As of today, Citigroup shares stood at $4.77 after hours.

The idea is to use Options derivatives to trade its shares and hopefully earning a small risk free profit, though there are still risks involved.

This is what I think is called “Calender Bull Spread”.

Heres the example that I have actually traded (Taken from Yahoo Finance):

Option pricing for C Mar 2011:
4.00 0.85 Up 0.07 0.85 0.86 9,098 289,566
4.50 0.49 Up 0.06 0.48 0.50 4,525 216,261
5.00 0.25 Up 0.03 0.24 0.25 26,869 327,288

Option pricing for C Jan 2011:
4.00 0.80 Up 0.10 0.78 0.79 25,408 946,186
4.50 0.38 Up 0.06 0.37 0.38 39,751 585,347
5.00 0.14 Up 0.02 0.13 0.14 104,742 2,410,326

The idea:
To buy In-The-Money Calls at March, and sell Out-of-the-Money Calls in January.

Based on the volume, we see the Jan 2011 $5 Call is very much traded up, causing the value to go up.

And to play safe, a $4 ITM Call is bought, because I guess it is unlikely the shares of Citi will drop below $4 by Mar 2011, with the Fed already clear their stake of Shares to the open market. (I am bullish on this, hence the name Calender Bull Spread)

So let’s do the Maths (Excl. Commissions):

Buy Jan 2011 $4 Call @ 0.86 x 20 calls = $1720
Sell Mar 2011 $5 Call @ 0.14 x 20 calls = – $280

$1720 – $280 = $1440

1) The ideal situation is Citigroup shares went above $5 by Jan 2011.

You’ve spent $1440 on a $4 Call that you can exercise anytime, or simply 72 cents a share. Now Citigroup is trading @ 4.77, and you’ve got an option to buy at $4 with 0.72 cents a share.
How nice ?

Next the real thing is if it goes through $5, and got exercised:
$5- $4 = $1 * 2000 would give you $2000. This is the profit “spread” you will have if its exercise.

Now take $2000 + $280 – $1720 = $560. This is the profit less the expenses.

2) What if it doesn’t go to $5 … by Jan ?

No worries, you have 2 more months. and you’ve just pocket $280 worth of options. Try selling this again in Feb and Mar. Remember the $4 Long Call Options still has value, in case something happens, you still can sell it off.

If you sold $280 x 3 for Jan, Feb, and Mar, and then selling off the Long call then you would have earned :

$840 / $1720 = 48% “interest” ROI

Based on the $1720 you’ve spent.

So why does this happen you may ask ?
The reason why this opportunity exists, all because the calls were slightly overpriced resulting this Relative value arb.

- The $5 Jan 2011 calls were to optimistic. The value went up, and so you Short the overpriced.

- Decided to buy a $4 Call because it simply cost 0.85 cents, just 8 cents higher than 4.77, and so you Long the “fairly priced”.

You may buy a $4 Call at May or August, but it may be slightly higher, probably $0.95, but its “Delta” is not gonna be priced higher (a 20 cents move in stock means a 20 cents move in Options value for March, as opposed to 20 cents move in stock with a 22 cents move in the Options value in August)

And if all doesn’t work well. Simply write/sell a $4.00 Call at March. You won’t lose much.

Disclaimer: I own shares of Citigroup, that is why I bother to look at the Options book =)

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As of July 12, Citigroup’s share price has almost broken out of its trading range of $3.70 and $4.10, gearing up for a breakout of share price. This has 2 implications.

1) The volume of block selling of Fed’s Citigroup shares were lesser than buying volume, resulting the share price to inch higher. There weren’t any unusual increase of volume traded suggesting that there aren’t much market movements. Thus it may not be a good sign, since the brokers may resume or increase the liquidation volume once again.

2) Based on EMH Efficient Market Hypothesis, the price we see today had priced in market risk, involving entire market’s movement, the release of Q3 company P&L results, as well as the possible good news in the Finance sector. This will definitely push prices up higher as demand increase for Citigroup.

So what are the signs we can expect to see ? Based on these 2 analysis, I am predicting the general 2-6 weeks price movements.

1) If the volume increases, even before or after the release of earning seasons, there might be a chance of Citigroup share price hitting 5-10% higher than what it is at $4 range. That will be about $4.20 to $4.40, keeping in mind the ongoing block sale.

2) Given the good market and strong Profits for Citigroup, we may see a surge of share price, followed by some cool down period, once again reaching the range of $4.20 and $4.40

Thus it may be a good time to already own some small positions, though I am not suggesting you to bet on it at such a mid-high price, depending on your risk level.

Disclaimer: The author have positions in Citigroup (Public, NYSE:C).