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AIG Skeptics Eye Technical Challenge Ahead

Will shares of AIG tumble by back-month expiration?

by 8/16/2012 2:08 PM
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Put activity is running higher than usual on American International Group, Inc. (NYSE:AIG - 34.62) today, as approximately 60,000 of these bearish options have changed hands, which is more than five times the equity's expected intraday volume. A large chunk of the volume centered around the near-the-money September 34 strike, where over 22,100 puts have been traded at a volume-weighted average price of $0.86. What's more, nearly all of them crossed at the ask price, pointing to buyer-fueled activity. Because today's volume exceeds current levels of open interest -- and implied volatility was last seen 1.4% higher -- it's a safe bet that new positions are being initiated here today. By purchasing these puts to open, traders are expecting the stock to keep trekking south of the $34 level through back-month expiration.

On the other side of the options fence, it looks like a block of 6,000 calls were sold at the November 32 strike for $3.79 each, while an equal number of calls were bought at the November 36 strike for $1.56 apiece -- yielding a net credit of $2.23. However, since open interest levels at these strikes are higher than today's volume, it's possible that one trader is closing a bull call spread on AIG -- a move that would coincide with the skeptical sentiment we're seeing in the stock's put options.

From a broader sentiment perspective, calls are the options of choice on the insurance firm. The 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio for AIG sits at 2.59, signaling that traders have bought to open 259 calls for every 100 puts during the past few months. This ratio lands in the 53rd percentile of its annual range, meaning traders have been showing a slight preference for calls over puts lately compared to what's typical among AIG speculators.

Meanwhile, the majority of analysts covering AIG maintain an extremely upbeat outlook toward the stock. Currently, the equity boasts 10 "strong buy" recommendations, compared to eight "holds" and not a single "sell" suggestion.

Technically speaking, AIG has gained more than 49% year to date, and has outpaced the broader S&P 500 Index (SPX) by roughly nine percentage points during the last 60 sessions. However, while the stock is trading just below its annual high of $35.05, this area ended up serving as resistance back in early May. In fact, after tagging this price peak, the equity fell all the way to $27.18 by early June. It's possible that today's bearish traders may be expecting a similar pullback, which could result in a profit by September expiration.


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