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Short-Term Bears Pounce on Citigroup

October-dated at-the-money put options active in C

by 10/16/2012 1:13 PM
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Citigroup Inc. (NYSE:C - 37.12) is the target of some aggressive bearish speculation today, now that earnings have already hit the Street. Though the equity is trending higher in the wake of an upgrade (and despite news of the CEO's resignation), option players are scooping up the at-the-money October 36.50-strike puts mere days ahead of expiration. What's more, overall put volume in Citigroup is running nearly four times ahead of typical intraday volume.

The October 36.50 put, has seen roughly 12,800 contracts change hands versus open interest of fewer than 700 contracts. The majority of the positions have traded at or near the ask price, and implied volatility is up more than 4 percentage points, suggesting increased buying demand. For these puts to be profitable by Friday's close, Citi would need to move south of $36.16 (strike price less premium paid). That's a move of nearly 2.6%.

Meanwhile, Citi has endured some of the "volatility crush" inherent in the passing of earnings reports. With the uncertainty of earnings out of the equation, expectations for future price movement revert closer to the mean. Schaeffer's Volatility Index (SVI) for C has dropped from 0.37 last Thursday to 0.30 today. In fact, the SVI is a chip-shot shy of an annual low, making it an alluring environment for option buyers, as premiums are theoretically cheaper than usual.

Since late July -- when the stock tested double-bottom support in the 25 region -- Citi has rallied close to 47%. C shares have even outperformed the S&P 500 Index (SPX) by 20 percentage points in the last two months. And currently, the stock is roughly 3.5% away from hitting a new annual peak. But while the intermediate-term picture may still look bright for C, some option speculators are counting on a decline over the next few days.


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