March 19, 2009 / 9:39 PM / 11 years ago

Citigroup call volume pops up, traders play both sides

CHICAGO (Reuters) - Citigroup Inc (C.N) on Thursday has again become a favorite options name as traders took profits off the table, employed so-called conversion strategies and made bullish and bearish plays on the stock.

Citigroup shares slide 15.58 percent to $2.60 after it said it may conduct a reverse stock split as part of an exchange offer that could give the U.S. government a 36 percent stake in the bank. The shares earlier hit a high of $3.89.

“The fact that we have had a near 20 percent move both up and down in the underlying shares today, has created a real day traders haven, opening up big swings in options prices,” said Andrew Wilkinson, senior market analyst at Connecticut-based Interactive Brokers Group.

The stock has been volatile in part because some investors are buying the preferred shares and selling the common shares short, bets that shares will fall, or using options.

“The call volume has been outrageous in Citi. Much of it is due to short covering,” said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group in Chicago.

About 2.25 million contracts traded in Citi, dominated by 1.49 million calls, which convey buying rights to the company’s shares at a fixed price within a specified time period.

The turnover was four times the usual combined volume, according to option analytics firm Trade Alert.

The bank's volume on Wednesday finished at 2.7 million contracts and topped the options on the popular S&P 500 SPDR, an exchange-traded fund designed to equal roughly 1/10th the actual Standard & Poor's 500 index .SPX.

The frenzied trading in recent sessions resulted in a boost in Citi’s call open interest. As of Thursday’s close, the number of calls outstanding was 5.1 million contracts, up from 3.5 million over the past six sessions, Trade Alert data show.

Citi’s volume was spread across the board with the heaviest in June expiration. Most was in calls and some of it appeared to be profit taking as shares jumped earlier in the session before falling.

The April $3 and June $2.50 puts were popular with the bears and the bulls focused on the April $4 and $5 strikes, Wilkinson said.

“There was also exceptional volume in the June $2.50 calls, likely due to a conversation trade and but notably where the bulls were stampeding today,” he said.

A lot of traders probably took some profits as well as covered their short positions in the stock, said Chris McKhann, analyst at Web information site optionmonster.com.

Conversion strategies turned up again in the June contract. In a conversion, an investor purchases the underlying stock and offsets this by buying a put and selling a call with the same expiration and strike price in what is viewed as a synthetic short stock position.

“We are still seeing people employ the conversion strategy that we saw yesterday in order to cover their short stock positions” mainly in the June $5 and $2.50 strikes, Kinahan said.

Reporting by Doris Frankel; Editing by Diane Craft

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