It’s the inevitable gut reaction we all have. If you see a massive discount-based sell-off in the options flow screen like we just did with financial giant Citigroup (C), then intense feelings of pessimism rise to the fore. However, the derivatives market can be difficult because you are never sure of the underlying intentions. In this case, the unusual options activity may be bullish for C stock in a roundabout way.
On Monday, Citigroup’s options flow readings — which focus on large transactions likely to be placed by institutional investors — showed that net trade sentiment fell to roughly $3.6 million below breakeven. To be fair, sentiment is constantly fluctuating in the derivatives space. In addition, it should be noted that sentiment was very positive last week.
However, what caught everyone’s attention this time is that most of the negative flow stems from a single trade: 2,000 contracts worth $97.50 expiring on January 15, 2027, with the entity (or entities) paying $2.33 million for the privilege.
Now, I’m not about to regurgitate these statistics about choices and make wholesale assumptions about underlying intentions. However, the nature of the beast suggests that these trades were not really placed with a bearish intent in mind, but rather as a kind of insurance play against violent volatility.
Some clues seem to confirm my suspicions. First, an expiration date more than a year from now suggests mitigating the downside through tactical initiative. Second, the time frame is also likely to capture major macroeconomic uncertainties, such as election outcomes and credit cycle shifts. Third, the strike price being so close to the market price indicates a classic “put insurance” profile.
Finally, you can study numbers left and right; No one will ever know why unless the traders in question care to explain themselves. This probably won’t happen, so logical inferences are the best we have.
It may not be a stretch to assume that had it not been for the current market panic, the above put options might not have generated so much interest. Options flow sentiment turns positive and negative all the time as institutional giants hedge their positions. But because of wider volatility, unusual selling carries more weight.
However, what we should really care about is the data – and the hard numbers tell a great story for C stock.
As you’ve seen in the past few months, I analyze stocks in a very different way than my colleagues. It would take a long time to explain the process, but in the simplest way possible, my system involves modifying the Kolmogorov-Markov framework overlaid with kernel density estimations (KM-KDE), and treating price behaviors as a discrete probability space with real outcomes and distributions.
Basically, the innovation here is that instead of looking at price as an individual journey through time, I look at it as a collection of hundreds (if not thousands) of experiences across a standard period of time. The idea is that over enough trials, prices should cluster around certain areas. Furthermore, different sequences of experiences should lead to different behaviors, which can be tracked or analysed.
To be 100% clear, this process does not guarantee perfect predictability – and no system can do that. But what it does do is provide a clearer idea of risk and reward profiles.
Using the KM-KDE approach mentioned above, the 10-week average forward returns of C shares can be arranged as a distribution curve, with results ranging between $97 and $103.40 (assuming a fixing price of $98.19, Monday close). Furthermore, price combinations are likely to prevail at $101.20.
The above evaluation collects all sequences since January 2019. However, we are interested in the current behavioral state, where the C repertoire is organized in a 6-4-D conformation; That is, in the subsequent 10 weeks, Citigroup recorded six weeks up and four weeks down, with an overall downward slope.
With this being the case, the expected average range over the next 10 weeks is around $92 and $117. Furthermore, price consolidation is likely to prevail at $100, with secondary consolidation occurring at $107.
Using the above market information, the trade that is arguably the most memorable for aggressive traders is the 97.50/105.00 bullish call spread that expires on January 16, 2026. This transaction involves buying the $97.50 call and selling the $105 call at the same time, for a net debit paid of $351 (the maximum that can be lost).
If C stock rises through the second strike ($105) at expiration, the maximum profit is $399, which is approximately 114%. The breakeven price comes to $101.01, which is exactly where the base group would be under 6-4-D conditions. Additionally, $105 is within the distribution range of the sequence, making the spread an attractive bet.
On the date of publication, Josh Enomoto had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data contained in this article are for informational purposes only. This article was originally published on parchart.com
The post Data Science Points to Upside for Citigroup (C) Stock Despite the ‘Insurance’ Bet first appeared on Investorempires.com.
