Citi (C) Jan 2011 calls at the $5 strike saw an uptick in activity in afternoon trading Tuesday. Four blocks, of 50K each, totaling 200K contracts hit bid-side for $1.28. The trades were part of a sale of 233,000 contracts and tied to 14.2 million Citi shares at $4.80. While it is possible that this massive premium sale is a closing trade (open interest stands at 603K), it seems more likely that, with the stock up 3 cents to $4.70, the activity is part of a buy-write strategy on expectations C will settle above $5 per share at the January 2011 options expiration. Implied volatility in Citi has settled back to 61.8 (-1.7), a new 52-week low, and well below the extremes near 250 seen earlier this year.

So, while implied volatility is falling to 52-week lows, investors are still selling premium on Citi. Recall that, in a buy-write, an investor normally sells 1 call for every 100 shares. In this example, the investor is selling the longer-term premium and collecting $1.28 for the January 2011 calls at the $5 strike. Meanwhile, they paid $4.80 per share and, since the multiplier for the equity option is 100, the cost of owning Citi falls to $3.52 (4.80 – 1.28) — excluding commissions. $3.52 becomes the cost basis and the downside breakeven at expiration. On the other hand, if Citi rallies and holds above $5 by the January 2011 expiration, those calls will be assigned. If so, the realized gain is $1.48 per share, or 42 percent. The downside risk occurs if Citi falls below $3.52 per share.

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