Citigroup Upgrade Boosts Stock Before Stress Tests

Bullish options premiums are pricing in elevated volatility expectations, too

Jun 20, 2018 at 11:35 AM
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The Federal Reserve is expected to release the first-round results of its 2018 Dodd-Frank Act stress tests tomorrow morning -- an annual event that came as a result of the most recent financial crisis. Ahead of the event, Citigroup Inc (NYSE:C) was upgraded to "buy" from "hold" at Deutsche Bank, which also raised its price target on the bank stock to $76 from $74.

The brokerage firm said Citigroup stands to benefit from the results of tomorrow's stress tests -- though Goldman Sachs (GS) and Wells Fargo (WFC) remain its top picks. At last check, C stock was trading up 1.1% at $67.49.

Widening the scope, Citigroup stock has been in a channel of lower highs and lows since topping out at a nine-year high of $80.70 in late January, down 16.4% since then. More recently, the shares surrendered a foothold atop their 320-day moving average in May, and later unsuccessfully tested this trendline during a broader bank stock rally earlier this month.

citigroup stock daily chart june 20

In spite of this uninspiring price action, speculative players are upbeat toward the financial shares. The July 70 call is home to peak front-month open interest of 43,344 contracts, and data from the major options exchanges points to mostly buy-to-open activity here.

According to Trade-Alert, some of this activity appears to have occurred last Thursday, when a number of positions were purchased for a volume-weighted average price of $0.62. If this is the case, breakeven for the call buyers at the close on Friday, July 20, is $70.62 (strike plus premium paid).

Today, it looks like one speculator may be rolling her long weekly 6/29 68-strike calls up to the 70 strike, betting on even bigger gains for C stock through next Friday's close. Regardless, premium on the equity's short-term call options are currently pricing in relatively high volatility expectations compared to puts, per Citigroup's 30-day implied volatility skew of 4.6%, which ranks in the 17th annual percentile.


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