Citigroup and Wells Fargo call a Wachovia truce

Citigroup (NYSE: C) and Wells Fargo & Co. (NYSE: WFC) have reached a temporary cease-fire in the battle to acquire Wachovia Corporation (NYSE: WB). Late Monday, federal officials urged the dueling suitors to lay down their legal weapons and attempt a compromise in hopes of avoiding a protracted standoff in court. According to reports, new discussions between the banks and the Fed could lead to a division of Wachovia's assets between the two sparring suitors.

For those of you just joining this banking soap opera in progress: Citigroup agreed last Monday to acquire Wachovia's banking operations, with a little help from the Federal Deposit Insurance Corporation (FDIC). However, last Friday, Wells Fargo emerged with a financially superior bid to acquire Wachovia in its entirety, which eventually prompted Citigroup to file suit against its rival.

Today's news has sparked heavy volume on Wachovia's October 5 put option. This contract has seen 22,371 contracts cross the tape today on open interest of 57,273. This could indicate that many speculators are betting that the Wells Fargo bid won't go through -- at least, not in its entirety. That bid priced Wachovia at approximately $7 per share, compared to $1 per share under the terms of the Citigroup deal, according to Bloomberg.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.