C Citigroup Inc

By Gunjan Banerji 

Traders pushed up the cost of bearish Citigroup Inc. options to levels rarely seen in the past year, with the bank scheduled to report quarterly earnings on Friday.

Prices of puts -- options that pay out when the underlying stock declines -- are trading at a premium to costs of calls, the contracts that wager on a rise in prices, according to data from Trade Alert. This relationship between the price of bearish contracts and bullish ones, called skew, is close to the widest it has been in the past year.

The options market is indicating an outsize move in the stock on Friday, pricing a 3.3% swing, according to Dan Deming, managing director at KKM Financial. That is greater than the average 2.9% swing by Citigroup's shares in the last eight quarters, Trade Alert data show. The swing can be in either direction.

"That's a good indication that options players are expecting some fireworks tomorrow," Mr. Deming said. "You can see that there is some event risk priced into these options."

Bank stocks slid Thursday ahead of earnings releases by four big lenders Friday. Financial shares had rallied in recent weeks on speculation that the Federal Reserve will increase interest rates this year. J.P. Morgan Chase & Co., Wells Fargo & Co. and PNC Financial Services Group are among the banks reporting Friday along with Citigroup. Analysts are projecting that third-quarter earnings of all four lenders will be lower than a year earlier.

Citigroup shares have fallen this year, but are up 2.6% so far this quarter. The stock fell 0.5% Thursday to $48.47 a share. Citigroup declined to comment on the options trading.

Traders may be bidding up the price of Citigroup puts because the bank is frequently traded as a proxy for global macro concerns, said Eric Wasserstrom, managing director of equity research at Guggenheim Securities. The company's exposure to macroeconomic issues is actually limited, he said.

While earnings expectations for Citigroup have dropped, the valuation of the stock has moved higher recently, Mr. Wasserstrom noted.

In contrast to Citigroup, options trading on Wells Fargo has been bullish, according to Jim Strugger, a managing director and derivatives strategist with MKM Partners. Well Fargo's stock fell 1.3% Thursday after The Wall Street Journal reported that its chairman and chief executive, John Stumpf, will step down after being under fire for the bank's sales-tactics scandal.

The number of Wells Fargo puts versus the number of calls has declined over the past few weeks. The ratio is currently at 0.86, compared with a one-month average of 0.91, Trade Alert data show.

The options market is pricing in a 2.7% move in Wells Fargo stock Friday after earnings are reported, according to Mr. Deming. In the last eight quarters, the shares have averaged a swing of 1.6%.

(END) Dow Jones Newswires

October 13, 2016 18:51 ET (22:51 GMT)

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