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Why Can't Citigroup Shake its Skeptics?

Despite C's technical prowess, some speculators remain stubbornly pessimistic

by 10/31/2012 9:39 AM
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Citigroup Inc. (NYSE:C - 36.94) has earned some technical bragging rights lately, considering the equity's year-to-date advance of more than 39%. The stock has also outperformed the broader S&P 500 Index (SPX) by roughly 32 percentage points during the past 60 sessions. Despite this strength, a number of options speculators remain firmly planted in C's bearish camp. In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.75 is just four percentage points shy of a pessimistic peak. In other words, speculators have been purchasing puts over calls at a near annual-high pace during the last 10 weeks.

Digging deeper into C's near-term trading activity, it appears that the front three-months' series of options holds a glut of put open interest. Specifically, the security's November 37 strike is home to open interest of more than 12,000 puts. Moving forward, this area could end up serving as a layer of options-related support if C is able to again surge above this level.

C is also coming off a notable peak in terms of short interest. In the latter half of September, the number of shorted C shares crested at 66.15 million, the highest level in two years. This number has since dropped more than 19% to 53.5 million. As short-covering activity continues, C could benefit in the short term.

On the charts, the security continues to trade above its ascending 10-week moving average, which has acted as a floor since late July. What's more, the shares tagged a new annual high of $38.72 on Oct. 18, thanks to a stronger-than-expected quarterly earnings report. Given the equity's pop higher, the Oct. 16 resignation of CEO Vikram Pandit must have been deemed a welcome change among shareholders, amid continued rumors of tension between Pandit and C Chairman Michael O'Neill.

Last but not least, Schaeffer's Volatility Index (SVI) for C sits at 33%, which ranks higher than just 8% of similar readings collected within the past year -- implying short-term options are reasonably priced at the moment. Also, the equity's Schaeffer's Volatility Scorecard (SVS) 95 suggests these options are relatively cheap in relation to the probability of an outsized move on the charts. As such, now may be an opportune time to bet that Citi will continue to climb a "wall of worry" to new annual peaks.


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