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Option Brief: Citigroup Inc (NYSE:C) is following the broader equities market into the red this morning, down 0.5% at $48.04, after SunTrust cut its price target on the stock to $55 from $57. However, one options trader on Thursday rolled the dice on short-term support for the stock, but hedged his bets just in case.
In late-day trading, symmetrical blocks of 4,000 contracts traded at the May 43 and 45 puts. The 43-strike puts crossed at the ask price of $0.07 apiece, suggesting they were bought, while the 45-strike puts changed hands at the bid price of $0.12 each, implying they were likely sold. Open interest rose at both strikes overnight, suggesting the strategist implemented a short put spread for a net credit of $0.05 per pair of options, or $20,000 total (net credit x 4,000 contracts x 100 shares per contract).
By initiating the spread, the trader will be able to pocket the entire net credit as long as C remains north of $45 through the close on Friday, May 16, rendering both puts worthless at expiration. However, by simultaneously buying the lower-strike puts, the trader's maximum risk is capped at $1.95 per pair of options (difference between strikes, minus net credit), no matter how far C should fall south of $43.
It's worth noting, though, that C's Schaeffer's Volatility Index (SVI) of 18% sits just 2 percentage points from an annual low. In other words, the stock's short-term options are inexpensive right now, from a volatility perspective -- which doesn't bode well for premium sellers. Still, the risk of the aforementioned spread pales in comparison to the volume-weighted average price (VWAP) of May 45 calls yesterday. Purchasing a contract here -- which would be an alternative way of betting on support at the 45 strike -- cost $3.59, which would represent the maximum risk for buyers, and would make breakeven $48.59 (strike plus VWAP).
On the charts, Citigroup Inc (NYSE:C) shares have surrendered 7.8% so far in 2014, and are now battling their 50-day moving average. However, the consensus 12-month price target of $58.80 represents a lofty premium to the stock's current price, and stands in territory not explored since early 2009. Plus, two-thirds of the covering analysts maintain "strong buy" opinions. Another round of price-target cuts and/or downgrades could exacerbate selling pressure on C.