Now's the Time to Buy Calls on This Bank Stock

Citigroup options are priced to move as the stock extends its 2017 uptrend

Patrick Martin
Dec 7, 2017 at 12:24 PM
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Bank stocks are poised for a December to remember, thanks to lawmakers' progress on a business-friendly Republican tax plan and an expected Fed rate hike next week. Within the sector, Citigroup Inc (NYSE:C) looks particularly compelling, as the shares embark on their latest rally from a historically significant moving average -- and test their footing at a major "round-number" level. 

Citigroup stock has etched out a channel of higher highs all year, adding more than 26% to trade squarely at $75 -- the aforementioned round number that's currently in play. Additionally, C is in the process of bouncing from its 80-day moving average, which has acted as a springboard for the shares following several pullbacks this year.

Specifically, according to Schaeffer's Senior Quantitative Analyst Rocky White, C's last nine meet-ups with its 80-day trendline have resulted in an average return of 5.54% one month later, with 63% of those returns positive. With additional support at the stock's 30-day moving average also in play, and the $75 level emerging as a potential foothold, it seems the deck is stacked in favor of another upside move after this latest 80-day test.

Citigroup Stock Chart Pullbacks

In the options pits, traders have been leaning toward Citigroup calls. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the bank stock's 10-day call/put volume ratio of 3.36 ranking in the 81st percentile of its annual range. This indicates that calls have been bought to open over puts at more than a three-to-one ratio during the past two weeks -- a much more bullish skew than usual.

Digging deeper, the January 2018 77.50-strike call has seen the biggest rise in open interest during the past 10 days, with 16,720 contracts added. However, data from the major options exchanges shows a notable skew toward sell-to-open activity at this strike. Those who sold to open calls at C's January 77.50 are expecting the stock to remain below this price through the early weeks of 2018 -- and, presumably, south of its freshly tagged Dec. 4 record high of $77.92.

With key technical support in place, and some lingering skepticism surrounding the shares, now is a prime time to consider buying Citigroup calls -- especially with short-term options priced at bargain levels. The stock's Schaeffer's Volatility Index (SVI) of 22% ranks in the 3rd annual percentile, suggesting extremely low volatility expectations are being priced into front-month contracts.


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