CHICAGO - Option volume in Citigroup on Wednesday skyrocketed, as the bank's calls became more popular than the S&P 500 SPDR SPY.P exchange-traded fund, typically a top favorite among the options crowd.

About 1.82 million calls, which give buying rights to Citigroup shares, traded, more than seven times the norm as investors who had bet the stock would fall were forced to reverse that trade when the shares soared nearly 23 percent.

Citigroup shares rose to $3.08, the highest finish since Feb. 13 on optimism over government efforts to stimulate lending.

Option traders appeared to take advantage of the share price move and used a so-called conversion strategy as an arbitrage opportunity between the Citi shares and its options.

The movement in Citi shares today was a short squeeze as people could no longer borrow the stock, said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group in Chicago.

So some investors turned to a conversion strategy which allows them to buy the underlying Citi shares while at the same time, creating a synthetic short stock position by using options, Kinahan said.

A short squeeze occurs when a stock price rises, forcing investors with short positions to buy the stock to cover their position and cut their losses.

As the stock price rises, more short sellers feel they have to cover their positions, making it harder to find enough shares to meet the demand, driving the price even higher.

In Citi options, many players focused on the June contract, trading both sides of puts and calls, conveying the privilege to sell or buy Citi shares at the fixed $5 price by June expiration.

Some were drawn to a stock and a combination options trade referred to as a conversion strategy.

The intrigue surrounds the June $5 put and call strike Citi options where arbitrageurs are said to be using so-called conversion plays to lock in risk-free profit opportunities between options and stock, said Andrew Wilkinson, senior market analyst at Connecticut-based Interactive Brokers Group.

In a conversion, an investor purchases the underlying stock and offsets this by buying a put and selling a call in what is viewed as a synthetic short stock position.

There has been a significant amount of activity in the conversion trade, specifically around the June $5 Citi strike, Credit Suisse said in a note to clients on Wednesday.

On Tuesday, about 250,000 June $5 conversions traded, which equates to 25 million shares of stock, the note said.

In all, about 2.71 million option contracts crossed the tape in Citi, seven times the typical combined volume, according to option analytics firm Trade Alert.

That dwarfed the approximate 2.6 million option contracts traded in the S&P 500 SPDR ETF, which is designed to equal roughly 1/10th the actual Standard & Poor's 500 index .SPX. (Editing by Leslie Adler)