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Kill or cure for AIG?

Today’s tickers: AIG, XLK, MRVL, VPRT, FNM, XLF, PMCS, AFL

AIG – American Insurance Group Inc. – It’s kill or cure for AIG according to options patterns evident on Thursday. With shares higher by 2.3% at $20.45 we’re sniffing out what appears to be a long strangle on the stock using options in the November contract. The trade involves volume of 14,000 contracts of the 20 strike put and the 24 strike call. In buying both of these the investor seeks to see shares in AIG significantly shift out of its torpor at relatively depressed levels. If we’re right that this is a long strategy, the breakevens on the trade are at $15.70 and $28.30 calculated by using the value of the net premium of 4.3 to implement the trade. The investor expects the company to shake off its illness, meaning its shares will recover dramatically to leave the upper breakeven behind. Or it expects the current weight of bad news to bring the share price to its knees following a similar path to that followed by the GSEs. Further out in the January 2010 35 strike straddle an investor likely sold a 2,000 contract straddle at a net 17.50 premium. While this is well away from the money today, this may reflect the anticipation of ultimate recovery for the company and a gradual pull back to a central share price of $35.00. The losses on the trade mount beneath an expiration-time share price at $17.50 to zero, while the investor’s captured premium is eroded should the shares rally as high as $52.50 beyond which losses would accrue. Implied volatility on AIG today stands at 71.1%.

XLK – Technology Select Sector SPDR. – A large trade went through in early activity on the tech fund involving the purchase of some 45,000 puts just out-of-the-money in the October contract at the 21 strike. The SPDR fund is actually higher this morning by 0.7% at $23.30 but this looks like a fresh long insurance position for a premium of 20 cents – unchanged on Wednesday’s closing price. The protection therefore kicks in should the fund decline in value to below $20.80. Open interest of 10,000 was in evidence at this strike yesterday. It looks like this position is growing as the minutes pass by this morning. Bought volume now stands at 115,000 contracts.

MRVL – Marvell Technology Group Ltd. – Shares are 0.7% higher today at $14.55, while options traders seem to have a fixation for selling puts at the 15 strike across the board. This is a bullish play with (almost) unlimited downside (shares can’t fall below zero). The September contract is the exception where puts have largely been bought, while in the October and November contracts investors clearly expect Marvell to be higher in price. In the November calls, the 15 and 17.5 strikes are well populated with an even split of buyers and sellers initiating activity today according to time and sales. The company is expected to report later Thursday.

VPRT – Vistaprint Ltd – Online graphic company Visataprint has some interesting volume chugging through today and within the first hour of trade the options volume is twice that of the typical daily average. With shares 1.7% higher at $32.85 we’re watching September and October 35 and 40 strike calls being sold at 60 and 30 cents respectively. In addition October 30 strike puts have been bought at 1.65. We’d say that a cautious bull is taking advantage of a rise in the stock of late to protect against adverse movements. The call sales could imply an existing long position to start with.

FNM – Fannie Mae – Shares are back above $7.00 – barely – thanks to an 8.3% rally on the day. That’s apparently what happens when you change senior management. Looks like a 15,000 lot put spread was implemented at the December 4 and 7 strikes at a cost of 1.55. A worst-case scenario for Fannie Mae putting its shares below the $4.00 mark by expiration in four months would reward this investor with 1.45 in per contract profits. The risk- reward looks skewed to us and we’d be inclined to note that this may possibly have been provoked by an investor long of FNM from lower down, lucky enough to have bought and held onto share price weakness. The cost of the December at-the-money protection at 2.60 is therefore relatively expensive and vastly reduced by the sale of the 4.0 puts at 1.10.

XLF – Financial Select Sector SPDR – While the technology Select Sector SPDR has the monster play today, the Financial SPDR is more active. Its shares are 1.5% higher possibly underpinned by positive news out of the ratings agencies before the market opened as well as stronger GDP data. The fund stands at $20.87 at the time of writing and we’re watching a ridiculous amount of buying at the September 22 and 23 lines (265,000 and 105,000). In addition there is also buying at way-out-of-the-money strikes between 26-29 where several thousand lots are in play. We could be seeing sizeable positions being closed out for a profit since it would be a mighty tall order to expect an 18% rally in financial shares over the next three weeks.

PMCS – PMC-Sierra Inc. – Shares are 2.3% higher at $8.86 while options volume of 16,200 contracts compares to open interest on the stock of 131,491 options. The September and October 10 strikes seem to be the favored harbor for investors. Some 7,500 calls in September and some 5,500 calls in October appear to have been purchased today at 15 cent and 25 cent premiums.

AFL – Aflac Inc. – There is considerable interest in options contracts on Afflac – the supplemental life and health insurance provider. Current existing open interest of 81,099 lots compares to volume seen today of 11,000 contracts mainly on the call side. With shares just 1% firmer at $56.79 we’re observing interest in the September contract at the 60 and 65 strike prices, where activity appears to have been initiated by buyers today. Two days ago the company announced an unusual method of repurchasing its own shares when it announced that it would pay Goldman Sachs $825 million using internal capital to fund purchases, to deliver three tranches of Alfac shares in December, January and February according to one version of the story. The story is possibly putting a floor under the share price at Afflac or could be order-flow from the investment bank as it seeks to slowly buy stock.

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