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Bullish Traders Count on Near-Term Gains for AIG

Short-term call activity ramps up on American International Group

by 12/7/2012 1:57 PM
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Bullish traders have been targeting American International Group, Inc. (NYSE:AIG - 33.85) today, amid reports that the company may sell a 90% stake in International Lease Finance Corporation. As a result, roughly 48,000 calls have changed hands so far, more than doubling the security's expected intraday call volume.

Leading the pack is the February 37 strike, which has seen nearly 15,500 calls cross the tape -- 88% of them at the ask price, pointing to buyer-fueled activity. These out-of-the-money contracts were exchanged at a volume-weighted average price (VWAP) of $0.60. Because today's volume exceeds current open interest levels -- as well as the fact that implied volatility was last seen 1.4 percentage points higher -- it can be assumed that new positions are being established here. By purchasing these calls to open, traders are betting on the stock to climb north of $37.60 (strike price plus VWAP) by February expiration.

Prior to today's upswing in AIG call volume, however, the mood in the options pits had been decidedly bearish. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.62 is just 10 percentage points shy of a pessimistic peak. In other words, traders have been picking up puts over calls at a near annual-high pace during the past two weeks. What's more, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.82 ranks higher than 72% of other such readings taken within the past year -- reflecting a stronger-than-usual preference for near-term puts over calls.

Meanwhile, short interest on the insurance company surged by about 26% during the most recent reporting period, implying that some of today's call activity could be the work of short sellers looking to hedge their bets. Even so, these shorted shares make up less than 2% of AIG's available float.

Elsewhere, most of the brokerage firms following AIG have big hopes for the security. No fewer than 10 analysts have issued "strong buy" endorsements, versus seven "holds," and zero "sell" suggestions. Furthermore, the equity's average 12-month price target stands at $39.59, representing a 19% premium to Thursday's closing price of $33.26.

This optimism is hardly surprising, considering AIG's year-to-date gain of about 46%, along with its year-over-year advance of nearly 44%. Thanks to today's near 2% increase, the stock is on pace to finish the week atop its 10-week moving average for the first time since Oct. 26. Should the shares keep up this positive momentum, today's February call players could end up collecting a profit within the next few months.


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