Condor Options

You know who’s going to win American Idol? This David kid (pictured): every female who comes within earshot of him goes absolutely nuts.

You know who’s not going to win American Idol, or anything else for that matter? Citigroup. The Striking Price Daily has the goods:

“The three largest problems for Citigroup are further write downs to their carrying values of [collateralized debt obligations] related to subprime mortgages, further write downs from leverage lending commitments, and further write downs associated with on balance sheet consumer loans,” Whitney wrote in a Monday research note.

With such a dour assessment it’s hard to believe that Citigroup could suffer from any other ailments. But the big bank can, and does. The bank disclosed late Friday in its 2007 annual report that its traders lost $100 million on 15 separate trades in 2007. That’s $1.5 billion, which is a lot of shekels to lose.

Schwartz recommends that investors who want to position for further declines in Citigroup’s stock consider buying a “put spread.” This strategy involves buying the January 22.50 put, and selling the January 20 put. If the stock declines to $20 before the options expire in January, investors stand to make a triple-digit return on their money. [link]

You know, we love Barron’s, and they’re one of the only (maybe the only) mainstream financial publication that has any decent, consistent options coverage. But how long do we have to live until “put spread” isn’t a scary-weird-newfangled phrase that needs its own scare quotes so that crusty mutual fund shareholders don’t feel left out?

Anyway, this is kind of an obvious trade, but not necessarily a bad one. There’s the risk that XLF is bottoming here (C makes up 5.8%), and you’ve obviously got no upside protection, but those trading losses at their prop desk make you wonder whether Citi is still making money at anything other than ATM fees.

[tags] Citigroup, C, XLF, put spread [/tags]