Citigroup Says Buy Volkswagen Puts Ahead of Carmaker Share Drop

By Gareth Gore

July 3 (Bloomberg) -- Citigroup Inc. told clients to buy put options in Volkswagen AG on speculation a ``massive change'' in demand as a result of the record oil price will lead to further declines in shares of Europe's biggest carmaker.

The brokerage advised buying put options expiring in December at a strike price of 160 euros, saying the price of the contracts is low compared with the carmaker's main rivals. That is 10 percent lower than yesterday's closing price.

``Faith in auto earnings numbers has collapsed over fears of a consumer recession'' and high fuel costs, London-based analyst John Lawson wrote in a note to clients. ``Volkswagen options are lower priced, which favors buying puts to express our negative stance.''

Clients will realize returns of as much as 550 percent if shares fall to the brokerage's 122 euro target price, the analyst wrote. The shares have gained 13 percent this year even as the benchmark DAX Index has lost 23 percent.

Put options give buyers the right -- but not the obligation -- to sell shares at a set price on an agreed date.

Volkswagen shares lost 1.09 euros, or 0.6 percent, to 177.29 at 9:30 a.m. today in Frankfurt.

To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net.