Citibank Play

I like the new Citibank - a bank which has promised not to be involved in proprietary trading and resume its role as a traditional bank. A traditional bank would not make humongous profits (and can lose humongous money too!) but it should make good profit and minimise itself from future financial meltdown. I have not invested in Citibank yet as I am closely monitoring the US govt sales of its shares in Citibank. Here are the current statistics (as at 23 July 2010):

• US govt received 7.7 billion shares of Citigroup common stock in 2009 when the Treasury exchanged the $25 billion in preferred stock it received in connection with Citigroup's participation in the TARP Capital Purchase Program. The exchange rate used in the conversion puts the government's cost at $3.25 per common share.
• The Treasury has already sold 2.6 billion Citigroup shares in two separate trading programs, grossing $10.5 billion in proceeds. The sales have brought the Treasury's stake in the bank down to 18% from a prior 27% level.
• The Treasury has authorized Morgan Stanley (MS), its sales agent, to sell an additional 1.5 billion Citigroup common shares.

Market participants have speculated that the U.S. Treasury would like to be fully exited from its stake in Citigroup by the end of the year.

Based on the US government's cost at $3.25 per common share, I believe that it would not sell below that price. That price (slightly above) is now my benchmark for consideration for investing (not trading). They are 3 good ways to play this game:

1. Buy the shares around $3.25 (around 50% Fibonacci level) or $3.65 (around 38.2% Fibonacci level)
2. Sell the $4 Put (a few months away). The idea is to collect the shares at $4 minus the Put option premium collected. If the options expires worthless, then collect the premium fully. This is one of Warren Buffet favourite strategies.
3. Buy the Call (preferably leaps)

Of the 3 ways above, I am more inclined for now, to play the Sell Put strategy.

[Update! - 8 Dec 2010. The government announced late on Monday that it was selling its remaining stake of 2.4 billion Citigroup shares, at a price of $4.35 per share, and booking a total profit of $12 billion. ]

Cheers !

PersianCat