Reuters recently reported that there Citigroup’s (C) options were the most actively traded in 2009 and so far in 2010.
The article quoted Henry Schwartz, president of option analytics firm Trade Alert, who said, year-to-date, Citi option volume (as of the start of this week) was 53.3 million contracts, or 7.8% of the total single-stock option volume.
And current open interest in Citi is 13 million call options, which is more than twice the number of put options, for a total of 18.6 million contracts. Schwartz said that’s 11.4% of the total single-stock open interest (the number of existing positions held by investors). To put this in perspective, he said that the next largest is Bank of America (BAC) with 9.6 million open contracts, less than half the Citi level.
Below is the options volume graph for C over the past three months (in thousands):
And here’s the open interest (in thousands):
The big question is why Citi’s options are so active.
When we first saw Citi options go nuts last year, it actually had nothing to do with, well, options. Rather, you had arbitrage traders buying Citi preferred shares versus shorting Citi common stock. Except that you couldn’t always actually short Citi common stock, and if you got “lucky” and found some you had to pay usurious interest on it. So traders created synthetic short stock via Citi options.
Generally this involved buying an in-the-money (ITM) put, and simultaneously shorting the call of the same expiration and strike at prices that equated to shorting stock lower than where C actually traded at the time, but in-line with the arbitrage against the preferred shares.
The upshot? If for whatever reason you wanted to own Citi stock at the time, you could have taken advantage of the options pricing and simply sold the puts and purchased the calls. Or you could have bought the preferred and gotten C at the conversion price. Both are, of course, pretty complicated strategies for the typical investor.
But what’s the reason for the action in Citi options now?
I see lots of theories, from bullish opinions, to call sellers cashing in on earlier bullish opinions, to investors unable to buy stocks under $5 using calls instead.
But perhaps there’s less here than meets the eye.
Remember that Citi is a $5 stock. So one call contract, if exercised/assigned equals about $500 worth of Citi stock.
But what about Apple (AAPL), a closely watched stock trading north of $250? When AAPL is at $250 , one call gets you $25,000 worth of stock — quite a difference from the Citi trade.
C has an average options volume of 2,661,810 and open interest of 18,099,500, while AAPL has volume of “only” 246,990, with an open interest of 1,291,410.
But what if AAPL split 50:1? It would now have volume of 12,349,500 and open interest of 64,570,500, and we’d be wondering why all the excitement in the AAPL options.
Now this overstates the argument a tad. Citi has a float of about 30 times the shares of AAPL, so you can knock a bit off the “price adjusted” AAPL options volume and open interest. But the point remains the same: There’s just nothing exceptional about the C volume in dollar or stock terms.
If there’s something of interest here, perhaps it’s the nature of the volume. Check out those two graphs above again. Open interest has increased about 25% over the last three months, but call volume has doubled (after rising five times at the peak).
It looks like we simply have a whole lot of short-term trading going on, and mostly in the calls.
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