Citigroup's Pair Trade Explained: Why Investors Should Remain Overweight CME And Underweight CBOE

Neil Stratton of Citigroup on Friday suggested that investors maintain a pair trade of being Overweight

and Underweight

as a "good way" to arbitrage current dynamics. According to Stratton, investors should see a stronger capital return, volume growth outlook and earnings per share growth at a cheaper multiple by following the pair trade. The analyst adds that momentum is building at CME versus possibly slowing (at least in the short-term) at CBOE. Stratton also notes that CBOE's valuation remains elevated, even after a four percent decline on February 6. Also, 2015 will likely see more volatility versus 2014 but that the next leg of VIX growth could be slow or even slower versus prior cycles. On the other hand, Stratton states that CME Group's earnings per share growth prospects are "superior" with a projected 15 percent earnings per share growth in 2015 versus a three percent growth forecast for CBOE. Moreover, CME is better positioned given its leverage to interest rates, indexes, energy and foreign exchange. Finally, Stratton also argues that CME Group's capital return prospects are stronger with a policy to return excess cash on the balance sheet above $700 million to $900 million along with an expected $2 annual dividend along with a $2.20 variable dividend, translating to a roughly 4.5 percent dividend yield. Meanwhile, CBOE's dividend yield is roughly 1.3 percent while coupled with a $100 million buyback in 2015 only brings its capital return to around 3.5 percent. Shares of CBOE Group are Sell rated with a $54 price target while shares of CME Group are Outperform rated with a $100 price target.