Citi Bailout Brings Some Optimism to Financials

Financial companies found themselves the broader beneficiaries of market goodwill in the wake of the latest government bailout, that of Citigroup (C - commentary - Cramer's Take). Shares in Goldman Sachs (GS - commentary - Cramer's Take) bounced 23.5% higher to $66.00 as implied volatility on its options came off sharply, trending with sector peers, down 26.7% to 113.2%.

The comedown in implied volatility coupled with today's share-price action emboldened one trader to enter a 5,000-lot long call spread in the December contract between strikes $65 and $85. The cost of a December $65 call, the at-the-money call, is up 93% from Friday's levels at $7.90, and the trader in this case was only able to take a little of the edge off of that price by selling $85 calls for 99 cents a pop. Still, the break-even implied by this position is just under $72, or about 9% to the upside from current share-price levels.

JPMorgan Chase (JPM - commentary - Cramer's Take) rallied 13% to $25.70 today on strength of the Citi bailout. Implied volatility on all JPMorgan contracts has come down by about one-third today but continues to show a 17-percentage-point gap to the upside compared with the historic reading; this suggests that option traders are holding on to that risk premium in JPMorgan at least for the next 30 days.

This was borne out in a number of option strategies -- not just in what looked like put-ratio backspread activity in the January contract between strikes $10 and $20 (we were not able to verify whether this was indeed opening positioning) but also in put-buying at the January $20 level that was tied to stock. A buyer of puts at this level pays $2.40 for downside protection in this January contract -- 40% less than he or she would have paid on Friday, providing powerful peace of mind for a trader looking to go long in this stock today.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.