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Despite being down with the rest of the market to trade at $41.69 this morning, American International Group Inc (NYSE:AIG) has been a technical titan. In the past year, the insurance concern has tacked on more than 32%. Plus, from a nearer-term perspective, AIG has bested the broader S&P 500 Index (SPX) by nearly 11 percentage points over the past three months.
So far today, a group of investors is betting on those longer-term trends to prevail against the recent broad-market downturn. Specifically, traders are loading up on July 44 calls, with over 2,700 contracts changing hands, 93% at the ask price -- suggesting they were bought. Implied volatility has surged 5.1 percentage points, too, so it is likely new positions were created.
The volume-weighted average price (VWAP) for the front-month calls is $0.78, so the speculators need American International Group to regain some of the ground it's lost over the past few sessions. In particular, the shares need to be trading at or above $44.78 (strike price plus VWAP) by July 19, when the options expire in order for the bulls to profit. The shares were last seen north of that mark on an intraday basis on Thursday. Even if the stock stalls short of breakeven, however, the most the traders can lose is the premium paid.
This morning's bevy of call buying -- beyond the action at the July 44 strike, since calls are outpacing puts by close to a 2-to-1 margin -- is out of keeping with the prevailing sentiment toward AIG on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In the past two weeks, traders have bought to open 67,328 puts compared to just over 50,000 calls, for a put/call volume ratio of 1.35 -- which happens to represent an annual high. In other words, the current level of put buying hasn't once been exceeded in the past year.
As a result, AIG's Schaeffer's put/call open interest ratio (SOIR) stands at 0.89. The SOIR ranks in the 84th percentile of its annual range, indicating greater-than-usual pessimism among options set to expire in the next three month.
Should those bearish bets begin to unwind over the course of the next few weeks in the face of American International Group Inc's (NYSE:AIG) underlying technical strength, it could provide the equity some powerful contrarian tailwinds.