Mark Sebastian is the creator of the Option Pit blog.

In the wake of the financial crisis, if one asked a passerby who the culprits that caused the near downfall of the free market banking system were, one of the first companies to be mentioned would be Citigroup Inc. (NYSE: C).

Citigroup took some massive and unnecessary risks leading into the financial crisis. And of the banks and insurance companies that got bailed out by the federal government, very few took more than this bank. In the end, Uncle Sam ended up owning a massive stake in Citi.

As Citi has come back from the brink and begun to pay off large portions of the bail out money, the government has begun to sell big chunks of its equity position. This is a part of the reason that while many of the financial stocks have recovered from the lows of the financial crisis, Citi has not.

Interestingly enough, it is another “culprit” in the financial crisis that has me thinking bullish thoughts on Citigroup.

Citi Call Volume Explodes

On Wednesday, Nov. 10, we saw an incredible surge in call volume in Citigroup. With a ratio of open calls to open puts of 2.3-to-1, traders were already unsurprisingly bullish on Citi given the limited downside of a $4 stock. On Wednesday, call options traded at twice the company’s average daily call volume, almost all toward the buy side. Put options, on the other hand, traded at about half their average daily volume. 

All of this could mean a little … it could also mean a lot. When reading paper it can be very difficult to determine what the customer is trying to accomplish. However, on Nov. 10, there were a few trades that were blatantly bullish, almost all of them initiated by Goldman Sachs Group, Inc. (NYSE: GS).

The first trade Goldman put on was the January 2011/March 2011 call spread. With the stock trading around $4.30 at the time, this trade is designed to make money as the company heads toward $4.50, and then begin to give it away.

If one is bullish, I like this trade a lot. It collects theta, and has a long delta (although it begins to get short after $4.50). The Goldman customer liked it more than me though, because the trader did 100,000 of these, which is a massive trade even for a company as liquid as Citigroup.

Interesting enough, after the call spread went up, Goldman came back and bought up a chunk of the C Jan 4.50 Calls they had just sold. This could have been the trade desk rebalancing the trade in an attempt to make it more bullish, although that could be one of many reasons. Regardless, this points toward the stock possibly rallying more than 5%. (The company ended up trading through $4.40 by day’s end on Wednesday, and held relatively steady today given the market sell-off).

I think many of us have known in the back of our heads that Citi was not going to stay around $4 forever, and now may be the time for a breakout.

Bullish Citi Spread

Since this is such a cheap stock, and the implied volatility is still relatively low (around 38% in March), I can think of a few trades I like. One that seems appealing to me is to buy the C March 4.50 Calls and sell the C Jan 5 Calls, and then the C Feb 5 Calls. If the company falls back, traders can roll down the January or February calls to the $4.50 strike, creating a time spread.

This trade is slightly more bullish than the Goldman call spread, but then again, based on the follow-up trading, so is Goldman Sachs.

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