There's a fishy options twist to the big

announcement by

Citigroup

(C) - Get Report

that it's buying

Associates First Capital

(AFS)

.

The

Chicago Board Options Exchange

said this morning it has initiated an investigation into the "unusual" recent trading activity in Associates First and Citigroup options. By midday Wednesday, shares of Citigroup were off $2 to $55.56, while Associates First was rallying $11.25, or 40.2%, to $39.25.

According to options traders, brokers from the

TheStreet Recommends

Salomon Smith Barney

unit of Citi bought about 4,000 of Associates First September 27 1/2 call options for a customer (or customers), on Friday and Tuesday. Brokers act as agents for their clients on exchanges. Salomon is a unit of Citigroup.

"These were unsolicited orders executed for a customer," said a Salomon spokesman. "The (Salomon) employees who executed the orders had no knowledge of the impending transaction."

Those call options -- which would give the holder the right to buy the shares for 27 1/2 before the third Friday in September -- would appreciate in value if Associates First shares rose. And after this morning's announcement, those September 27 1/2 calls are vastly more valuable than they were Friday and Tuesday, when Associates First shares traded between 27 5/16 to 28 1/16. The September 27 1/2 calls would've been a relatively cheap option to buy considering the calls would've been near the money and have little time value left on them because they will expire Sept. 15.

Wednesday, the September 27 1/2 calls were trading up 10 11/16 ($1,068.75) to 12 1/4 ($1,225) on the

American Stock Exchange

.

The CBOE trader noted that Associates First options aren't very actively traded and the volume popped up over the past couple of days. "It just seems pretty blatant what happened," the trader said. The trader also said that the "connection looks pretty obvious," noting the unusual volume in the options a couple of sessions before the takeover announcement and the brokerage firm which acted as broker for the trades.

Exchanges don't have the jurisdiction to discipline individuals who are not employed by member firms so typically any information obtained in such an investigation is referred to the

Securities and Exchange Commission

for further investigation. The SEC has the authority to bring civil lawsuits in securities fraud or insider trading cases.

The CBOE, the nation's largest options exchange, said volume totaled 23.9 million contracts in August, a 22% jump over the year-ago period. Open interest in all CBOE listed options at the end of August totaled 47.3 million contracts, up a whopping 81% over the year-ago period.

Average daily volume in August totaled 1.04 million contracts. Total equity option volume came in at 20.9 million, up 41% over the year-ago period. Index option volume, however, came in at 2.98 million, down 37% compared to the year-ago period.