Citi: Facing Bearish Trades

By David Russell

Citigroup (C) is facing a negative sentiment today as some bears position for the banking giant to break the buck.

OptionMONSTER's Depth Charge monitoring program detected money flowing into the December 1 puts, pushing the premium up from $0.07 to $0.08. More than 25,000 contracts changed hands against open interest of 19,310, with one large purchase generating more than three-fifths of the volume in the strike.

C was down 3.35 percent to $2.60 in late morning trading and has fallen 23 percent in the last month. Estimates are all over the map on the company ahead of its second-quarter earnings release scheduled for the morning of July 17. The stock needs to lose about 69 percent of its value by expiration for today's puts to turn a profit.

In another noteworthy Citigroup play today, one investor apparently took profits on bearish risk-reversal trades, buying 7,000 July 10 calls for $0.01 and selling an equal number of July 10 puts for $7.40. While we don't know how much the investor paid to implement the position, it was probably far below $7.39 credit they received today.

Options volume in the name is less than half average so far today, with puts generating 59 percent of the activity. That's more bearish than an average session, when puts account for 46 percent of trading.

(Chart courtesy of tradeMONSTER)

Comments

[Fourpenny Guy:]

Citi is clearly mismanaged, and with this week's management changes, including the 5th CFO in 5 years, Citi is basically drifting towards oblivion. I suspect that Citi may be broken up into 3 pieces, or sold, in part, to stronger competitors, particularly on the banking side. Interestingly, Morgan Stanley needs a retail bank, and Citi has one, so C should do a joint venture with Morgan with that entity.

The risk averse traders would do well to steer clear of a firm that cannot repay TARP, has 264 billion in derivative exposure, will be diluting its share base in the coming weeks, and then doing a reverse split. There is no compelling reason to own a firm that blatantly overlooks money laundering controls, and one can bet that Citi lacks internal controls in other areas, too. The smart money is selling prior to earnings, and options are pointing to a 2 dollar stock, if not one under a buck. As we saw with AIG this week, reverse splits kill companies. However, Citi needs to toss Vikram out the door, and bring in a seasoned banker.

One can only imagine what C would look like now had they had a seasoned banker to negotiate for Wachovia, and merged with Goldman. Morgan would not have a controlling interest in Smith Barney. Citi is basically finished, and earnings will shed little light on the future as Citi is shedding strong assets, and losing clients in the part of Smith Barney it has. I would put money elsewhere, in smaller regionals, and better managed, tarp-free banks.

Jul 10 05:09 PM

[Warm_Paw:]

It's not bearish, it's bullish.
Citi should be underwater but govt has changed accounting rules so it will come through unscathed.
Geitner cheerleading a rally until banks healthy enough to mark to market toxic assets.
So, with that being said, citi doesn't fall apart and your trader pockets $7.40 a share of the premium on the puts while paying .1 cent a share on his calls.
So the calls expire worthless?
What's $70, after making $49,000 in premiums.
I think the traders are going to make a buck on the positive note this week, just in time for it to get ugly in August when AIG falls apart.
Notice AIG went up a buck and change today?
Obviously speculation after pundits claiming no intrinsic value left.
It's the inside traders twisting the market out of context that has conservative money sticking to the sidelines.
I'd like to get a hold of the Goldman trading program and see what their game plan was to be for this strike date.
RIMM just falls to $64 for no apparent reason while it's one of the few companies actually making money. This roller coaster ride is a circus.
I'm buying real estate with my money - trading days are over until there is some form of normalcy on Wall St. Just crooks and low lifes.

Jul 10 05:45 PM

[untrusting ...:]

Not sure what you are talking about, it makes little sense, except that yes it is a bullish bet. The $10 puts almost certainly will not expire worthless. In fact they require the seller to PAY $10/share for C for 7,000 puts x 100shares = 700,000 shares of C. That's $7 million dollars. Given $10-$7.40 premium, that's $2.60/share at risk or $1,820,000, not including transaction costs. Thus for every $.01 that C closes below $2.60 on the July 10 puts, this investor will lose $7,000 as it is almost a 100% certainty that C will close below $10 on the July $10 puts (puts/calls will be adjusted if the C reverse spit goes through to maintain the same relative value). The big question is where will C close? Nobody knows but the market is certainly betting that C will continue to trend down, so unless this option buyer/seller has some inside information, this is one mighty high risk option bet and the market is essentially showing that it will be a losing bet, as baring something dramatic, C could very easily move towards $2/share or less. Not a bet I would make unless I had inside information or was a Goldman Sachs trader with "propietory trading information", but hey it's his money so is OK with me.


On Jul 10 05:45 PM Warm_Paw wrote:

> It's not bearish, it's bullish.
> Citi should be underwater but govt has changed accounting rules so
> it will come through unscathed.
> Geitner cheerleading a rally until banks healthy enough to mark to
> market toxic assets.
> So, with that being said, citi doesn't fall apart and your trader
> pockets $7.40 a share of the premium on the puts while paying .1
> cent a share on his calls.
> So the calls expire worthless?
> What's $70, after making $49,000 in premiums.
> I think the traders are going to make a buck on the positive note
> this week, just in time for it to get ugly in August when AIG falls
> apart.
> Notice AIG went up a buck and change today?
> Obviously speculation after pundits claiming no intrinsic value left.
>
> It's the inside traders twisting the market out of context that has
> conservative money sticking to the sidelines.
> I'd like to get a hold of the Goldman trading program and see what
> their game plan was to be for this strike date.
> RIMM just falls to $64 for no apparent reason while it's one of the
> few companies actually making money. This roller coaster ride is
> a circus.
> I'm buying real estate with my money - trading days are over until
> there is some form of normalcy on Wall St. Just crooks and low lifes.

Jul 10 06:32 PM

[Emerald:]

Say what you will, but I've got my money on Uncle Sam, like it or not. My "C" holdings are a five year wait and see proposition. Don't fight the government with your own money.

Jul 11 01:50 PM