Walk on Bullish Eggshells Around AIG

by Joseph Hargett | December 12, 2012 8:36 am

American International Group (NYSE:AIG[1]) investors rejoiced Tuesday, sending shares of the insurance giant soaring more than 5% higher following news that the U.S. Treasury has sold the last of its stake in the company[2]. For its part, the government reportedly banked a profit of $22.7 billion on the AIG bailout. Investors, meanwhile, looked forward to a future without a government stake looming overhead.

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From a technical standpoint, AIG shares have posted solid gains in 2012, rallying more than 50% since the start of the year. The stock has also enjoyed support near its 50- and 200-day moving averages throughout much of this uptrend.

Back in November, AIG broke down below an area of support/resistance near $35, but the stock refused to stray far below its 200-day moving average, bottoming near $30 by mid-November.

The shares ultimately rebounded, and were in the process of challenging the $35 region and its 50-day moving average when yesterday’s news broke. As a result, AIG’s rally-on-the-news has placed the stock back above a pair of technical support levels.

While AIG’s price action is reassuring, there are some trouble spots.

For instance, the stock is currently trading a mere 12% below the consensus 12-month price target. Furthermore, there also is ample room for analysts to moderate their outlooks as AIG approaches this target, with the equity garnering 12 “buys,” 10 “holds” and no “sell” ratings.

On the options front, AIG is staring up at heavy accumulations of overhead call open interest. Specifically, the December 34, 35 and 36 each sport call open interest of more than 13,000 contracts, while the January 2013 36 strike holds more than 30,000 call contracts by itself. A natural unwinding of the hedges related to these calls could create headwinds for AIG.

This uncertainty, combined with the potential for overhead technical resistance, should inject a bit of caution into AIG bulls’ trading strategies. One such strategy that takes advantage of the stock’s staying power but hedges against short-term weakness or stagnation is a bull put spread.

For instance, with AIG trading above firm support in the $34 region — an area that also is home to its 50-day moving average — a January 2013 33/34 bull put spread could fit the bill perfectly.

At the close of trading Tuesday, this spread was bid at 28 cents, or $28 per pair of contracts — the maximum profit should AIG close at or above $34 when January options expire.

Traders should note that a maximum loss of 72 cents, or $72 per pair of contracts, is possible if the stock closes at or below $33 at expiration.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

  1. AIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=AIG
  2. U.S. Treasury has sold the last of its stake in the company: https://investorplace.com/2012/12/sale-of-aig-stake-adds-to-bailout-profit-for-u-s/

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