What is the Citigroup stock-option strategy?

The Dow Jones Industrial Average has tumbled more than 900 points in late trading Friday after Citigroup rolled out a new stock-option strategy that many market watchers believe could destabilize the market.

The move by the Citigroup index option desk — dubbed a “price move known as a verion” — or VMO, has already been used by the company, but investors feared that it might become widespread.

The strategy involves putting a wide swath of options contracts at different strike prices, which can be very popular during bullish market rallies. Some traders purchase a huge range of Puts on the Dow Jones Industrials (as seen in the chart below) in the expectation that the market will fall, then the market goes down, then the options contracts expire and the investor realizes a big gain from the stock options.

This type of strategy was criticized during the dot-com bubble in the late 1990s and mid-2000s for causing market “crashes” that caused considerable damage to investors’ portfolios.

After the announcement, Citigroup shares slumped after 10 minutes of trading. The company later offered a detailed explanation of the method’s strategy in a statement to the New York Times. The NYSE described the move to the WSJ.

Citigroup’s financial support teams throughout our company have previously used VMO strategies, including in August of 2017 and February of 2018, both when the Nasdaq had heightened trading volatility as a result of volatility in global equities markets. The strategies used in these 2017 and 2018 periods did not create a harmful market response or markets decline, nor are these the methods used today, nor are they unique to Citi.

Stocks were already sinking Friday after Dallas Federal Reserve Bank President Robert Kaplan said in a conference that a period of “more muted” growth on “an ongoing basis” is expected in the second half of the year.

Leave a Comment