Tuesday, October 13, 2009

Options Traders Citigroup Lotto Ticket Trade (C)

Options traders are making, and have been making, a very large bet using Citigroup, Inc. (NYSE: C) stock options that is technically a very low risk bet if done on a de-leveraged basis.  It is almost very similar to a Citigroup Lotto Ticket.

October stock options expiration date in only about 75 hours away for this Friday.  With the stock itself being such a low-priced stock, many might be shocked about the call and put options trading seen here.   The stock is up 1.5% today at $4.845 on almost 300 million shares as of 1:10 PM EST.  But the OCT-2009 $5.00 CALLS have seen some 89,503 contracts trade versus an open interest of some 791,234 contracts.  The last trades were at $0.11 and the market on this one is listed as $0.10 X $0.11.

In short, this lotto ticket pays off only if shares go north of $5.11 (plus transactional fees).  But if traders are only buying one contract per 100 shares for the exposure to any big earnings upside, then they are actually taking less event risk than stock traders. It would be easy to imagine that Citi shares could fall more than $0.11 if the news is atrocious.  Merely having a stop loss during market hours won’t protect those traders who have on a theoretical $4.50 stop loss if this were to gap down significantly.

As always, out of the money options expire worthless at each options expiration date.  So calling this a lower-risk trade only applies if traders are using the de-leveraged trade.  Options of this sort are 100% purely for risk-based capital. And as far as lotto tickets, the odds are directly at an inverse proportion to the potential reward….

JON C. OGG


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