You’ll Love These New Options…If You’re a Robot

10/25/2010 11:17 am EST

Focus: OPTIONS

Steven Place

Founder, InvestingWithOptions.com

If you’ve been paying attention, Citigroup (C) opened up what are being called “half-strike options.” Normally, options on an underlying instrument will be struck on whole numbers, in increments of ten, five, or one, depending on how badly people want the stock to pin. The actual reasoning behind strike selection has been written on old parchment, sealed with wax, and hidden deep in the depths of the Options Industry Council (OIC) Web site.

Now last time I checked, C was trading in the single digits. The closing price was around four bucks, and the current average true range is around .125. While that may seem low in magnitude, the stock currently has a 20-day historical volatility (HV) of 37—that’s about as high as the HV for Amazon.com (AMZN).

But seriously, who trades these things? Exactly what rationale does one have trading C options on an active basis? The current November straddle has a whopping price of .28, so unless you work with a per-trade commission structure, you’re probably not going to win a lot of battles in this name, and yet, the name on average trades over 400,000 contracts per day.

My sense is that Citigroup stock and options are an algorithmic playground. There are all sorts of arbitrage and high-volume trading between circuits; not that there’s anything wrong with that. The characteristic of trading C is that it is a battle for pennies and nickels. That, coupled with the high volume on the options board, makes adding these half-strike options a compelling argument for those who make money off commissions. And they are probably giving the customer just what they wanted.

Just remember, those customers aren’t human.

Steven Place, option trader and blogger, InvestingWithOptions.com

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