Getting Long Financials with Two Trades
July 2nd, 2008 by 
CA Editors
Stephen Frankola sends: In my personal account, I did two things yesterday:
I put in an order at 6AM to buy these nice little illiquid tools called Fixed Return Options, a new derivative (how could that ever be a bad thing?!) invented by the administration of TradeKing, my online broker. Read how an FRO works.
Anyway, how these things work, is that they are all-or-nothing contracts. If your contract finishes above the strike price (when you own a high-finish contract), you get $100 credited into your account. When it finishes below, it’s worthless. The put-like options work the opposite way.
I bought Citi (C) high-finish options at the August 17.50 strike price. So, if the price (well, actually, a different metric that measures the average price of every trade that day, but basically price) finishes at $17.51 on expiration, I get $100. If not, it’s worthless. The contracts were only $40 each, so the risk/reward was worth it to me. (I don’t have a ton of confidence in Citi as a company, but I do think it’s oversold, but regular options had premiums too high or were too far out of the money.)
The FROs can be sold before expiration, but since the market is pretty illiquid right now, it’s best to hold as long as the trade looks like there’s a good chance of success.
I also bought CIT after the bell at $6.88. It was down 15 percent on no real news yesterday; I figured it was just a financial company getting dumped as funds and firms window-dressed. This morning they announced that they are selling the home loan business, their most troublesome one, for some nice cash AND the forgiveness of lots of debt. It’s over $8 right now.
As I wrote yesterday, I hope that this new month and quarter mark a turnaround for the market… but that doesn’t look to be the case, at least during the opening of this first day. Hold on for the ride.
Subscribe to our feed:
Visit Stephen’s Blog.
See more C, CIT, Financials, Stephen Frankola | 
July 2nd, 2008 at 12:22 am
I’d like to know what you’re doing with your CIT shares after they popped… holding and looking for more?
July 2nd, 2008 at 9:17 am
I actually tried to get out, but selling was limited because I had bought it the previous day… and I didn’t feel like calling in to a real broker/representative and getting it done that way.
I’m looking for $10 in the short term as good news (general financial, not CIT specific) seems to keep trickling in, then I’ll probably free up the cash. I like CIT’s long term prospects as they trim the proverbial fat from their business, but I don’t know how much more upside there can be in the immediate after a 30% gain.
I may plow some of the (current paper) gains into TMA preferred shares. The three different classes are currently around $4.20-$4.40/share, and the tender offer is for $5 cash plus three shares of common stock (worth about $.60 total now, possibly worthless soon). Either way, the arbitrage, which does pay out in cash, still has a ~15% spread (not including value of the common stock).