Morning Update

Overnight the biggest news story was that there was no Spanish downgrade; Moody’s reiterated their rating of Spain’s debt at Bbb3 with a negative outlook. This sent Spanish stocks higher and 10-yr yields to 6-month lows. The other European indices are little changed, and US futures are modestly higher. This is mostly due to stronger than expected housing starts, which came in at 0.872 million versus 0.765 consensus.

The big news story yesterday was the abrupt resignation of Citibank’s CEO Vikram Pandit. Since becoming CEO in December 2007 Citi’s stock has fallen 88% versus a 6% gain for Wells Fargo and 2% gain for JPMorgan over the same period. The market seemed to welcome the change and Citi’s shares closed up 1.6% on the day, well ahead of the broad market. Option trading was also bullish yesterday with a put/call ratio of 0.71. The biggest trade of the day was the purchase of 10,000 January 2014 45 calls for $2.75 with the stock at 37.00. This is a bullish trade that is betting Citi’s stock will be above 47.75, or 23% higher, at Jan. ’14 expiration, 457 days from now. Yesterday implied volatility in Citi options plummeted to a 52-week low as the stock rallied, meaning option premiums are relatively low in the stock right now. When implied volatility falls to extremely low levels it is a good time to consider buying out of the money options: calls to bet on a rally, and puts to insure a stock position. This trader is betting on a rally, and Citi’s chart looks poised to deliver. If the stock can close above 38.50 the next major area of resistance is around 45.00, the July 2011 highs. Should Citi breakout, these Jan. 2014 calls could prove an excellent buy.