Investors have recently bid up the share prices of Citigroup Inc. (C) to an extreme high of a volatility range ahead of the company's fiscal fourth quarter earnings announcement. Analysts expect the country's fourth-largest bank to report $1.66 in earnings per share (EPS) and $16.76 billion in revenue. At first look, it appears option traders are positioned for a positive move, as the number of call options is growing in the open interest. The unusual option activity could create a strong upward trend in the price action if Citigorup delivers better than expected earnings results.
A growing number of call options remain in the open interest for Citigorup, and option premiums are unusually high ahead of the earnings report. Trading volumes indicate that traders have been buying call options and selling puts in anticipation of a favorable earnings result. Unwinding these bets could create unexpected downward pressure on the Citigroup share price.
Investors continue to appear to be rotating into sectors considered "safer" havens during times of inflation. Combined with the Federal Reserve shifting their tone from dovish to hawkish, this sector rotation trend appears to be accelerating ahead of earnings. Over the past month, Citigroup has outperformed the wider market, having gained 11.5% compared to State Street's S&P 500 Index ETF (SPY), which has added 0.6%.
- Traders and investors have bid the Citigroup share prices to an extreme high of the volatility range.
- The share price has recently closed well above its 20-day moving average.
- Call and put pricing are predicting a stronger move to the downside.
- The volatility-based support and resistance levels allow for a stronger move downward.
- Call and put open interest appear to be positioned for the price to rise in the near term.
Price Action Analysis
An analysis of recent option activity combined with technical analysis of share price movement can grant chart watchers valuable insight into the overall sentiment toward Citigroup ahead of earnings. The chart below illustrates the recent price action for the Citigroup share price as of Tuesday, Jan. 11.
The chart illustrates how Citigroup shares have been in a relative downward trend since reporting earnings in the previous quarter, highlighted by the red arrow. The share price failed to meaningfully break above the 20-day moving average until beginning its most recent trend upwards in late December. This trend is highlighted in blue and helps to highlight how the Citigroup share price rose well above its 20-day moving average starting at the beginning of 2022. The Citigroup share price has recently closed at the extreme high of the range depicted on the chart in purple.
The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Citigroup stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing. It's notable that these bands briefly narrowed in late December and have since been expanding. This could mean that option pricing is growing ahead of the Citigroup earnings announcement.
The ATR has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10-20 time periods, which includes two to four weeks of trading on a daily chart.
Option Trading Details
Option trading detail can provide chart watchers additional context to help them form an opinion about expectations that investors may have. Recently, option traders are favoring calls over puts by a significant margin. On Tuesday, Jan. 11, there were over 103,000 calls traded compared to 46,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming earnings result, although further analysis is required.
The open interest for Citigroup currently features 1.3 million calls compared to 1.6 million puts. At first look, it would appear the open interest is slightly bearish; however, further understanding of how this open interest is parsed can provide greater context.
For Jan. 21, the next monthly option expiration date, the highest open interest is on the $60 put, with 74,000. This would represent a more than 10% downside to the current share price of Citigroup. However, it's notable that there are 71,000 calls in the open interest at the $60 strike as well.
These large open interest numbers represent calls that are significantly in the money and puts that are significantly out of the money, yet the open interest occurs at the same strike. This could be option traders taking large straddle positions ahead of earnings. A straddle is an option strategy that involves buying a call and a put at the same strike price and profiting when the stock rises or falls by an amount more than the total cost of premium paid.
The current implied move for Citigroup earnings based on at-the-money straddle pricing is 3.1%. Over the past 12 quarters, Citigroup has exceeded the implied move two times. The implied move for the Jan. 21 $60 straddle is 10.8%. This position could be option traders selling positions to collect elevated premiums ahead of earnings while implied volatility is high.
The open interest for closer to the month options appears to be bullish. That's because there's a larger number of calls than puts in this area, and implied volatility suggests that traders are selling puts at these strikes.
Option traders also recognize that Citigroup shares are in an above average range and have priced their options as bets that the stock will close within one of the two boxes depicted on the chart below between today and Jan. 21. The green-framed box represents the pricing that call option sellers are offering, which implies a 58% probability that Citigroup shares close inside this range by expiration if prices go higher. The red box represents the pricing for put options with a 36% if prices go lower on the announcement.
The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.
The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either way, but with much more room to the downside. This suggests that option buyers don't have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.
These support and resistance levels show a large range of support and resistance for prices. As a result of this, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, Citigroup shares rose by less than 1% the day after earnings and traded sideways the following week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
The Keltner Channel indicator displays a set of semi-parallel lines calculated from the base of a 20-day simple moving average. Because the upper lines are drawn by adding a multiple of ATR to the average, and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
As one of the first four major financial stocks reporting earnings for the quarter, investors will pay keen attention to the earnings results of Citigroup. The share price has recently been bid up to an extreme range, and option traders appear to be betting that the upward trend will continue after earnings.