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American International Group Surge Attracts Bullish Traders

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AIG April 40 call popular in Thursday's trading.

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Insurance giant American International Group (NYSE:AIG) was deluged by options traders on Thursday before the markets broke for the long weekend, with 62,000 calls changing hands -- nearly double the normal volume on what was otherwise a slow trading day. This bullish speculation is not surprising given AIG's strong performance this year; the stock was up 1.5% on Thursday alone.

One strike seeing some attention on the day was the April 40 call, where more than 80% of the 6,724 contracts changing hands traded at the ask price. Implied volatility was higher in Thursday's trading, and open interest rose over the weekend, suggesting there were some buy-to-open orders in play. These front-month calls traded for a volume-weighted average price (VWAP) of $0.30, meaning the breakeven price at expiration on April 19 is $40.30 (strike plus VWAP). Delta on this out-of-the-money option is currently 0.29, giving the position a more than 1-in-4 chance of expiring in the money.

As stated, AIG has had a strong climb up the charts, jumping 10% on the year and more than 25% over the last 12 months. It has been in a minor slump since hitting its two-year intraday high of $39.90 on Feb. 12, however, and had recently dipped below its 20-day moving average until Thursday's rally. In addition, the company won a legal battle Thursday night after the market closed when a key witness and former Federal Reserve of New York employee changed his testimony in AIG's ongoing legal battle with Bank of America (NYSE:BAC).

Sentiment on the options trading floor appears mixed, however. AIG's 10-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is a healthy 3.97, and that ranks in the top 19% of readings taken in the last 12 months. That means calls have been bought to open at a much higher pace than normal over the last 10 days. But widening the scope a bit, Schaeffer's put/call open interest ratio (SOIR) for AIG is 0.85, and that is in the 79th percentile of similar readings in the last 12 months. So put open interest among options set to expire in the next three months is higher than normal as well.

This article by James Pilcher was originally published on Schaeffer's Investment Research.

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