Citi (C) June 4 call is the most actively traded equity options contract in the first hour of trading. 35.9K traded. The top four trades (1874, 1000, 1000, and 919 contracts) all hit bid-side for 15 and 16 cents. The trades are possibly closing sales, opening sales, or buy-writes. The premium selling comes as implied volatility in Citi options falls to multi-month lows of 115, down from 117 Tuesday and less than half the extremes of 330+ seen in late November 2008.

Recall that in a “buy-write” or covered call strategy, the investor buys shares and sells calls against the stock. Generally, 1 call is sold for every 100 shares (1 call gives the right to buy or call the stock for the strike price of the option). In the Citi example, some investors are likely selling June 4 calls and buying Citi shares.
At current prices, the investor can buy Citi for $3.76 and sell the June 4 calls for 16 cents. Since the mutiplier for a call option is 100, the strategist collects $16 in premium (100 X .16), which offsets the cost of the stock. Therefore, they pay $376 for 100 shares and receive $16 for selling the call. The cost of owning the stock falls to $360, or $3.60 per share, which is the trades breakeven. If the stock is below that price level at the June expiration (23 days), the trade loses money. However, a move higher, and the position begins to show better results. A move to $4 or higher will result in assignment and, if so, the strategist sells (has called away), Citi for $4 and a 11.1 percent profit in a little more than 3 weeks.

However, the short call or the entire position can be closed at any time. Also, if shares move just below $4, the call will expire worthless and the investor keeps the shares and can possibly sell the July 4 or 5 call.

Click here for more recent examples of the buy-write strategy.