I’ll be the first one to say it, I think CIT Group, as a company, is a complete turd. Yes, completely. With that now behind us, let’s see if we can find a way to make some money off of it. I think I found a good way, by using options, to capitalize on CIT as a stock, bouncing from its current price level. First let’s look at the chart:
(Pictures Are Posted on Site Link at Bottom)
For those of you new to my site, you will soon realize the importance of CCI. This is my favorite indicator. Do others work well? Yes. Do I care though? No. I found something that works and I know it is not the only one that does work, but for the sake of simplicity I mainly use this indicator. CCI right now, crossing up over -100, is giving us a strong buy signal. The last buy signal CCI gave us was in July, and we went from sub 0.75, to up over 2.00 per share. Over 100% return without even using options. Not bad!
So, they chart is saying to buy the stock, not that the company is good. Let’s get over it. The stock is a buy, but what do we do. Well, you could straight up buy CIT right now and be poised for a good return IF things get better. If the company goes bankrupt, well your out of luck.
Using Options to Put Risk:Reward in Our Favor
CIT Options Chain
Let’s note the going price for the April 2010, $1 strike put options. They are selling for $0.75. So if CIT goes bankrupt AND the shares fall to $0 instantly, these are poised to only make 25 cents profit. Who in their right mind would take that trade? Many stocks never trade down to $0 even after bankruptcy. Check out GM’s stock if you don’t believe me. Worthless, yes, but still fools are buying it up.
So I propose this, you sell the $1 strike April 2010 put option for $0.725, and in turn you buy the $1 strike call option for April 2010 for $0.325. This will give you an credit of $0.40. This spread is often times called a synthetic long.
Shane, what does this mean? This means that your exposure to risk will be $0.60 per share, or $60. So if you buy 100 shares right now, you are poised to lose up to $110 as the stock is roughly trading for $1.10 per share. If the stock goes to $2.10 per share, and you place this option trade, you will receive $1 per share in profit, plus the $0.40 per share in premium you collected.
Comparison: Long 100 Shares
$1.10 risk (investment) per share
$1.10 debit out of the account
Profit potential: Unlimited
Profit if CIT hits $2 per share ($0.90, or 81%)
Comparison: Synthetic Long By Selling April $1 Strike Put while Purchasing $1 Strike Call
$0.60 risk (investment) per share
$0.40 credit into the account
Profit potential: Unlimited
Profit if CIT hits $2 per share ($1.40, or 233%)
By using options strategically, we can see that we can truly position ourselves to make a lot of money with a lot less. In both cases, the probability of hitting $2 is the same. In both cases, the probability of bankruptcy is the same. However, in both cases, different strategies are implemented, and each strategy poses different risks AND rewards, with identical price movements. The $60 risk for 100 shares could yield $140 profit, or 233% return. While the $110 risk for 100 shares could yield only a $90 profit, or 81% return.
Both situations the probability to be right is the same! However, if you position yourself to be profiting greater, you will have a better chance at taking these bigger risks, and profiting greatly in your winners, which will reduce the impact of losses from others. This strategy is just a synthetic long spread strategy, but this simple strategy is simply fantastic.
Work smarter not harder my friends! Good luck and happy trading!