Citigroup’s trigger PLUS tied to Gold Miners ETF to offer dual directional, neutral bet

By Emma Trincal

New York, Dec. 11 – Citigroup Global Markets Holdings Inc.’s 0% dual directional trigger Performance Leveraged Upside Securities due March 2021 linked to the VanEck Vectors Gold Miners exchange-traded fund give investors a chance to profit from limited moves in the price of gold in either direction. The strategy may reflect a short-term outlook on the economy, the post-Elections climate or simply be a technical bet after gold rallied strongly this year, sources said.

The underlying is an equity fund of gold mining stocks whose price is closely correlated to that of gold.

If the final share price is greater than the initial share price, the payout at maturity will be par of $10 plus 200% of the ETF return, subject to a maximum return of 18.4%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final share price is less than or equal to the initial share price but greater than or equal to the trigger level, the payout will be par plus the absolute value of the stock return. The trigger level will be 80.5% of the initial share price.

If the final share price is less than the trigger level, investors will be fully exposed to the decline from the initial share price.

“It’s interesting. You’re getting the absolute return with the upside leverage. If you shorten the term and put a cap you can do it,” said a market participant.

Hedging 2020

The trade was a bet on the China/U.S. trade tensions.

“That’s a hedge kind of trade on the outcome of the U.S. Elections,” he said.

“What does it mean for the continuation of trade talks with China if Trump gets re-elected? If a deal with China happens or if it doesn’t what does it mean for the price of gold?

“It may be a kind of way to play both outcomes. If it’s up you get 2x up to a double-digit cap. If it’s down you can participate with the absolute return up to 20%.”

The 18.4% cap on a 15-month tenor is the equivalent of a 14.5% annual return on a compounded basis.

“That sounds right for that group of stocks. It’s a rather volatile group so you expect to get more than 10% a year.”

Capping

Elliot Noma, founder of Garrett Asset Management, expressed a similar interpretation: the notes had a lot to do with China and investors’ expectations about a potential deal.

“The real story behind it is the trade war,” he said.

“If the trade war with China lingers on after the Elections, that’s going to be bullish for gold.”

But investors did not expect a strong uptrend.

“The rationale for the cap is that it will be a war, but not a nuclear war. So, they’re willing to give away some of the upside. This is for an investor bullish on gold but not overly bullish,” he said.

No Great Depression

The economy could also support the bullish case for gold if it was to deteriorate.

“But a recession would have to be severe for gold to go to the ceiling,” he said.

Recession fears have receded lately especially after last week’s strong jobs report.

“Central banks have clearly said they would do anything to avoid a major recession.”

All those factors – a strong economy and the “Fed put” – explain the moderately bullish aspect of the trade.

“That’s where the cap comes in,” he said.

There is margin for error in the structure with the 19.5% range of absolute return on the downside.

“Not only you’re getting the protection. You’re also flipping the return on the positive side if it’s above the barrier,” he said.

Technical approach

Among the factors that may put pressure on gold, he mentioned interest rates, which move in the opposite direction of gold.

“If the economy grows and interest rates go up, gold would go down.”

“That’s because gold, which doesn’t pay interest rates, becomes relatively less attractive than bonds when rates go up.”

The notes could also be designed to accommodate a technical view on the robust gold rally seen in the spring and summer of this year.

The VanEck Vectors Gold Miners ETF rose 54% between $20.14 a share in May and $30.96 in early September, the low and peak of the year. Since September’s high, the fund has dropped 10.3% to $27.77 a share, its closing price on Wednesday.

“Someone is betting that the gold run may continue or that it can retrace a little bit more, however not more than 20%,” he said.

The barrier level of 80.5% at $22.35 would be near the 52-week low of May at $20.14.

Sideways

“This is a straddle play,” he said.

“You’re betting in both directions hoping the price will stay within a specific range.”

The underlying options strategy features a short straddle that represents the simultaneous sale of a call and a put at the same strike price – 80.5% for the put and 118.4% for the call. The two options generate a position that makes money when the underlying finishes between the two strikes.

Investors in this strategy expect the underlying to trade in a range and the volatility to potentially decline.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter. Morgan Stanley Wealth Management is a dealer.

The notes will price on Friday.

The Cusip number is 17327U137.

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