“Worthless” AIG Has Option Bears’ Claws All Over It

By option_review

July 9, 2009

543

Today’s tickers: AIG, ABC, RGS, & CSCO

AIG – Investor uncertainty over the fate of the insurance company surged this morning following extremely bearish reports from analysts at Citigroup. One analyst at Citi reported “a seventy percent chance that the equity at AIG is zero”, sending shares of the insurer lower by more than 21% to $10.31. Option traders looking to reel in profits on the rapid erosion in price today were seen gobbling up bearish put options in the near-term July contract. Investors expecting continued declines targeted the nearly at-the-money July 10 strike price and bought more than 4,800 puts for an average premium of 1.05 each. These traders will begin to accrue gains if the market price of the stock falls below the breakeven point at $8.95 by expiration. More pessimistic individuals purchased puts some 2,100 times at the July 7.5 strike for 39 cents each. Perhaps these traders see shares slipping to the current 52-week low on the stock of 6.60 attained back on March 6, 2009. Finally, traders expecting shares of the behemoth to halve by expiration, purchased 1,000 put options at the July 5.0 strike for an average premium of 13 cents per contract. Investors long the 5.0 strike puts breakeven beneath a share price of $4.87. Option implied volatility soared this morning from yesterday’s closing reading of 167% up to more than 200% at times today. – American International Group, Inc.

ABC – The drug distribution company appeared on our ‘hot by options volume’ market scanner today after one investor initiated a bullish reversal in the August contract. Shares of ABC are off slightly less than 1% to stand at $17.78. Hoping for upward movement in the price of the underlying by expiration next month, the optimistic investor looked to the August 15 strike price to sell 5,000 puts for 15 cents apiece which he spread against the purchase of 5,000 calls at the higher August 20 strike for 20 cents each. The transaction cost the trader a nickel per contract. ABC shares must rally 13% from the current price in order for the investor to begin to amass profits at the breakeven point of $20.05. We note that the market price of ABC has not breached $20.00 since September 15, 2008. – AmeriSource Bergen Corporation

RGS – The owner and operator of hair franchises and retail product salons has experienced a 0.5% hair loss for its shares to $12.30 following the firm’s additional offering of 11.5 million common shares priced at $12.37 apiece. Investors anticipating ‘bad hair days’ for Regis through expiration in August were seen scooping up put options on the stock. The August 10 strike price had approximately 4,500 puts picked up for an average premium of 45 cents apiece. The puts would prove to be profitable investments for hair-bears if shares of RGS slip another 22% through the breakeven point to the downside at $9.55 by expiration. Option volume accumulated during the trading day has reached nearly 9,000 contracts, exceeding the existing open interest on the stock of 6,802 lots. – Regis Corp.

CSCO – A trail of hoof-prints led us to the August contract on CSCO where a stampede of bullish investors laid claim to call options on the stock. Shares of the firm have climbed less than 1% today to stand at $18.21. The August 19 strike price had approximately 16,000 calls purchased for an average premium of 65 cents apiece. Shares of the networking and communications products company must increase about 4% to the breakeven point at $19.65 in order for call-buying bulls to profit by expiration. Additional bullish action was observed at the higher August 20 strike price where 2,000 calls appear to have been picked up for 30 cents each. – Cisco Systems, Inc.

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