Unusual put option activity in Citigroup (C) stock signals a large investor's bearish view in the bank over the next several months. This is seen in Barchart's Unusual Stock Options Activity Report today, Thursday, April 6.
The Report shows a trade for over 3,000 puts was made at the $36.00 strike price for an expiration period of June 16, which is 71 days from now. This strike price is over 21.7% below today's price of $45.99 per share. Given how long the expiration period is from today and the low strike price, I assume that the initiating investor was likely a long-put buyer.
The reason is very simple. If you think a stock is going to fall, and you buy puts to make money on it, you want at least several months for this to play out. In this case, there is 2 months and 10 days for C stock to fall over 21.7% before the investor begins to make money.
In fact, since the premium paid was 41 cents, the long-put investor's breakeven point is $35.59 per share. That means Citigroup stock has to drop 22.6% from today.
Obviously, the investor expects to make good money on this trade, so they probably think the stock will drop significantly from here. For example, the investor paid 41 cents for 3,000 put contracts, which cost $123,000. Unless the stock falls below $36.00 on or before June 16, it's not likely that the investor will be able to keep any of that money.
However, keep in mind that the investor does not have to wait until June 16 to make a good return. For example, if Citigroup stock falls 10% from here within the next month, there is a good chance that the option premium could skyrocket. At that point, the investor will likely take profits.
In fact, this trade is likely simply a play on the bank's upcoming earnings report for Q1 due out next Friday, April 14, before the market opens. They probably expect numbers to emerge that will tank the stock. Let's look at that possibility.
Citigroup's Outlook
Citigroup stock trades at a significant discount to its tangible book value per share, $81.65 as of Dec. 31, according to the bank's financial supplement last quarter. At $45.99, this puts the ratio well below 1.0x, at 56.3% (i.e., $45.99/$81.65).
But the problem is many of the loans on the bank's balance sheet have likely deteriorated in quality. The bank has to recognize this and increase its reserves, which reduces the book value. That will raise the price-to-book value ratio, which could hurt C stock.
Moreover, investors may not feel that the bank's profitability will continue as strong going forward. Citigroup's net interest income spread could be compressed with higher interest rates. As it stands, analysts now project $5.91 earnings per share for 2023, which is 15.6% below 2022's $7.00 EPS. That puts C stock on a forward multiple of 7.8x.
But if the U.S. economy hits a recession, earnings could turn negative for the bank and its book value could turn down even further.
Nevertheless, at this point, Citigroup stock seems to be moderately priced, given the information that investors have now. In addition, C stock has a very ample 4.46% dividend yield, which will work to protect the stock from tanking very deeply.
This means that the long-put investor in C put options must be expecting much worse financial data and outlook for the bank. They have given themselves plenty of time for this to work out. For example, if the Federal Reserve keeps hiking rates over the next several months, that could add to concerns about Citigroup's valuation.
The bottom line is that at this point, with this trade the investor has a very bearish outlook on C stock, but they have plenty of time for the trade to work out.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
