Part of options trading has to do with “a gut feeling” and there are some trades you make based on what you really believe will happen. And there are some you don’t make because of that same feeling. For the past few months, we have done a lot of trades with financial stocks as we have bought call options on sell-offs and put options on rallies in hopes of riding the stock higher or lower.

Wachovia (WB, $1.84, down $8.16) was one of the stocks we played after it sold-off but for some reason I had a feeling Wachovia was in trouble and wasn’t going to bounce higher again. The stock was down 20% Friday and I mentioned the heavy option put buying as a reason not to go long. At the time, I didn’t think Wachovia would fall that hard, that fast but it has. The October 5 puts (WBVQ, $3.20, up $1.70) were going for 85 cents and hit a high of $4.50 when the stock traded as low as a penny. Wachovia shares did not open until much later in the trading session and when they did, the stock reached a low of $0.01. Wow.

The October 7.50 puts (WBVY, $5.70, up $3.20) stood at $1.50 on Friday when we went to press and they have also done well. The put option activity that was going on in Wachovia was a clear warning signal that something was up. In fact, it almost makes you wonder if Wall Street knew this was coming.

Most stocks go up when they are bought out. However, when the company’s not worth as much as its stock you will see these types of things. I was a big believer in Wachovia getting bought and that came true. Thankfully, I still did my research and knew about Wachovia’s trouble mortgage business.

Citigroup (C, $17.75, down $2.40) agreed to acquire Wachovia’s banking operations in a deal that was helped by the Federal Deposit Insurance Corporation. Citi got a great deal and will be able to expand its business while the FDIC could be responsible for loan losses. Sounds like a win-win for Citigroup as Wachovia’s shareholders are left holding the bag. Wicked game this Wall Street, huh?

Citigroup was actually positive at one point today but collapsed with the rest of the market when the $700 billion bailout failed. More on that Tuesday.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Citigroup, option trading, Wachovia

This entry was posted on Monday, September 29th, 2008 at 4:57 pm and is filed under Financial Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.