Sell SAP Call Options as Product Demand Weakens, Citigroup Says

By Gareth Gore

Nov. 10 (Bloomberg) -- Citigroup Inc. told clients to sell SAP AG call options on speculation shares of the world's largest business-management software maker will ``tread water'' until the end of the year as demand for its products weakens.

The brokerage advised selling call options expiring in December at a strike price of 30 euros. Selling December-expiry contracts allows for the possibility of SAP announcing its full- year outlook as early as mid-January, it said. The stock rose 4.2 percent to 29.035 euros as of 11:05 a.m. in Frankfurt.

The strategy is a way for investors to profit from the recent increase in option prices, which are ``exceptionally high by historical standards,'' Citigroup said. It remains profitable so long as the shares fail to rise above 31.25 euros, based on the 1.25 premium currently paid for the contracts, it said.

``In the near term, SAP is unlikely to see positive catalysts,'' analysts including London-based Stuart MacDonnell wrote in a note sent to clients today. Recent data also points to ``continued demand weakness,'' they said.

American-style call options give the buyer the right to sell shares at a pre-agreed price by a specific date. By selling a call, investors are betting the contract won't be exercised, allowing them to keep as profit the price paid for the contract.

The software maker last week urged employees to take remaining holidays as part of cost-cutting efforts in the face of a drop in expected earnings. It said last month that adjusted operating margin will be about 28 percent, less than the 28.5 percent to 29 percent it previously forecast.

SAP is cutting research and development spending and plans to freeze hiring and restrict travel expenses to help weather the global credit crisis. On Oct. 6, the company reported lower- than-anticipated software and related service revenue for the third quarter, citing a ``very sudden and unexpected drop in business activity'' as customers put orders on hold.

Citigroup has a recommendation of ``buy'' on SAP shares. ``We are more positive on SAP in the medium term as we view cost control, one of SAP's strength, to be key in this downturn,'' the analysts wrote in today's note.

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