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Call Volume Swells as Citigroup Inc Shares Falter


Citigroup attracts near-term call buyers -- and possibly sellers

Citigroup Inc (NYSE:C) is trending lower along with the broader market today, and is off more than 2.4% to hover at $51.63. Nevertheless, call activity is running hotter than usual on the banking giant, with roughly 33,000 contracts crossing the tape thus far -- a 45% mark-up over the norm. Conversely, around 17,000 puts have changed hands. Taking a closer look at the data, it appears that this heavy call volume could represent a mix of buying and selling activity.

On the bullish side of the action is the weekly 8/9 53-strike call, where close to 2,800 contracts have been exchanged for a volume-weighted average price (VWAP) of $0.11. A large portion of these calls traded at the ask price, while implied volatility was last seen 5.6 percentage points higher -- suggesting that at least some of the contracts are of the buy-to-open variety. In other words, speculators will secure a profit if C muscles north of breakeven at $53.11 (strike price plus the VWAP) by this Friday's close, when these weekly options expire. This denotes an increase of 2.9% to the stock's current perch. The delta for these calls sits at 0.12, meaning they have a 12% chance of finishing in the money.

Meanwhile, more than 4,500 contracts have crossed at the August 52.50 call for a VWAP of $0.44. However, the majority of the calls switched hands at the bid price, implying they were sold. Although data from the International Securities Exchange (ISE) confirms that a small percentage of the contracts were sold to close, implied volatility has ticked higher, hinting that perhaps some of the calls were sold to open. In this scenario, traders are expecting C to remain south of $52.50 through front-month expiration -- rendering the contracts worthless, and allowing the sellers to pocket the initial premium received. This could also be reflective of a covered-call strategy, in which case the speculators may be shareholders looking to generate some extra income, or perhaps pick up some downside protection in the event of a pullback.

Friday's put activity notwithstanding, C calls have been preferred over puts lately. In fact, traders on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 185,916 calls during the past month, compared to 100,491 puts, resulting in a 20-day call/put volume ratio of 1.85.

Despite today's drop, Citigroup has advanced close to 31% in 2013, and nearly 81% during the past 52 weeks. What's more, the shares remain perched atop their 20-week moving average, which has served as support for nearly a year.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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