AIG Shares Decline As Put Demand Picks Up

American International Group, Inc. (AIG) - An explosion of options activity was observed on the insurance company today. The current volume of more than 71,600 contracts exchanged by investors thus far has shattered the existing open interest on the stock of 55,495 lots. Option traders heavily favored put options on AIG amid a more than 13% decline in shares to $14.05. Some individuals expecting further bearish movement in the stock got long of puts as low as the July 12.5 strike price where 4,500 puts were purchased for 80 cents apiece. These investors may be protecting a long stock position beneath the breakeven point at $11.70, or may merely be looking for put premiums at that strike to appreciate in the near-term. Interestingly, the lower July 10 strike price had 3,000 puts sold short for 27 cents per contract. These short-sellers will retain the 27 cent premium as long as shares remain higher than $10.00 by expiration. Additionally, traders appear happy to have shares put to them at an effective price per share of $9.73 in the event that the put options land in-the-money. Plain-vanilla put buying was seen at the nearly in-the-money July 14 strike price where 1,800 lots were scooped up for 1.20 apiece, as well as at the in-the-money July 15 strike where 1,000 puts were bought for 1.75 each. Finally, one contrarian investor was seen establishing a bullish reversal on AIG by selling 3,000 puts at the July 12.5 strike for 80 cents apiece spread against the purchase of 3,000 calls at the way out-of-the-money July 17 strike for 47 cents per contract. This individual pockets a net credit of 33 cents on the transaction, but would need to see shares rebound higher by 21% for the calls to land in-the-money above a share price of $17.00 by expiration.

Discover Financial Services (DFS) - Shares of the credit card issuer fell more than 10.5% to $9.38 today after the firm announced a public offering for $500 million in common stock. DFS, which received $1.2 billion in TARP funds, revealed that it may use a portion of the proceeds of the offering to pay back some of the rescue funds it borrowed. Investors wary of continued declines in the value of the stock looked to the now in-the-money July 10 strike price to purchase 3,600 puts for an average premium of 86 cents per contract. Investors long of these put options will breakeven if shares decline beneath $9.14 by expiration. A large jump in the option implied volatility reading on the stock launched DFS onto our ‘biggest implied volatility % gainers’ market scanner this morning amid a surge in volatility to 67% from yesterday’s value of 55%.

General Electric (GE) - Option traders appear to be looking for a rise in implied volatility at the industrial conglomerate as they bought both call and put options expiring in January Tuesday. With shares at GE down 1.7% at $11.28 investors bought around 6,500 12 strike calls and the same amount of 10 strike puts for a combined premium of 1.85. Option implied volatility has been steady at a little beneath 50% for the past two months, but has picked up recently from 43 to 47%. That’s likely the result of downward pressure on its shares and a decline through $11.25 would mean a three-month low after an impressive bullish run all the way to $14.55 in May. Today’s trading pattern suggests that this investor expects shares to stray outside of a trading range bound by $8.15 and $13.85 by expiration. As with any strangle combination, this is unlikely to be an expiration based view. The point of owning calls together with puts is more of a volatility play. If the investor is accurate in predicting a rise in implied volatility the combined premiums will tend towards 2.0 and above.

Petroleo Brasileiro S.A. (PBR) - The Brazilian oil and gas company had a large-volume ratio put spread initiated by a bearish investor amid a more than 2.5% decline in shares today to $36.25. Shares of PBR have fallen over the past four days, mirroring declines observed in the price of crude oil as well as many other Brazilian stocks. The pessimistic put spread involved the purchase of 12,500 puts at the January 2010 36 strike price for 4.86 apiece against the sale of 25,000 puts at the January 30 strike for 2.33 per contract. The long-term bearish spread cost the investor just 20 cents and yields maximum potential profits of 5.80 per contract if shares plummet 17% to $30.00 by expiration at the start of 2010. Shares need only decline about 1% from the current price for the trader to begin to garner profits at the breakeven price of $35.80.

Human Genome Sciences, Inc. (HGSI) - The biopharmaceutical company jumped onto our ‘most active by options volume’ market scanner this afternoon after one investor initiated a call spread in the August contract. Shares of the firm had gained as much as 3% this morning, but are currently slightly higher by less than 0.5% to $2.71. The call spread involved the purchase of 8,000 calls at the in-the-money August 2.5 strike price for 1.10 apiece spread against the sale of 8,000 calls at the higher August 5.0 strike for 65 cents each. The net cost of the transaction amounts to 45 cents and yields maximum potential profits to the trader of 2.05 per contract if shares can rally up to $5.00 by expiration next month. Another option trade of note was the purchase of 20,000 puts at the August 2.5 strike for 84 cents apiece. The mass of protective puts may be the work of the same investor who enacted the call spread, or could be the work of another trader looking to profit to the downside beneath the breakeven share price of $1.66.

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