Citi option volume swells, some players bet on losses

CHICAGO (Reuters) - Option trading volume in Citigroup Inc swelled on Thursday as many speculators bet the bank's hard-hit stock would extend its losses by Friday's November options expiration.

Citigroup's stock fell as low as $4.77, a nearly 14-year low in morning trading as investors lost confidence that the bank can work through its credit woes.

Fear prevailed even as the bank's largest individual investor, Saudi Prince Alwaleed bin Talal, said he would raise his Citi stake to 5 percent from less than 4 percent.

The stock was down 20.3 percent at $5.10 in late afternoon trade on the New York Stock Exchange.

"It seems that there has been a total loss of confidence, as investors are nervous about future negative news in Citi," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

"That is obvious as investors pile into the lower strike put options which expire tomorrow and in the next few months," Lefkowitz added.

Roughly 291,000 puts and 290,000 calls in Citi changed hands in afternoon trade -- double the normal combined daily volume, according to option analytics firm Trade Alert.

An equity put option conveys the right to sell the company's stock at a fixed price within a specified time period, while a call option gives the right to buy the security at a set price and time.

RUSHING FOR THE EXIT

"One day before expiration, option traders have blown the roof off the existing open interest at the November put conveying the right to sell Citi shares at $5 a piece," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

November options go off the board on Friday after the close and settle on Saturday.

Investors paid premiums between 24 cents and 78 cents for more than 65,700 contracts situated in that strike price in afternoon trade. Volume exceeded the existing open interest of 38,856 contracts, indicating fresh positions were initiated.

"For speculators establishing positions today even at the lowest premium, Citi shares would have to settle at no more than $4.76 at Friday's options expiration -- a new low," Wilkinson said.

Traders were also looking at Citi November calls with the same $5 strike price as 32,147 contracts changed hands against existing positions outstanding of just 4,600, Reuters data show.

"Given the immense liquidity and elevated speculation in the $5 strike series, many traders are establishing new positions or aimed at booking small short-term profits," he said.

Looking at the December contract, the lower $2.50 strike puts attracted interest as more than 31,400 contracts traded, more than twice the number of established positions.

Traders were prepared to pay a premium as high as 47 cents to sell the stock at half its current worth within a month, Wilkinson added.

(Reporting by Doris Frankel; Editing by Jan Paschal)