C – Citigroup shares set not just a fresh 52-week low today – but a multiyear low – with a precipitous 6.7% decline to $21.52. The move came after Dubai International Capital head Sameer al-Ansari said Citigroup would continue to require outside capital infusions despite its grueling regimen of writedowns. The sense of pessimism was further reinforced by yet another projected loss, this time forecasted by Merrill Lynch, which is bracing for a new round of $15 billion mortgage-related writedowns. The move elicited a mass exodus among option traders into Citigroup puts, which are outmoving calls by a factor of 2.5. Of note here is gargantuan volume in the April 20 puts, which have already traded more than 111,000 times today – more than 4 times the prior open interest at this strike, as the price of the position has appreciated some 77% from yesterday’s levels, still reflecting a slightly less than 1-in-3 chance of exercise for the $20 put heading into April. Front-month action appears to show volatility plays at strikes ranging from 20-25. Implied volatility has also made an abrupt jolt upward, up some 14% on the session to more than 61%. While that’s only a slight gap above the 60% historic reading for Citigroup, it’s the highest implied volatility reading we show in at least a year, and a strong indication that the tumult for its share price isn’t going to end with today’s fresh lows.
FRE – News of an agreement with the New York State Attorney General’s office to set more stringent rules for home mortgage appraisals sent shares in Freddie Mac down 7% in early trading to $22.09. Meanwhile, its 181,000-plus active option contracts – the equivalent of about 30% of its open interest - are trading with a skew to puts by a factor of nearly 10 to 1 as the current volatility environment suggests about 5% more price risk to Freddie shares than they have shown historically. Traders are seeking protection against this level of price risk by piling into out-of-the-money April puts, notably at the 17.50 strike, which is already trading at 12 times the open interest, and at the 20 strike, where traders are seeking opening positions at $2.20 apiece for a position that requires another 19% decline from current levels just to break even.
HOT – News that Starwood Hotels and Resorts will make its entrée into the never-starved-for-luxury United Arab Emirates with the opening of a premium hotel in Ras Al Khaimah sent implied volatility kicking 13% higher on the session to 43% - still below the 49% historic volatility reading. Option activity accelerated to more than 5 times the normal level, this against a 5% gain in share price to $49.94.
