Shares of megabank Citigroup (C) have nearly rallied back to their pre-pandemic peak in recent months. However, one trader sees the potential for a big decline in shares at some point in the next year and a half.
That’s based on the January 2023 $80 puts. With nearly 600 days until expiration, over 5,300 contracts traded against an open interest of 118, for a 45-fold surge in volume. The buyer of the puts paid about $12.90.
The $80 strike price is slightly in-the-money given a recent price in shares near $79. Bank stocks can be particularly vulnerable to economic uncertainty, so if at any point in the next 18 months there’s a fear in the market, this trade could soar.
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However, shares don’t look too bad right now. Earnings are up 213 percent in the past year and revenue is up 45 percent. The bank has a fat 25 percent profit margin, and yields 2.6 percent.
Action to take: With the large rally in shares, they still trade at 10 times earnings. However, with the economy showing signs of unexpected inflation, those earnings could be eaten into, and the market may value companies at a lower level. Investors may want to consider the bank after a healthy pullback given its steep rally recently.
That leaves the put option as a trade capable of delivering mid-to-high double-digit returns in the coming months, possibly on an autumn selloff.
Disclosure: The author of this article has no position in the stock mentioned here, and does not intend to trade this company after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.