Oh how the mighty have fallen
Monday, November 17, 2008
THE STRIKING PRICE
Puts Point to Lower Citigroup Price
By STEVEN M. SEARS
Some are fear-surfing Citi with low-strike puts.
CITIGROUP'S BOOK VALUE IS $18.10. The stock trades around $9. Is it a bargain?
Historically, buying below book value is a great investment move, but Citigroup (ticker: C), down 67% this year, is attracting few buyers. Options trading suggests lower lows, even after the stock slumped to a 52-week low of $8.27 Thursday. "There's real fear in Citigroup. People don't like blue-chip stocks priced in single digits," says Steve Sosnick, financials trader for Interactive Brokers' Timber Hill market-making unit.
Citigroup is attracting November and December buyers of puts that will pay off if the stock falls below $2.50 or $5. Not everyone is a "death trader," positioning for a Lehman-like implosion. Some traders are "fear-surfing," with low-strike puts that would provide exponential returns if the stock keeps sliding. The world's most important companies are usually above trading games. But Citigroup now seems more like some doddering community bank than an impregnable pillar of the international financial system. Reports of management turmoil exacerbate the perception. Citigroup's directors, frustrated with performance, are reportedly considering replacing the chairman, although the company has denied this.
Indeed, Citi puts are exceedingly expensive, reflecting real concern about its future. Implied volatility of about 150%, compared with sector volatility of 88%, suggests the stock could fall below $2...or race higher. In fact, some investors may want to position for a rebound. Jack Gonzalez, head of flow-derivatives sales at UBS, says bulls can buy January 12.50 calls that expire in 2010. "Given how shareholder equity of about $126 billion has decreased significantly to balance-sheet assets of about $2.05 trillion, and the fact the stock was recently at $13, this stock-proxy strategy provides a good risk/reward," Gonzalez observes.
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