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Will Citigroup Inc (C) Continue to Drop as Earnings Near?

One C bear opens an aggressive long put spread

by 10/8/2013 1:28 PM
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Bears are once again a dominant force in the Citigroup Inc (NYSE:C) options pits today. Close to 31,000 put options have changed hands already today, representing a 28% mark-up to typical intraday volume and narrowly outpacing the number of call contracts on the tape. The stock, meanwhile, is following the broad market's lead, down 0.5% to $47.95.

Garnering notable attention are the November 40 and 45 puts, which have posted respective volume of 3,625 and 5,826 contracts. Among this volume was a pair of symmetrical block trades, as 2,461 contracts changed hands at each strike shortly after the open. The lower-strike puts traded for the bid price of $0.13, and the higher-strike puts went off at the ask price of $0.65, meaning this long put spread was executed for a net debit of $0.52 per pair of contracts.

This is a relatively aggressive bearish play, as it reaches its maximum profit of $4.48 (difference in strikes less the net debit paid) on a move below the sold strike ($40), which is a 16.6% drop from C's current level. In fact, the breakeven price of $44.48 (long strike less the net debit paid) is a 7.2% pullback from the stock's most recent perch. On the flip side, risk is limited to the $0.52 net debit, should Citigroup still be north of the $45 strike when back-month options expire on Nov. 15.

Implied volatility (IV) for the November 45 put stands at 32.2%, notably higher than the stock's two month historical volatility of 20.4%. Against this backdrop, today's spread buyer may have opted to offset the relatively high price tag on the long put by selling the lower-strike option, which also has an elevated IV reading of 39.1%. In a similar vein, Citigroup's 30-day, in-the-money IV measure has surged 8.8% higher today to 32.4%.

Citigroup Inc (NYSE:C) will report earnings ahead of the open on Oct. 15; analysts are expecting a profit of $1.06 per share, equal to the year-ago period. In the last eight quarters, C has topped analysts' earnings expectations on six occasions, but has gained less than 1% (or even moved lower) five out of eight times in the session immediately following.

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