Follow Up to Trade Alert - (C) November 13, 2013
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Further Update to: Trade Alert -(C)
Buy the Citicorp (C) December $45-$47 bull call spread at $1.75 or best
Opening Trade
11-12-2013
expiration date: 12-20-2013
Portfolio weighting: 10%
Number of Contracts = 57 contracts
After ignoring the financial sector for most of the year, I am more than happy to jump into it here. The sector has been a serious laggard for the past three months, trailing the front-runners I picked in technology, industrials, health care, and consumer cyclicals. After chasing these favorites, traders are now looking for new fresh meat to devour.
No one would touch financials with a bargepole while interest rates were falling. This is because banks are most profitable when short-term interest rates, where they borrow, are low, while longer term rates that they lend at, are rising. Falling interest rates make financials a no go area. They have done so with a vengeance after the September Federal Reserve decision not to taper its quantitative easing program.
Two weeks ago interest rates bottomed and began a rapid upswing, which I believe could last many months. We could even see ten-year Treasury bonds back up to 3.0% by year-end, and 4.0% by the end of 2014. That?s why I called the top of the bond market two weeks ago and showered you with a quick succession of Trade Alerts to go short Treasuries, all of which became immediately profitable.
By buying bank shares here you are playing the second derivative of the short bond trade. Banks are about to go from being less profitable to more profitable during a falling bond, rising interest rate environment. Every trader on the street knows this, hence the sudden renaissance of the financials.
I picked Citibank (C) because I know the former CEO, Vikram Pandit, well, having worked with him for a decade at Morgan Stanley (MS). That relationship gave me unequaled access to the inner workings of this financial institution.
Citibank is not the target of multiple government civil and criminal prosecutions, as JP Morgan (JPM) has become, thanks to the London whale incident. They also do not suffer from the legacy problems bedeviling Bank of America (BAC), which they stepped into with their multiple acquisitions during the financial crisis.
Citibank also sponsors that really cool bike sharing program in Manhattan, called, what else, Citibike.
There is another method to my ?Madness? here. Take a look at the six-month chart for (C) shares. It shows absolute rock solid support at the $47.40 floor. That makes the Citicorp December $45-$47 bull call spread a complete no-brainer.
If you don?t like Citibank you can cast a wider net and buy the Financial Select Sector SPDR ETF (XLF). You can click here to find the precise index makeup and the fund details. Berkshire Hathaway is the largest holding, with an 8.18% weighting, while Citibank is the fifth largest holding with a 6% weighting.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months further out.
Here are the specific trades you need to execute this position:
Buy 57 December, 2013 (C) $45 calls at????.$4.90
Sell short 57 December, 2013 (C) $47 calls a?$3.15
Net Cost:????????????....??..?.?......$1.75
Profit: $2.00 - $1.75 = $0.25
($0.25 X 100 X 57) = $1,425 ? 1.42% for the notional $100,000 model portfolio.
