Sunday, June 06, 2010

AIG

Here is a trading chart of AIG, using low-volatility trend settings (7, 4.0) for longer-term trades:


8/5/09      BUY     22.00     +11.30     +51%
11/27/09   SELL   33.30     +6.28      +19%
2/10/10    BUY    26.92      +7.89       +29%
5/20/10    SELL   34.81       open        open


The most recent SELL signal was May 20th and with AIG closing Friday at 34.75, this trade has not taken off, not yet.  The AIG Weekly Trend Model did trigger its own SELL Signal on Friday's close, so this becomes an example of a fresh, actionable trade.  

The previous three trades averaged 33% gains, so at a minimum, I would expect a drop to about the mid-20's on this trade.  That estimate is pure speculation, but in crafting an option play based upon this signal, a projection like this can be helpful.  The other trades lasted about three months each, so that too enters into option analysis.  

Shorting the stock here is the cleanest, easiest play on this SELL, but, leverage does liven up the game.


10 comments:

Allan said...

Just to follow-up on AIG after the open on Monday. When AIG popped after the open and then began to lose steam, I bought the June 35 puts @ $0.90.

A

Allan said...

Typo, paid $1.90 for those puts.

Allan said...

Two hours later, the June 35 puts are up 27%. There are a few strategies available now. First, take the 27% and call it a day. Not a bad return for a single idea. Second, let it ride consistent with the SELL SIGNAL. That is my choice, but either of these alternatives work depending on your trading psyche.

Other ideas include selling some out of the money puts and carry a spread into the next few weeks. This too works for some folks. I refer simplicity, but that's me.

A

Allan said...

Here is an option strategy from Phil Davis of Phil's Stock World:

Because the premiums on call options are so high, an interesting way to go short on AIG is to set up a ratio backspread.

You can buy 3 Jan $37 calls for $4.90 ($1,470) and you can sell 5 July $34 calls for $2.90 ($1,450).

That will put you in the trade at net $20 and if AIG fails to hold $34 through July options expiration, whatever value remains in your Jan calls can be cashed and kept.

Should AIG go higher, you can "roll" the calls you sold to a higher strike at a later month. For example, the Aug $36 calls are $3 so you have a pretty wide margin for error.

There are margin requirements to this trade since you are selling 2 uncovered calls plus there is a $3 spread between the strikes but this is an excellent, well-hedged way to bet against AIG.

Allan said...

Here's a link to Phil's take on shorting AIG:

http://seekingalpha.com/author/philip-davis/instablog

Anonymous said...

As much as I like Phil's idea but I want to keep it simple and not using margin so I bought a couple of August $34 puts

JD said...

Hi Allan - interesting. I bought the July 35 Puts, thinking that having just 11 days left in the front month options didn't give it sufficient time to claw back any adverse moves. For TZA buying into a longer expiry worked well because there were periods of drawdowns I needed to ride over. Your thoughts?

Allan said...

I chose June because of the structure of the US markets now and in particular, financial stocks. Although my expectation is that ultimately AIG will drop under 30, that for the next 11 days it is likely to drop to the low 30's, providing a double or triple in the June 35's. An aggressive move, but one that I think is worth the risk. There is nothing wrong with going out to July, that may end up the better move, but my bet was for something more immediate.

A

Allan said...

In case anyone is still following the AIG thread, I added to my puts today (Wednesday June 9th) bring my average cost down to $1.76.

JD said...

Thanks Allan for the update - I am holding on to my July Puts which are slightly up, and in a zig-zag market, that is actually a very good position to be in.

I am out of of my June TZA Puts though, and almost doubled my money on that one. So cool!