Financial Sector Options

For the savvy investor now may be the time to get back into financials, and a good place to start is Citi. The Nation's largest bank is really under emense pressure to step up its earnings. Citi's stock price is down more than 14% from the beginning of the year, and that has investors out for blood. Additionally Citigroup's equity report did not help; up just 1.7% since Aug. 10, versus a 5.7% gain for J.P. Morgan, a 4.5% gain for Bank of America and 8.1% gain for Wachovia. This means that the margins are there Citi just has to find them.

All of the big banks: Bank of America, Citigroup, J.P. Morgan, and Wachovia, have all recently begun tightening credit default swap spreads. If you want to take a gamble and be ahead of the curve on the rebound, try some stock options. What this will do is limit the risk in a particular stock, and/or sector. Remember the financial sector as a whole is just now peering though the credit-cloud that has been cast over it by the subprime mortgage crisis. The November 50 calls are a good bet.

Credit Default Swap
Many people may not have a clue as to what a CDS is, so we will explain. A credit default swap, or CDS, is a tradable contract, although not in the listed-securities market, that reflects the credit risk of a particular company, like Citigroup. The contract term is typically five years, and during that time the CDS owner is protected from a "credit event." In essence, a credit default swap is like a put option.

A tightening of credit spreads bodes well for a stock because it demonstrates that investors are less afraid the company will default on its bonds. CDS are increasingly important in options trading because there is a growing interest in the influence CDS products have on options volatility.