Citigroup capital infusion fails to stem the tide

Today’s tickers: C, AAPL, YHOO, SPLS, WMI, SMG & VIX

C – Shares in Citigroup Inc. rallied on news of a 4.9% stake thanks to the Abu Dhabi Investment Authority, but it wasn’t long before the stock was once again trading in the gutter. The release of the news overnight had put a healthy bid beneath S&P index futures, but the tone continues to feel fragile. ADIA’s investment now out strips that held by Saudi prince Alwaleel bin Talal, who maintained his allegiance to recently departed CEO, Charles Prince. News stories report how much of a relative bargain Citi has become with its attractive dividend yield and record low price-to-book ratio. Seems that’s not appealing enough given the speculation that the dividend yield will become more attractive if Citi sees fit to conserve capital further by reducing its dividend. Options volume on the stock was the most active on the board by 10:45 am with 237,000 contracts trading. By 12:15 volume was close to 350,000 lots.

In the December contract, investors are starting to see a stronger likelihood that shares will end the year somewhere between $30 to $35 per share judging by the 10,000 lot strangle that appears to have been sold this morning at a price of 1.90. That view would be errant should shares rally beyond $36.90 or slip beneath $28.10 at expiration. In the March contract a buyer lifted 10,000 32.5 calls at 2.70 implying a breakeven at $35.20. In the June contract both 32.5 and 40 calls were actively purchased. In the January contract a huge slug of 27,000 puts traded to the middle of the market, while similar amounts of the 27.5 and 25 puts have also appeared in most recent trading, and judging by the bump up in the share price since then, these could have been sold to rake in premium of 1.65 and 1.10 on the view that a floor is in place for the stock. Implied volatility on the options stands much lower today at 56.3% from 62.9% as some of the uncertainty surrounding the future of the company at least appears to have dispersed with the infusion of capital from the Arab investor.

AAPL – Apple Inc. continues to benefit from its status as one of those companies that can regenerate itself and increase its appeal to consumers. Reports of strong sales of Apple gear continues to support shares, which stand 1.5% higher at $177.25 today. Options volume of 93,000 makes it second in volume to Citigroup in the realms of corporate ticker in play. The body of volume is at the December at-the-money call line where 11,000 calls have traded at 8.55. Open interest is equally significant both here and at the 200 strike.

YHOO – Yahoo! Inc. There’s a strong bullish bias to activity in the Internet search engine’s options Tuesday with 62,700 contracts in play. Almost seven calls are in action for each put, which underscores a 2.5% rally in its shares to $25.84. However, much of the call-side action is concentrated at the December 30 and 37 strikes where 13,000 and 26,000 lots have traded respectively. While this could be a one-by-two ratio call spread, it’s more likely position closing given the proximity to December’s expiration. Unless there is an imminent takeover to be announced, the prospect of Yahoo’s shares rallying 16.7% before December’s expiration looks slim.

SPLS – Staples Inc. Higher margins could have been what investors really wanted to see at office-supply retailer judging by the 8.3% share price gain to $21.40 today. That’s kept options volume of some 16,000 contracts at 10 times its average daily volume according to our option market scanner. December calls at both 20 and 22.5 strikes were sought after, while in the March contract it appears that the 22.5 line was of interest to investors. Calls were sold and puts were purchased. The 20 puts were also active with clear two-way traffic generating around half of today’s overall series volume. Implied volatility eased marginally to 38% post earnings.

WMI – Waste Management Inc. Options volume of 16,000 in this issue so far Tuesday is six times usual average volume. It all appears at the January 30 put strike where open interest of 19,496 lots exists. Overall volume today represents around 10% of total open interest. Given the 1% gain to $33.92 in the stock and the 5% slide in put premium today it appears that an investor is either closing some of the current position or selling premium in the expectation that shares will remain buoyant above the 30-strike price. The options traded at a premium of 2.85 while implied volatility of 30% is now below that on the underlying shares at 32.6%.

SMG – Scott’s Miracle Grow. Around 50% of current open interest of 9,392 lots is in action today on this stock where shares are just 0.4% higher at $35.01. The trading pattern is neat with three round-lot transactions of 1,000 contracts having traded. Curiously the put premiums involved in all three traded today are higher, despite the same direction for the stock. That’s even more curious given the slight dip in option implied volatility from 42% to 40% overnight. It appears that in the January contract an investor is buying lower protection at the 35 strike and has sold what appear to be existing long positions between the 37.5 and 40 strikes above. In the March contract, the 30 and 35 contracts traded to mid market but we’d conclude that this looks like a put spread costing 1.90 aimed at protecting from a further slip in the stock. Its fortunes have been poor in the recent past having slipped from grace from $50 as recently as August.

VIX – CBOE Volatility index – the more-than-1% gain in the major indexes today sent the VIX back down by as much as 7% Tuesday to 26.86. Trading in VIX options remained balanced but some optimists targeted much lower volatility readings by the time the December contract expires. There were buyers of puts at the 20 and 22.5 strikes on combined volume of nearly 4,000 lots. At the other end of the range on the call side, a seller of 2,000 calls at the 40 strike took in premium of just 0.20. This investor clearly feels that 40 is so far away that this is a relatively low-risk play given the fact that investors having stared down the barrel of the gun and seen a 10% correction in the S&P pretty much failed to lift the volatility index even above a reading of 30. Still at least one investor sees the market remaining volatile into February and lifted some 4,000 calls at the 30 strike.

Andrew Wilkinson and Rebecca Engmann Darst

ibanalyst@interactivebrokers.com

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About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school.