Rumors of a bid by Citigroup for Barclays last week produced such demand for out-of-the-money call options that they became more expensive than at-the-money calls. In the past six months, most stocks have had an upward sloping term structure, meaning that one-to-three month options have been lower in volatility terms than one-to-three year options. Reports of a Citigroup offer for Barclays, however, caused the term structure on Barclays options to invert. This meant that at the end of last week, one-to-three month options had a volatility of around 45%, and longer-dated options had a volatility of around 35%.
Analysts were recommending alternative strategies last week, such as buying long-dated at-the-money call options, financed by selling short-dated out-of-the-money options.
