Citigroup's Stock Drop Drives Traders' Interest

By YVONNE BALL
November 2, 2007; Page C5

A sharp fall in Citigroup's shares after a pair of analyst downgrades and worries over capital levels brought option traders out in force.

As the stock slumped 6.9% to $38.51, the volume of options traded was heavy, with about 252,700 call options on the stock traded compared to 272,500 puts.

Rebecca Engmann Darst, equity options analyst at Interactive Brokers noted buying of November $40 calls; however, the price of these fell to 91 cents, down $1.15, which she said may have encouraged some activity.

Some 46,300 of these options traded compared to open interest of 14,644.

Ms. Engmann Darst said she noted similar buying activity in the November $45 calls a couple of weeks ago amid speculation that Chief Executive Charles Prince was close to resigning.

She said the fall in premiums yesterday could possibly be "luring some options traders in on a bet that [Citigroup's] share price can recover in the short term if the CEO is at long last forced from his watch."

Meanwhile, many option traders booked handsome profits after United Therapeutics Corp. delivered the results of a closely watched Phase III drug trial.

Early yesterday, United Therapeutics disclosed that results of the trial of Viveta, an inhaled formulation of its flagship Remodulin pulmonary-arterial-hypertension treatment, "robustly met its primary end point."

The eagerly awaited news sent the stock up 38% to $94.11 and sparked a flurry of profit-taking among some bullish investors who had been anticipating the outcome of the late-stage trial for months.

"This has been an event that every health-care trader has been really gunning for since the spring," said Adam Futterman, managing director, options sales and trading at WJB Capital Group Inc.

"Most people were bullish that it was going to work out."

As shares in United Therapeutics soared, almost 53,600 call options on the stock changed hands compared to 50,500 put options, according to Track Data.

The release of the results led to a sharp fall in implied volatility on the front-month options, but many traders who were long call options booked handsome profits early in the session as the cost of those options soared.

"The key to making money on this news was to sell those calls as close to the opening as you could. And, yes, we saw some unwinding of those positions," Mr. Futterman said.

For example, early in the session traders fetched up to $6 for their November $90 call options, which were selling for $2 on Wednesday.

After falling below $3 early in the afternoon, these options last traded at $6.30 after the underlying stock hit an intraday high $96.74 toward the end of the session.

"We saw all sorts of strategies going into this, but certainly those who were long calls are enjoying life today," Mr. Futterman said.