Citi: A covered call strategy

Not sure what do you mean by this, but if they get called, it is a better outcome! Typically when I write a covered call, I don’t write significantly OTM, but often write with deep in the money calls. I wanted to cover the downside, I want the stock to be called, so that I could get my initially calculated return and hopefully they get called near the expiration so that I could collect the dividends. This will give you few choices to roll further out, if you choose, and you can choose to book short-term gains/ losses on the option side, and split the option and the stock for long-term gain/ losses on the stock side.

I track my trades using the model on the below link. Hopefully it helps you to manage the trade. BTW, your 2025 call actually gives you lesser annualized return!! But both are healthy gains and hopefully for both of us Citi trades above $50 by Jan 25!!!

1 Like

Hi kingran,

Thanks for the excel.

I meant to say…What if I had jumped way too early, and start losing money, far more than these covered calls can make up for

Having said that, I feel that a loss is less likely…And if anything, I feel these will get called away in a year or 2…I am guessing that it may be that we see some volatility with ups and downs for a while, and then the market recovers/FED cuts rate…I doubt that the bank stocks will rip, but if the markets stabilize, they should stabilize too, and start their way up. …Hopefully, that means we collect the dividends, while price slowly and steadily raises.

In the past, I would have bought the dips, and more dips, and just wait for it to recover…However, this last year or 2 has killed my portfolio especially the SAAS stocks…
I think I am mistaking a mistake translating that experience into these more stable stocks, and would very likely rue not waiting for the prices to appreciate before selling the covered calls on these stable stocks…But I wanted to have some sense of “security” and “peace of mind” and so felt the need to have some downside protection in lieu of reduced profit…hence the covered calls, and so happy with that.

Are you mainly looking only into the bank stocks or are there other companies which interests you in the current prices…


I have a pretty broad set of stocks I invest.

  • Financials (BAC, C, WFC, MA, V, PYPL, & BRK)
  • Homebuilders (HD, LOW, (PHM/TOL/DHI currently not in portfolio but owned them for many years, in and out)
  • REIT’s (BRX, KIM, (WY/SPG/INVH and other names in and out or small positions))
  • Stalwarts (CVS, SBUX, TGT, WMT, CL, VZ etc)
  • Energy (OIH, CVX, XLE, other names in and out)
  • Special situation (these changes ex KMX, DG, DLTR, CLF)
  • Fixed Income (WFC-L, REIT preferred’s, treasuries)
1 Like

Nice portfolio!

I rue missing out on home builders when they were way down, and now many of these have ripped …Iam not sure why though…if recession hits, I would have expected them to fall, but seeing the reverse of that…I hope the rise in price is not a rug pull, but yes, now they are too pricey for me currently…watching the HD/LOW and may start to buy them if more opportune price comes along.

I see you own CRWD…I did but just sold recently (and now I am sure that since I have sold, they will go higher. :slight_smile: ):)…I was not sure why on days when most of the other tech stocks are rising, they seem to show modest rise…but do participate in the downside when things fall.

Your tech stocks are solid…but was surprised to see AI stock…Is this a speculative buy which you bought on a lower price and riding it up on the AI wave? Or do you feel its fundamentals are solid enough? Specifically asked about that as that seems to be the odd one out as the only unprofitable company in your holdings…my guess is that it is a very small position?

There are combination of thinks at play here.

  1. Labor market is still strong
  2. Higher mortgage rate means, many of the existing homeowners are trapped; They cannot sell their house to buy new one. Here is an important fact, 80% of home sales are existing homeowners selling & buying a different home.
  3. Homebuilders are focused on new homes and because existing home owners are trapped there is such a low inventory (40 year low), meaning homebuilders have robust demand
  4. unlike 2008, many of them have switched to optioning their lots, so lot less trapped capital for them.

A better way to play homebuilders is focus on LOW/HD and wait for the post I am working on :slight_smile:

AI, I am owning it over a year, before it became a meme stock. I was intrigued by their AI integration on enterprise applications. They have $900 M cash on the balance sheet. They will not go bust quickly.

1 Like

@Peter003 I took quick look at SCHW, here is a sobering reality, they have no tangible equity. That doesn’t mean SCHW brand doesn’t have any value, but if you deduct intangibles ($11.5 B), Goodwill(12 b) and unrealized losses ($22 B) from the shareholder equity of $36 B, they have negative equity!

Of course they don’t have to book unrealized losses, they will be earning interest on the bonds and their cost of deposit might go up, so they may lose money, but could still recover the unrealized losses over time, Goodwill and intangibles have value, that’s why they are in the balance sheet.

But, SCHW story is hardly clear. They are reporting on Apr 17th and will come to know how much of their deposits have shifted into money market, etc. And what is the new guidance for the rest of the year. You may very well get an opportunity to buy it below $45. Always be careful for what you wish for.

Hi Kingran,

That makes a lot of sense. Yes, will wait for your post on LOW/HD :grinning:


Yep…I had a similar feeling. Took a loss and sold it around 52. 80…Will look to get back when it gets to $45…It may very well go below that, but I somehow doubt that FED will be timidly watching if anything remotely happens to an institution of this size…

Of course, while the depositors will be 100% protected, You and I may very well get slaughtered as an investor…So, have to be cautious on this one…

As expected, my other positions where I sold covered calls are all positive …and the calls are all negative…And I am totally fine with that (capped my profits, but I will take that any day compared to the red sea that my SaaS stocks are floating in!!)

Thanks again for all your thoughtful posts! Look forward to those.


Hi Kingran,

Hope you made “bank” on the banks… :grinning:

I had unfortunately sold my 3 bank stocks (JPM, WFC, C) on Thursday…well, it was still at a profit, and considering the massive losses I have from the SaaS stocks, I would take it any day…but I hate having sold JPM…Wow, what a jump!!

I bought back WFC out of FOMO in the premarket (stupid me, if I had waited a few more hours, I could have bought it for 2% less, but u win some and lose some). My thesis was not based on any sound principles…just that of the 3 so far, it seemed to be the one which is still well off its recent FEB highs, compared to say Citi which is pretty close to the $ 50 mark it had been prior to the SIVB debacle…
I thought the earnings report wasn’t bad for WFC, and although it was not obviously not as good as the JPM.

I am -10% on my BAC purchase…but that is one I planned to hold anyway as if Warren buffet is comfortable holding, I see no reason for me to panic on that…

Thanks for your thoughts on these and other investments.


I wish I had shorted CS :sob: :sob: Having an opinion and the conviction to act on it are very different.

1 Like

An update on Citi Qtr

  • Sale of consumer business on various countries is on track. They are delivering on what they committed.
  • TBV keeps increasing, $84.21, Fridays close shares are trading at 58.2% of TBV
  • They keep hiring on wealth management, made a key acquisition from BAC; For context, Andy Sieg, member of BAC management committee, used to run much bigger unit at BAC ($2.8 Trillion client assets), so expect him to grow this business; How exactly they are going to grow this business, how much capital they will be committing, Asia vs US, etc needs to be seen; He has to wait 6 months before he can start at Citi
  • ROTCE is 11%, normalized is 9% (excluding gains from India and Vietnam sales); The timetable on expense reduction is now later part of 2024; Achieving ROTCE targets are tied to their ability to bring down the expenses. They cannot grow their way, but have to reduce their earnings;

Separately Citi knows India very well, they run their worldwide back office in India, and was there for 40 years, India with its worlds largest population and a middle class of over 400 million is a key market, the digitalization of financial transaction is really accelerating (the rate of growth is astonishing; I have to post on that someday), why Citi cannot grow there and have to exit?

  • TTS growth is spectacular (31%), they hit their targets on this segment way ahead of schedule (!) and this sort of growth is unsustainable because much of it is driven by the interest rates and at some point Citi is going to give it back; The interesting thing is fee growth in this segment. Mike mayo (of WFC; ex Citi) threw a softball on this; And then he came back for a last question which is another softball (wondering whether he is planning to join back Citi :slight_smile: ) on deposit inflow, composition and clarification (moon lighting) on un-insured deposits
  • Credit card is growing and along with it the losses will also grow; current default rate is abnormally low, and will revert to mean and some more in the next 18 months; The timeline here is shifting (the original expectation is end of 20223, now it is going into 2024); Which is good and bad; Good because the current year earnings will benefit from lower reserves/ losses; Bad because it will be an headwind in 2024;
  • CET1 is 13.4%; So they should be able to take the Mexico sale hit and should have some flexibility to execute buyback; The management realizes the pressure from Investor expectation on this, Perhaps, post stress test, they may have an opportunity.

As things change they remain same, the TBV is inching up, and shares are trading at significant discount to BV, they are executing on the re-structuring, making lot of hiring on wealth, the expenses are growing, the timeline to bring them down is shifting.

1 Like

Not really, My financial allocations were already on higher side so… In any case, I closed the call options I sold by buying them back. So I could book some gains on them, and that is equivalent to buying shares, if you will. I am waiting for the WFC BAC and C to move up some more so that I can put back the covered call. Also, the VIX going down significantly is not helping. I have sold some deep out of the money puts (like WFC $20, C $30, BAC $15, $20) in march and closed all of them and took the profits. I was able to earn 50% on those puts in few weeks, I am not interested in waiting the rest of the year to earn the remaining 50%.

May be “May” will bring some volatility :slight_smile:

With Mexico President’s recent nationalization of certain private railroads and his hints on he wants public-private deal on banamax, made the German buyers drag their feet resulting Citi scrapped the sale and decided to go IPO rout. While this pushes the sale by another 18 months to 2 years, the immediate benefit is, Citi’s CET1 ratio will not be impacted by the sale and allows it to buyback shares. Whether Citi will do some buyback to take advantage of the low prices needs to be seen.

Did you ever bought back?

Here is the note from Morgan Stanley on C post second quarter results.

Taking buybacks out of our model through 2026. Following Barr (Kingran: Fed Vice Chair of supervision) comments last week, we update our model to reflect a 20% incremental increase in RWAs from Basel III Endgame over 3 years, up from our prior estimates of 12%. Given that we expect Citi to generate only ~50-70bps of CET1 per year from net income - dividends (Kingran: after dividends) in 2023-2026, it doesn’t appear enough to buy back stock with a ~200bp hit to CET1 coming to GSIBs from new capital rules, on top of Citi’s 30bp higher SCB following this year’s stress test and a 50bp increase in C’s GSIB surcharge coming next year. Citi stated on the call that they will evaluate buybacks on a quarter-by-quarter basis, with no explicit indication buybacks are set to resume.

Citi has some levers to pull and need tight execution and expense reduction. If they can do all of that, then they have some excess capital that can be deployed on buybacks. It is not going to be super meaningful. Assuming various scenarios, I expect $2 to $4 billion annual buybacks or roughly $1 B in buybacks. Timing of divestitures, expense, implementation of new rules will impact this. The biggest catalyst for Citi is finding ways to “shrink”, release capital and use that capital and the profits to buyback. Until they do that it will be “cheap” or a “value trap”.

Be careful for what you wish for! I am suffering from indigestion of eating so much citi!. :slight_smile:

After announcing yet another restructuring, the stock is bouncing from the $40’s. I have closed the most of the covered call, i.e., bought back the call I have sold and owning the stock straight. Writing the covered call had brought down my cost basis and cushioned some impact. But, Citi is a disappointment still.

Oct 13th is earnings and it is Friday the 13th!! What can go wrong? or What else can go wrong??

Before earnings Citi announced they are restructuring the organization, while Citi has not yet provided the new reporting, numbers, but expect Citi to take charges in the next 2 quarters regarding the restructuring. While they didn’t spell it out but restructuring (simplifying the business) is euphemism for job cuts. So we basically looking at 2Q 2024 for somewhat clean numbers, still there is Basel III endgame requirements. So you are looking at the benefits of the restructuring, post Basel III cap-ex build, hopefully credit cost normalization (i.e., credit cards were abnormally doing good last few years and it is mean reverting, i.e, the defaults go back to normal level, i.e, higher charge off’s :slight_smile: ) all done by 3Q 2024.

So you have another year of restructuring. The share price is discounting all of this and more. At a simple level, if Citi can get to $75 ( A level it was trading in early 2021 in the next 5 years, that will be 14% CAGR and add to that you will be getting 5.5% dividend, means significant gains. Still by then $75 will be a significant discount to the TBV.

Now, I have been wrong on this name so long. Something can go from value to deep value, to deep deep value, until market cares. If anyone is really such a long-term investor, may want to consider at this price.

Below some selected lines from the latest 10-Q balance sheet

The deposits with the banks are going down, because Citi is losing deposits, especially non-interest bearing deposits. I have talked about the bank deposits are walking (not a bank run, but slow bleed) to money market, CD’s, or bonds in search of higher yields. Banks are still offering very low rates.

This is not going to correct anytime soon. What this means is, very soon, may be starting next quarter, the NII growth will start reversing. Why, because the interest Citi is earning on its assets are not going to go up, but the interest they are going to pay will continue to go up.

The below table shows, what Citi has earned vs what it pays in interest. The $35 B non-interest bearing deposit loses means, Citi has to find the funds elsewhere by paying market rates, that is $1 B at 3%, $1.4B @ 4%, $1.75B 5%. Hence the tailwind of raising interest rate will soon abate, yet the higher rates will work its way into the cost of deposit, double whammy!

if you see the rates on consumer loans (mostly credit card) is already double digit, there is not much room for it to grow, same for corporate rates. OTOH, look at the rates on their debt, they have gone up by 232 basis points or 2.32%

Separately, Citi has to retire its preferred’ s or rotate them because they are resetting to SOFR (LIBOR replacement) + (unfortunately I have so much Citi common, I cannot add any citi preferred’s , for those who are interested look into it CR-J, current yield 9.5%, there is a high chance Citi might redeem them quickly but even if they take one quarter to redeem you get above market rates)

Now, I am very skeptical of “higher for longer” because US investors, regulators, politicians are so addicted to excess liquidity, cheap money. It will be difficult to change the behavior without a significant external shock. In the last 15 years we had 9 years of 1T+ deficits. So there is a higher probability of interest rates to come down, or rate cut in 2024 as soon as recession sets in !!!

So the credit loss are somewhat mitigated by AOCI gains.

From the first image, the AOCI is constant and comes around $23 per share. Given citi’s TBV is $86.9 and the current share price of $42, the share price discounts almost everything or completely de-risked!!

PS: I have pasted this as image, instead of the table, because I don’t know how to get the color. If someone knows, I would appreciate the opportunity to learn.

The details of the restructuring are emerging… Looks like the cuts are going to be deep… Now you have a CEO who is very motivated to keep her job, so if Citi implements this deep cuts and manage to not impact the business at big level, the much talked about bending the curve on expenses in 2H 2024 is possible. Haven’t seen much analyst chatter on this news.

1 Like