Having a great discussion with Adam W. about what's going on in the C options today. http://adamsoptions.blogspot.com/2009/03/citi-not-sleeping.html
It seems a few big customers are paying $1.05 for the June $5 conversion. In laymens terms, that allows you to put on a synthetic short in C, but it will cost you 33% to create a borrow for the shares. Why? I believe the reason is to play the preferred/common arbitrage that was created when Citigroup agreed to convert those lousy TARP preferreds for lousy common stock. What they did was sell the preferred at $25 face value, paying between 6.5% and 8.25% dividends. Now with the common so cheap, they offered to take the preferrerd off your hand for a premium to where it has been trading in exchange for the common shares. Without getting in too deep, you can buy the preferred for lets say $8.00, it is convertible into 7.3 shares of the common, which was trading about $1.25, so you are creating about $1.125 of value. As the stock has run to $3, the spread between the offer and where the preferred is trading has gone kablooey. Today, you could have effectively created about $8.40 of value!!!. Remember, you can only lock this in with a short of C, so that is why the options reversal traded so wide.
By the way, the WSJ picked this trading activity up so you can read about it tomorrow.