Citigroup Inc (C) is a banking giant whose stock is currently trading around $59.80 in a 52 week range of $38.31-$62.53. The stock has been very strong over the past year with shares rallying more than 48% in over the past 12 months. Although the stock has seen a bit of a pullback from its recent highs it still appears to be setting up well for a long ahead of earnings next week. To confirm the setup we will examine the stocks historical performance record on and around earnings day, the current expected earnings move being priced into the options market and the current technical setup.
First, we will examine the historical movement record in Citigroup Inc. We are most concerned with spotting patterns in the stock’s price action on and around earnings day. Catalyst movement can be very different from underlying trend so it’s important to isolate earnings movement as much as we can. To do this we will look at the price action in the session immediately following the release of the earnings report. When doing this we can see that C has rallied 4 times and sold off 4 times in the past 8 quarters with an average move of 2.3%. This tells us that there really is no bias in historical movement and that we may need to rely more on the chart in our analysis. In any event we now need to compare this average move to the expected move being priced into the options market.
To calculate the market makers expected move we will use the price of the at the money straddle. To isolate earnings expectations, we will use the shortest dated options that still contain the catalyst event. In this case, we will use the price of the Apr 13th Weekly options. Below Is the current market for the ATM C straddle for Apr 13th Weekly Expiry.
As we can see above the market for the straddle is around $1.85. This implies an expected move of around 3.1% by next week’s expiration. While this is much larger than the average move on earnings day we must consider the fact that now these options still contain a full week’s worth of time premium. We know there are not any opportunities to sell premium in C ahead of earnings. Next we will examine the chart.
Below is the daily chart in C
Here we can see that the stock is currently above the Ichimoku Cloud and the cloud is technically upward sloping. Although this is not an incredibly strong chart we know that it still indicates the stock is in bullish territory and with no bias in historical movement we cannot justify anything but a long. With an expected move of $1.85 being priced into the options we will set our upside target at $61.85 and look for an options setup.
Possible trade: Buying the C Apr 13th Weekly 61-62 Call Spreads for $0.20
Risk: $20 per 1 lot
Reward: $80 per 1 lot
While this setup in Citigroup Inc is not the strongest we could hope for the analysis has lead us to a trade with a great reward to risk setup. This type of analysis can help trader find low risk high reward setups like this.
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