Who do you believe: Citigroup Says Buy Bank Puts Because Rally Will Fade

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Citigroup Says Buy Bank Puts Because Rally Will Fade

By Jeff Kearns

March 31 (Bloomberg) -- Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.

“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.

He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

The difference between prices for bullish and bearish options, known to options traders as “skew,” and prices for credit-default swaps, which are used to protect against a default on a company’s debt, both show that investors expect the XLF to reverse gains, the strategist wrote.

Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETF’s share price is rising.

“This is an interesting reversal,” Wang wrote. “The higher the spread is, the more premium investors are placing on downside protection.”

The XLF hasn’t closed below $8 since March 11. The basket of shares is still down 30 percent this year.

Options are derivatives that give the right to buy or sell a security at a set price and date. Puts give the right to sell and calls convey the right to buy. Credit-default swaps, used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
Last Updated: March 31, 2009 17:09 EDT

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兵不厌诈

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turbotornado

news was out at 8:00 sharp! what a trap

zhyangi

Ding

多吉

news was out at 8:00 sharp! what a trap
turbotornado 发表于 2009-3-31 08:29 PM

Last Updated: March 31, 2009 17:09 EDT