Wednesday, June 23, 2010

In a gadda da vida: "Citigroup Inc. Iron Butterfly takes Advantage of a Range (C)

Sometimes I feel old.
When I was learning options, life was simple: strip, strap, straddle and spread.
The stock's up a penny at $3.95, here's Options News Network:
Citigroup Inc. (NYSE:C) has been stuck in a range for some time, with the most recent closing low of $3.64 in May. Earnings season doesn’t really get going until mid-July, with C’s earnings due on July 16 (options expiration day). The $4 level seems “sticky” and based on options pricing, there isn’t much of an expectation for C to move sharply higher dollar wise, but realize that percentage changes in the stock can be large. If you believe that C will stay within the $4 range plus or minus 20 cents for the next couple weeks, you can examine an iron butterfly in July. You can buy back the short call or put if you develop a directional bias and the spread can be removed ahead of earnings to mitigate risk.

Iron Butterfly Trade Details:
C shares have dropped three cents to $3.99 during morning trading.
Below are the elements for this iron butterfly. If possible, use a limit order to place this trade, specifying one price for the four-legged strategy.
Credit Spread/iron butterfly:
  • Sell to open the July 4 straddle
  • Buy to open the July 3-5 strangle
Overall credit for the spread: $0.25 ($25 per lot) or better ...

...Profit/Loss Details:
Maximum profit: $0.25 (the net credit collected) minus Click Herecommissions
Maximum risk: $0.75 (the difference between the strangle strikes minus the premium collected). Return on risk for this strategy is roughly 33%.
Upper breakeven price: $4.25 (the straddle strike plus the premium received)
Lower breakeven price: $3.75 (the straddle strike minus the premium received)