Citi Advises Buy-Write to Increase Lafarge, BA Return

By Gareth Gore

Oct. 14 (Bloomberg) -- Citigroup Inc. advised clients to simultaneously buy shares and sell call options in companies including Lafarge SA, British Airways Plc and Syngenta AG as a way to boost stock-market returns after option prices surged.

The buy-write strategy allows investors to keep the premium paid for the option so long as shares fail to rise above a certain level. Investors should also use the strategy on Royal Ahold NV, Total SA, Bayer AG, Accor SA and LVMH Moet Hennessy Louis Vuitton SA, the brokerage said.

``Heightened uncertainty creates opportunities,'' London- based analyst Stuart MacDonnell wrote in a note to clients dated today, adding that ``perception of risk in derivatives markets has spiked'' after the price paid for European options surged to the highest in at least nine years.

Clients should buy shares whilst selling call options expiring in December at strike levels 10 percent above the current stock price, the brokerage said. The buy-write strategy will outperform a rally in the shares of up to 10 percent plus the premium paid, it said.

American-style call options such as those traded on most European companies give the buyer the right to buy shares at a pre-agreed price by a specific date. By selling a call, an investor is betting the option won't be exercised, allowing them to keep as profit the premium paid.

VStoxx Index

European option prices rose as global stocks plummeted on concern the deepening credit crisis will send the global economy into recession. The VStoxx Index, which measures the cost of using options as insurance against declines in the Dow Jones Euro Stoxx 50 Index, rose as high as 81.03, the highest in at least nine years.

The VStoxx Index dropped as much as 12 percent today to 59.14, the lowest in three days.

``The perception of risk in the derivatives markets has increased dramatically,'' Citigroup added in the note to clients. ``This risk perception is also reflected at the single stock level, with premiums trading high even on relatively 'good quality' stocks.''

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