Are Dropping Stock Prices Causing a Decline in Options Volume?
Citigroup (C) is trading at $5 per share. It is not the only stock below $10. In fact, according to Bespoke Investment Group, the number of Russell 3000 stocks trading below $10 is up to 1,228. A full 42% of the list is below $10. And that was calculated as of Monday’s close. When the stock is that low, why would anybody buy a call that expires when they can simply buy the stock? I mean, the stock is less than $5. That is much less than Citi’s at-the-money leaps in August 2007 when C shares were $47. My point isn’t that you should go out and buy the stock because it’s cheap. I wouldn’t touch it with a 10-foot pole. My point is that, once a stock gets below $10, the reason for buying a call diminishes because the stock itself has become a perpetual option. Furthermore the risk in selling a call against the stock in a buy-write also diminishes, as the added protection you get from the covered call is insignificant compared to the loss of opportunity if the stock were to turn around and h
