Investors can profit if they catch a momentum stock early on but they have to be quick on their feet to exit or get steamrolled over. Tesla (TSLA) and Twitter (TWTR) are significant recent examples of such momentum stocks.
For long-term investors, a better method is to sit back, relax and wait for others to panic. Once a sufficient amount of blood is flowing, step up and calmly buy while others are pounding the sell button faster than Thumper after a second Grande at Starbucks (SBUX).
This year has been rough for Citigroup investors and shares are just above this year's lows. At near $47, the stock is down nearly 11% for the year to date.
The bank has several balls to juggle. The FBI and the Securities and Exchange Commission are investigating Banamex, the Mexican division. The Federal Reserve rejected Citigroup's proposed dividend increase, and everyone is stressed over the failing stress test.
Next week adds another source of fear because the bank reports earnings on April 14. The company is expected to report $1.16 per share, 7 cents less than the same period last year.
Analysts range from $1.01 to as high as $1.30. Citigroup beat the consensus estimate five out of the last eight quarters. But Citigroup doesn't need to beat estimates for investors to make money. After the above-mentioned headlines beat the shares into a pulp under $47, the sellers are running out of steam.
Short-sellers are hard to find. They're the smart money. If Citigroup's shares were vulnerable on a long-term basis, you can bet they would pounce on it in a heartbeat. Short interest is only 1.2% of the float, an incredibly small amount. Short interest alone should tell you the neon flashing sign "BUY NOW" is lit.
The bank's earnings are becoming increasingly cheap compared to its competitors. With a forward price-to-earnings ratio of 9.64, it's on sale compared to its peers. U.S. Bancorp (USB) and Wells Fargo (WFC), two banks I use and am highly bullish on, have price multiples over 35% higher than Citigroup. JPMorgan Chase (JPM) comes close, but Citigroup is the better value. The dangerous part of buying a falling knife for value comes from entering too early.
Investors can shield or at least mitigate short-term fluctuations and the upcoming earnings release by using volatility to their advantage. For example, the June $40 strike price call options are trading for about $6.85 and are in the money $6.55. That results in a time premium cost of 30 cents, or less than an average of 2 cents per day.
Anything above $46.85 at the time of expiration is profit. But if the wheels fall off the cart and the shares nose-dive, the total amount of risk is $6.85, not the $46.55 amount at risk for shareholders.
Delta is the amount of change in the option price in relation to the underlying price. Delta will increase if Citigroup's shares rise in price, resulting in an almost one-for-one increase. In other words, using this option provides a large proportion of upside, while protecting your downside.
Investors willing to add one more leg to create what's known as a bull debit spread can almost eliminate time premium cost by selling a May $52.50 call against the $40 call. A spread strategy limits the profit potential to $5.94 ($52.50 - $40 = $12.50 - $6.85 (cost of option)= $5.65 + .29 (premium from selling $52.50 strike) = $5.94).
Using this spread strategy means anything above $46.56 is profit up to $52.50, for a possible 80% gain off of $6.56 at risk in less than 80 days.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.