Citigroup Says Buy Porsche Options, Not Shares, to Ride Upside

By Gareth Gore

Nov. 28 (Bloomberg) -- Citigroup Inc. advised clients to buy Porsche SE call options as a way to profit from an advance in the company’s shares while still guarding against the “risk” of holding the German luxury carmaker’s stock.

The brokerage advised using strategies including buying call options expiring in June at a strike price of 60 euros. Investors can reduce the cost of the transaction by simultaneously selling twice as many call options expiring in the same month at a strike price of 80 euros, it added.

The strategy would remain profitable so long as Porsche shares remain within the range of 60.10 euros to 90.90 euros, according to Citigroup. Shares of the maker of the 911 sports car slipped 2.9 percent to 51.39 euros as of 10:59 a.m. in Frankfurt, extending their decline this year to 63 percent.

“While we certainly wouldn’t suggest investors chase the shares, it might be prudent to have in place some ‘protection’ should the shares” rise, analysts including London-based Stuart MacDonnell wrote in the note sent late yesterday. Citigroup cut the price estimate on the stock to 50 euros from 57 euros and reiterated its “sell” recommendation.

Earlier this week the Stuttgart-based carmaker reported a 15 percent drop in four-month sales and said it may delay taking control of Volkswagen AG as the credit crisis and global recession curb demand for its sports cars. Chief Executive Officer Wendelin Wiedeking said Porsche may no longer take 50 percent ownership of Volkswagen this year.

Option Prices

The strategy reduces the cost of buying calls outright at a time when option prices are “expensive,” the analysts wrote in the note. Call options give the purchaser the right to buy shares at a set price on or by a given date. By selling a call option, an investor is betting that the contract won’t be exercised, allowing them to keep as profit the price paid.

“Implied volatility continues to trade at elevated levels, and this makes option prices expensive,” they wrote. “However, an interesting consequence of the preoccupation with downside risks across the market is that the price of upside call options is somewhat depressed due to the high volumes.”

The VStoxx Index, which gauges the price paid for options on Euro Stoxx 50 stocks, has surged to a level three times higher than it was a year ago after stock swings and uncertainty increased. Options are derivatives, or securities that derive their value from an underlying asset, and can be used to protect against a decline or to speculate on the asset’s future value.

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