Wall Street May Have Overpriced the Fed Rate Hike’s Impact on Citigroup Stock Spreads

The Federal Reserve's recent rate hike caught Wall Street off guard, leading to a sharp decline in Citigroup (C) stock following the announcement. While the hike theoretically enables banks to increase net interest income, a forceful Fed can prompt money-center banks to rapidly raise rates on deposits, compressing net interest margin gains.

Citigroup stock, still up 14% year-to-date, saw a 2% drop midweek, likely due to an accelerated deposit beta. The 135/140 bull call spread expiring on October 16 is deemed a poor investment, with only a 37.4% chance of breakeven and a 30.08% probability of profitability. However, the analysis suggests that if we consider a nonrandom walk, where the future is influenced by past events, the probability of profitability for the spread could be as high as 50%.