Stocks quoted in this article:
Put players have been active in American International Group Inc's (NYSE:AIG) options pits in recent months. In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.91 ranks higher than all other comparable readings taken in the past year. Simply stated, puts have been bought to open (relative to calls) at an annual-high clip over the past 10 weeks.
Today's activity differs quite drastically from this withstanding trend. At last check, roughly 17,000 calls were on the tape -- more than two times the intraday average, and three times the number of puts traded. This, as the equity tagged a five-year peak of $55.42 in early trading, before easing back to its current perch at $55.01. Diving deeper, it appears a number of speculators see another multi-year high on AIG's near-term horizon.
Specifically, the front-month at-the-money June 55 call has received notable attention. The majority of the 2,709 contracts traded here have gone off at the ask price, and implied volatility is higher -- two indications that new positions are being purchased.
Based on the volume-weighted average price (VWAP) of $0.71, these call buyers will see a profit if AIG is sitting north of $55.71 (strike plus VWAP) at the close on Friday, June 20 -- when front-month options expire. Gains are theoretically unlimited with each notch above this breakeven mark the stock settles at expiration. Meanwhile, should the security finish south of the strike price, the most the speculators stand to lose is the initial premium paid.
However, now appears to be an opportune time to purchase AIG's front-month options, as the stock's Schaeffer's Volatility Index (SVI) of 16% ranks lower than 97% of similar readings taken over the last 12 months. Simply stated, premium on the stock's short-term options is modestly priced, from a volatility perspective.
On the fundamental front, the Senate yesterday unanimously passed an amendment to the 2010 Dodd-Frank bill that will allow the Federal Reserve to adjust capital rules for insurers like American International Group Inc (NYSE:AIG) -- a rare move for Congress. A similar bill is waiting for approval in the House of Representatives.