Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Determining AIG's Next Move

By

Will the company continue at its recent pace?

PrintPRINT

Options volatility in September is in the 150 range. That implies that 68% of trading days in American International Group (AIG) should range under about 10%. As you can see on the chart, it has gone way beyond that on many recent sessions. In fact, Thursday and Friday saw over 20% moves, and if that keeps up, AIG merits an implied volatility in the 300s.


So does that mean you should go run out and by every option in sight here?

Of course not. It's not likely that kind of action continues for any extended stretch. And if AIG sits still, the daily decay and volatility risk of owning 150 volatility is rather large. I mean the September 50 straddle trades at something like $14. With under three full weeks of trading to go, that's a lot of wood to make up if you buy it, and AIG stops moving around at this pace.

What I'd say, though, is that this is exactly why many options traders preach that triple-digit volatility is a buy. Options volatility is only relevant in comparison to the volatility of the underlying. No one knows the volatility of the underlying going forward, so the best clue around (barring an expected news event) is the volatility of the recent past. And given AIG's recent past, hard to say straight shorting options here and closing your eyes makes any sense.

That being said, bubbly stocks have what seems like backwards volatility behavior. The more AIG rallies, the higher volatility will likely climb. Conversely, if AIG drifts down a bit, volatility likely contracts. And that's part of why I like the idea of owning options paper at strikes near here, and shorting it on the wings. Although ironically, I suspect the higher "wing" will come back to haunt me.

The implosion of AIG has the world up in arms. Join Hoofy & Boo as they take you through what happened, from start to finish.



No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE