Citigroup Option Traders Remain Optimistic

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Citigroup Option Traders Remain Optimistic

Options purchasers are acting in a way that suggests they believe the share price will go higher in the future after Citigroup Inc. (C) announced that it had outperformed forecasts for its second quarter earnings results. Given that the C share price fell 0.29% on the day the report was released, this could come as a surprise.

Investors had held the share prices range-bound before the results report, and there was a substantial amount of open interest in put options. The number of option trades suggested that investors had been purchasing puts and selling calls. Options trading following results, however, indicates that investors are hopeful that C will continue to move higher. The reason for this is that although the price action seems to be maintaining support, the option market suggests that traders are simultaneously selling puts and buying calls.

Options traders may be cautiously hopeful, according to a study of price movements between stock prices and option trading activity on the days after results. Even though Citigroup’s stock price dropped 0.29% after results, the movement after the release just brought prices closer to their 20-day moving average. C, however, clearly closed under that threshold. In addition, although call option activity rose, put option activity remained mostly unchanged. This may occur because traders in options think Citigroup is inexpensive at the moment and that the stock price will rise soon.

Key Takeaways

  • Following the results report, traders and investors continued to buy Citigroup shares as the price declined by less than 1%.
  • The share price of C began the day above its 20-day moving average on the day of the earnings release but ended the day below it.
  • Despite the decrease in the share price, put and call option activity seems to be poised for a rise.
  • The support and resistance levels based on volatility allow for a greater shift higher than downward.
  • Trading opportunities are presented by this setup should the decrease in share price based on earnings reverse.

Their decisions suggest a projection for the next weeks since option trading reflects the actions of investors who want to hedge their long holdings or speculators who seek to earn from accurately forecasting unanticipated movement in an underlying stock or index. This is due to the fact that trading options is essentially a gamble on the market’s probability, one that is placed by traders who, on average, have more knowledge than most investors. To make the most of this information, it’s important to comprehend the circumstances around the price behavior. The setup after the earnings announcement is seen in the chart below, which shows the price movement for C’s share price at lunchtime on Thursday.

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Current Trends

Over the duration of the one-month trend, the stock’s share prices have stayed in a broad range. In the previous month, C increased to $80 per share in the beginning of June, dipped as results drew closer, and eventually fell by around 0.29% on the day of the release.

The center portion of the chart’s technical examinations is where the price ended up. The studies’ 20-day Keltner Channel indications serve as its foundation. These are price levels that are multiples of the stock’s average true range (ATR). This array makes it easier to see how the price has varied but has mostly remained within a typical range during the whole month. This price change for C shares suggests that investors lack faith in C’s future.

Tip

A common technique for displaying historical volatility over time is the ATR. Two to four weeks of trade on a daily chart are often included in the 10 to 20 time periods that make up the standard average length of time utilized in its computation.

Based on the price trend for C staying in a moderate range, chart watchers may infer that traders were not anticipating a large move either upwards or downwards heading into earnings. By focusing on the specifics of option trading, chart watchers might also develop an opinion on investor expectations. Traders seemed to anticipate that C would not move much, either up or down, following results before to the release.

Tip

A 20-day simple moving average serves as the foundation for the semi-parallel lines that make up the Keltner Channel indicator. This channel indicator is a great visualization tool for charting historical volatility since the higher lines are created by adding a multiple of ATR to the average and the lower lines are created by deducting a multiple of ATR from the average price.

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Trading Activity

The recent behavior of option traders suggests that they believe C shares are cheap. They have bought call options in an effort to predict whether the stock will close inside the box shown on the chart between now and August 20, the next month’s option expiry date. The price that the call option sellers are providing is shown by the green-framed box. By August 20, there is a 69% likelihood that Citigroup stock will finish inside this range or below. Sellers are thus just somewhat positive. Buyers, however, are grabbing these prices, indicating that they believe these options are underpriced. It looks that purchasers are ready to face the long odds since the pricing suggests that there is only a 31% possibility that prices will close above this green area.

The fact that C had more over 1 million call options and just around 1.2 million put options in the open market as of Thursday highlights the prejudice that option purchasers exhibited. Although they are quite close, it seems like more put options are being offered. This often means that traders of call options anticipate a rise in price.

Even though volatility has significantly lessened since results, there are still more put options than calls in the open interest. This indicates that put option sellers are selling them rather than buying them, which fosters a bullish outlook. The call volume significantly exceeds the put volume for strikes at the money and one step in either direction. The amount of out-of-the-money put options drops considerably more quickly than the volume of out-of-the-money call options, indicating that more traders anticipate an upward trend in the price of C shares than a downward trend.

The 10-day Keltner Channel research with a 4x ATR setting produced the purple lines on the graph. With this metric, the price action is more likely to produce zones of strong support and resistance that are strongly connected. When the channel lines have recently made a considerable turn, these areas become visible.

The graphic below includes annotations for the levels that the turns designate. What stands out about this chart is how closely the call and put prices are spaced, leaving plenty of room for movement on either side. This implies that option purchasers aren’t entirely confident in the direction the firm will take in the wake of the report. The share price moved less than it did following the last earnings announcement, despite the fact that investors and option traders did not anticipate significant movement from the report.

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These levels of support and resistance demonstrate a wide range of price support and resistance. As a consequence, it’s probable that there may be a significant movement in either way soon. Next the prior results report, C shares increased by 0.5% the next day before beginning to decline the following week. In the week after this statement, investors may be anticipating a similar little price movement. Share prices may increase or fall more than anticipated in the near future due to the wide volatility range; nonetheless, there is more space in the volatility range to support an upward trend.

Market Impact

Due to Citigroup’s vital ties to the financial industry, its earnings report has a significant impact on the market. After results, C shares normally fluctuate little, so the outcome doesn’t immediately affect index prices. No matter what the investigation concludes, financial services stocks are probably going to be significantly impacted.

C contributes to setting the tone for the market as a whole as one of the first big firms to submit its quarterly earnings report. The market’s response to a generally good report may have an impact on other sector stocks, like Bank of America Corporation (BAC) and Wells Fargo & Company, that may issue similarly favorable reports in the future (WFC).The day the report was issued, State Street’s Financial Sector Index ETF (XLF) and Invesco’s KBW Bank ETF (KBWB) both had declines of less than 1%.

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