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Citigroup Speculators Bet on a Recovery by Week's End

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Near-term call volume spikes on the bank stock, despite Wednesday's tumble.

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Citigroup (NYSE:C) was one of several financial companies that took a beating yesterday, which some analysts attributed to a weakening enthusiasm for the sector as a whole following the recent Cyprus bailout drama. However, Wednesday's bulls were apparently unfazed by the stock's 3.7% drop, as roughly 99,000 calls crossed the tape during the course of the session -- a 29% mark-up from the equity's average single-session call volume. By contrast, about 59,000 puts changed hands. Leading the pack was the weekly April 5 43-strike call, which saw more than 12,600 contracts traded -- the majority of them at the ask price, pointing to buyer-driven activity.

These near-the-money calls were exchanged at a volume-weighted average price (VWAP) of $0.49. Meanwhile, open interest at this strike soared by 4,562 contracts overnight, signaling the initiation of new positions. By purchasing the calls to open, speculators are betting on C to muscle north of $43.49 (strike price plus the VWAP) by this Friday's closing bell, which is when these weekly options expire. However, the options market seems less certain about whether the calls will be profitable, as their delta fell to 0.33 from 0.86 within the course of a day. In other words, these options now have 1-in-3 chance of finishing in the money.

However, Citigroup is no stranger to bullish speculation. The equity sports a 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.85, confirming calls bought to open have nearly doubled puts during the last ten weeks. This ratio ranks higher than 79% of similar annual readings, meaning traders have been picking up calls over puts at an accelerated clip in recent months.

Technically speaking, the banking behemoth has climbed more than 7% year-to-date, and around 21% on a year-over-year basis. However, a look at the charts shows that Wednesday's decline put the stock on pace to finish the week below its 10-week moving average, which has been breached just three other times on a weekly closing basis since July 2012. Still, even if the shares do not ascend past the $43 level over the next day or so, the most yesterday's call buyers will be forced to part with is the initial premium paid.

Citigroup was trading at $42.50 as of Wednesday's close, and was pointed 0.1% higher in pre-market activity this morning.

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

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Twitter: @schaeffers
No positions in stocks mentioned.
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