Citigroup’s $1.24 million bearish autocalls on S&P to offer short bet, partial hedge

By Emma Trincal

New York, Nov. 28 – Citigroup Global Markets Holdings Inc.’s $1.24 million of 0% bearish autocallable securities due Nov. 21, 2024 linked to the S&P 500 index provide a potential double-digit premium for bears based on a barrier observed daily during a specific autocall period. The so-called American observation increases the odds of getting called, hence, of receiving payment, an adviser said. But it’s the early stages of the deal that will ultimately determine the final outcome, suggested another.

The notes will be called automatically at par plus a call premium of 14.5% if the index closes at or below its initial level on any trading day starting Feb. 20, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the final level of the index is less than or equal to its initial level, the payout at maturity will be par plus 14.5%.

If the index gains up to 15%, the payout will be par.

Otherwise, investors will lose 1% for every 1% increase of the index from its initial level.

Three months

Jonathan Tiemann, president of Tiemann Investment Advisors, said that while a call was likely, a rising market during the first three months will reduce the chances for such outcome.

“What the market does during the three-month no-call will determine the odds that this thing will be called eventually,” he said.

“If the market is up in the next three months, it creates a gap you’ll have to cross in order to be back to today’s value.

“The S&P is now at 4,550. If it’s up to 5,000 in February, it will have to go back down to 4,550 by November,” he said.

In this example, a 10% increase of the benchmark by February would require a 9% decline from that level in order for the underlier to reach its initial price.

Tiemann said such scenario may not necessarily be likely but was still possible.

“The more the market goes up between now and February, the lower your chances of getting called,” he said.

The reverse was also true:

“If the market is not up between now and February, you’re almost certain to be called and quickly,” he said.

Modeling the probabilities and timing of payments was challenging, he said.

Short, tax strategy

This adviser saw two possible uses for the notes.

One would be as a “synthetic short.”

“It’s a pretty bold and risky bearish bet, but if you hold it against a long position, you have a hedge,” he said.

However, the hedge would be limited since the return is capped at 14.5%, he added.

Another potential use would be tax optimization.

“If you’ve had a position in the S&P for a while with a very low tax basis and wanted to reduce your exposure without being hit by taxes, this note would help you do that. You would not have to sell your position. If it went down, the note would protect you.”

But the tax strategy also shows some limitations.

“If your long position is down 20% and you get called in three months, you only get 3.6%. It’s a hedge but not a perfect one.

“This note was not structured for a hedge,” he said.

Overall, Tiemann found the note disappointing.

“I don’t like it especially. The hedge is sort of OK. But it’s a little bit too complex for its own sake,” he said.

Likely call

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, liked the notes, which reflected his view on the market.

“I think it’s very unlikely that the market would be up a lot three months from now. Why would it be with record inflows, record insiders selling and this alarming AI bubble?” he said.

He said the chances of an automatic call happening on the first date were high.

“If you believe the market is totally random, which I don’t, it’s a 50/50 chance.

“In my view, the likelihood of a first call is very high...higher than 50%.

“You would get 3.6%, which is more than double the rate of Treasuries and the chances of getting that return are very high.

“So, this it’s a reasonable trade,” he said.

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the note was overly “complex.”

“It is so confusing. If it takes you a long time to explain it to a client – and it certainly will – it’s not worth showing it to them. How can investors make a sound decision with such a complex payoff?” he said.

“I don’t like this note.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Nov. 22.

The Cusip number is 17291TFC7.

The fee is 1.25%.

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