AIG Put Surge

• Posted by Adam Warner
• on December 1st, 2009

Some trades from yesterday, courtesy of Cuttone and Company.

In Sun Microsystems (JAVA), the Dec 7 puts were bought 50,000 times for $.06 to sell 20,000 Dec 8 puts @ $.10.  This is basically an insurance policy on the deal breaking. If the deal goes through, they spent $100k.  If the deal breaks, they lose money down to $6.30 in the stock, the break even.  Below $6.30, they profit.  For instance, at $5, they make $3.9mm; at $4, they make $6.9mm, etc.

 There was lots of put action in American International Group (AIG) on Monday, with over 41,000 Dec 25 puts and 24,000 Dec 30 puts trading, to name a few.  The puts traded as the stock dropped precipitously after Sanford Bernstein cut their price target by 40%, citing an $11Bln shortfall in reserves.

As active traders, we tend to look at options spreads more as positions then “held to expiration” plays. But in something like that JAVA above, it’s actually the right way to analyze it. Arbs have trades on in the underlyings in ungodly size and you often get large options plays like that for insurance. It is a binary bet as JAVA would likely gap down if there’s trouble.

And AIG? Why does that name ring a bell? It’s at the 200 Day now, which means…..something I suppose. Options volatility actually had just hit a low last week, near 57, before yesterday’s surge. That sounds pretty cheap for AIG, but took a gander at the 10 Day HV and it hovered around 20 for the first half of November. Now? Back to 80. Tough option to price fairly, to say the least.

 

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