With overhead resistance looming amid yesterday’s downturn, the odds of the AIG rebound continuing are small. And really, the bears should be all over this setup, as it’s offering a solid low-risk entry.
Let’s flesh out the details.
On the price trend front, the tides are turning. The recent selling pressure has sufficiently reversed both the 50-day and 20-day moving averages lower. Rallies are always suspect in such an environment.
Yesterday’s drop in AIG stock confirmed the formation of a lower-pivot high just beneath the 50-day moving average. With the path of least resistance pointing lower, now is as good a time as any to initiate bearish plays.
Absolute price performance aside, AIG has been atrocious on a relative basis. The financial sector is firing on all cylinders these days. Bullish setups have multiplied, and most of AIG’s peers are flying high. The relative weakness is yet another feather in the bears’ caps.
Should the selling intensify, the $60.50 level is as logical a target as any. Though, today’s option trade idea will thrive if the stock simply falls to $62.50
The AIG Option Trade
Option premiums remain subdued for AIG, suggesting a long option trade is the way to go. Aggressive traders could go for the jugular with a straight put purchase, while those looking for more finesse (not to mention less risk) should consider the following bear put spread:
Buy to open the April $65 put while selling to open the April $62.50 put. This creates an April $65/$62.50 put spread for a $1.25 debit. The max loss is limited to the initial $1.25 and will be forfeited if AIG sits above $65 at expiration. To minimize the damage, I suggest exiting the trade if the stock rallies above the 50-day moving average near $65.30.
If the stock falls below $62.50, you stand to capture the max gain of $1.25. That’s a potential 100% return if AIG declines a buck or two further.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.