Options Update: Citigroup Puts Popular as Credit Suisse Cuts Banking Stocks
Shares of banking behemoth Citigroup
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PowerRating) are trading more than 4.5% lower today following a pair of reports. First, Credit Suisse downgraded its view on the U.S. banking sector to “underweight” from “market weight,” stating that it believes that write-offs in Europe and the U.S. will total about $1.3 trillion. The move was part of a global equity strategy from Credit Suisse, which also cut European banks to “small underweight,” and offered up a “benchmark weighting” on Japanese banks.
Second, Wells Fargo
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PowerRating) has topped Citigroup, in terms of market value, to become the third-most valuable U.S. bank. According to a story at Bloomberg, “Two years ago, Citigroup was worth more than $240 billion, double Wells Fargo’s value. Citigroup shares have since plunged 58 percent, compared with Wells Fargo’s 4.1 percent decline.”
Naturally, options speculators were circling C shares like vultures looking for fresh meat in the financial sector today. More than 74,800 Citigroup puts have changed hands so far on the session, more than tripling the stock’s average daily put volume and placing the security on today’s Intraday Volume Explosion List. However, it was the more than 30,000 contracts that traded at C’s September 20 put that caught my eye today.
Anatomy of a Citigroup Put Position
Digging into C’s put volume, I noticed that there were quite a few block trades skirting the edge of institutional activity. However, a large block of 15,000 September 20 Citigroup puts stood out like a sore thumb amid the deluge of blocks of 300 to 900 contracts. Looking more closely at this large trade, the 15,000 contracts crossed the tape at 9:48 a.m. Eastern time, changing hands at the ask price of $0.66 – we’ll use this trade as today’s example. Keep in mind that today’s volume at the September 20 put falls well short of the 128,000 contracts already open at this strike. As such, today’s volume could be the closure of existing positions. However, given that C has fallen back below this key support level in today’s trading, and that the trade crossed at the ask price, it would seem that we are dealing with the initiation of a buy-to-open put position on the shares. Running with this put-buying theme, let’s see how the trade actually plays out:
The hypothetical trader purchased 15,000 C September 20 puts for $0.66, or a total outlay of $990,000 — ($0.66 * 100)*15,000 = $990,000. For this trade to reach breakeven, C would need to drop a mere 0.31% to $19.34 per share. We arrive at this by subtracting the cost of the option ($0.66) from the strike of the purchased 20 put ($20 – $0.66 = $19.34).
Since the September 20 put is practically at-the-money, the trader needs very little movement out of the shares in order to realize a profit on the position. However, the proximity of the option to the underlying shares also creates a fair amount of volatility in the position. What’s more, there is greater risk that C could move against the purchased put, thus scuttling the trade very quickly. Meanwhile, there is less than 2 weeks until September options expire, creating a potentially nerve-racking situation for the trader is C finds any short-term strength. Let’s see if the stock’s sentiment or technical backdrops provide any clues to the possibility that this purchased put position will be profitable before expiration on September 19.
Getting Technical
The technical prospects for an at-the-money C put trade are actually not a dismal as one would suspect. The stock is off more than 30% so far this year, easily underperforming its peers in the Select Sector Financial SPDR (XLF), which is off 21% for the same period. C is also battling resistance at its declining 10-week and 20-week moving averages. The equity has closed only 2 weeks above these trendlines since June 2007. The latter of these moving averages is currently positioned at the 20 level, and could help keep a purchased September 20 put from moving out of the money.
However, C’s 10-week moving average resides just below short-term support in the 19 region. This configuration could prove to be troublesome for the put trader, C needs to extend its decline rapidly before September options expire on the 19th. Any technical support could limit any profits on the position, or provide a springboard for C to keep the shares pinned close to the 20 level. Such a development would impact a September 20 put by eating away at the time value on the option.
The Sentiment Drivers
The sentiment backdrop for C is a different matter all together when considering the profitability of a September 20 put on the shares. Specifically, pessimism is running high on the shares, and while most of this negativity is deserved given the stock’s poor technical performance, the impact of any positive developments for the company could be amplified by the lowered expectations. The biggest concerns for a put trade on C is the stock’s negative Schaeffer’s put/call open interest ratio (SOIR) of 1.20, which ranks in the 71st percentile of its annual range, and the 72% of analysts doling out “hold” or worse ratings. Any upgrades from the brokerage bunch, or an unwinding of negativity from the options crowd could place upside pressure on C, potentially pushing a September 20 put out of the money.
The Verdict?
The upside risks from C’s sentiment indicators, in my opinion, are greatly muted by the current perception of the financial sector on Wall Street. Furthermore, I doubt we will see any market-moving activity similar to the Fannie Mae and Freddie Mac bailout any time soon, so C bulls may have already expended their sideline capital in yesterday’s 6.5% rally. With C trading back below its 20-week moving average and the round-number 20 level, the risks to a C September 20 put boil down to time value at this point. With the shares locked in a long-term down trend, the question may not be “is a 20 put on C a good strategy?” but rather “is a September 20 put on C a good strategy?” The security appears poised to extend its poor price action, but whether or not the shares will move fast enough and far enough for today’s hypothetical to realize much of a return on the trade remains to be seen.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.