Citi Option Trader Bets Nearly $1M On Long-Term Upside

Shares of Citigroup Inc C traded higher Monday as traders became increasingly optimistic that a combination of Federal Reserve stimulus and a potential coronavirus vaccine can help big banks weather the economic downturn.

Despite concerns over the impact of emergency interest rate cuts and loan losses, Citigroup shares were rocketing higher in the past week. Several options traders made large bets on Monday that the stock is just getting started.

The Citigroup Trades

On Monday morning, Benzinga Pro subscribers received eight option alerts related to unusually large Citigroup option trades. Here are a handful of the largest:

• At 10:09 a.m. ET, a trader bought 500 Citigroup call options with a $50 strike price expiring on Jun. 12. The contracts were purchased near the ask price at $1.601 and represented an $80,050 bullish bet.
• At 11:43 a.m. ET, a trader sold 2,026 Citigroup call options with a $52 strike price expiring on Friday. The contracts were sold near the bid price at 41.8 cents and represented an $84,686 bearish bet.
• At 11:44 a.m. ET, a trader bought 1,000 Citigroup call options with an $47.50 strike price expiring in January 2022. The contracts were purchased at the ask price of $9.75 and represented a $975,000 bullish bet.
• At 11:47 a.m., a trader sold 1,947 Citigroup call options with a $52 strike price expiring on Friday. The contracts were sold at the bid price of 41 cents and represented a $79,827 bearish bet.

Of the eight large Citigroup option trades on Monday morning, four were either calls purchased at the ask or puts sold at the bid, trades typically seen as bullish. Three were calls sold at the bid trades typically seen as bearish. One trade was executed near the bid-ask midpoint, trades typically considered neutral.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Citigroup option trade, there’s certainly a possibility it could be a hedge on a large position in Citigroup stock.

Can The Fed Save Bank Stocks?

The large 2022 Citigroup call purchase stands out as a particularly large and particularly long-term trade. The bullish bet comes less than two weeks after Bank of America analyst Erika Najarian singled out Citigroup among large-cap bank stocks as “deeply discounted.”

Bank of America has a Buy rating and $57 price target for Citigroup.

The Federal Reserve’s massive stimulus measures have pumped an incredible amount of money into the financial system, and banks could ultimately benefit from the surge in lending.

At the same time, a smoother and faster economic recovery from the shutdown could result in smaller loan losses than anticipated for banks like Citigroup. Finally, Citigroup’s balance sheet is much healthier this time around than it was during the 2008 financial crisis.

Despite extreme job losses and GDP contraction, the COVID-19 outbreak does not appear to be threatening the stability of the global financial system like the mortgage crisis of 2008. 

Bullish sentiment among StockTwits messages mentioning Citigroup was at 72.9% on Monday, up from its 2020 low of 42.9% on March 4.

Benzinga’s Take

The nearly $1-million call purchase has a break-even price of $57.25, suggesting at least 15.7% upside over the next year-and-a-half.

U.S. banks managed zero interest rates for years during the financial crisis recovery, so the call buyer may be betting that Citigroup will be much more efficient in navigating the difficult recovery environment today than it was a decade ago.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

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How To Read And Trade An Option Alert

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