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New Calls

Amer. Intl.Group - AIG - cls: 3.75 chg: -1.01 stop: n/a

Company Description:
American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. (source: company press release or website)

Why We Like It:
Unless you've been living under a rock you are well aware of the climactic moment that AIG is currently in. If you are not familiar with the story just read tonight's market wrap. Here's the situation. AIG has to raise a lot of money and raise a lot of money fast or their credit worthiness is going to be downgraded, which would cause the company to go under. Most market experts and pundits believe that AIG is just too big to let fail. I'm not going to go into all the details here. Essentially, we found what looks like a low risk way to trade this situation.

Our plan is a covered call on AIG. The stock closed at $3.75 following a 21% sell-off. After hours, with all the buzz that the company may not get funding, the stock is trading around $2.00. If you look at the January 2009 $5.00 calls on AIG they were trading at $2.25/2.55 but that was at the closing bell when AIG's stock was at $3.75.

We are suggesting that readers buy shares of AIG at the opening bell tomorrow, wherever that may be, and then sell the $5.00 January 2009 call. For argument's sake let's pretend that AIG opens at $2.00. If we buy the stock we can sell a call for every 100 shares we own. Now if AIG does open at $2.00 then the $5.00 call is going to be trading for less than $2.50. Let's say it's at $1.50. If you sell the call then your cost basis in AIG is only $0.50. We're making a $0.50 bet that AIG does not go under and somehow avoids bankruptcy.

If AIG doesn't file bankruptcy then what are the odds that the stock bounces back above $5.00 before January 2009 expiration? They're probably pretty good odds.

Here's our challenge. We don't know what AIG is going to open at tomorrow. Nor do we know what the $5.00 Jan. 2009 calls are going to be at. If AIG opens in the $3.00-4.00 range then you may want to sell the Jan. 2009 $6.00 calls. If AIG opens above $4.00 then you may want to sell the $7.50 calls. If AIG opens below $1.50 then consider selling the $2.50 or $4.00 calls. You get the idea. We're making a bullish bet that AIG will survive. If it doesn't survive then we're trying to significantly reduce our risk by selling calls. This puts a cap on our upside but it's probably worth the added peace of mind.

Suggested Options:
Depending on where AIG opens for trading tomorrow will determine which call we sell for this covered call play. Here are a few to consider. If AIG gaps down tomorrow morning these values will gap down as well. (Options listed are for January 2009)

BUY CALL JAN 4.00 AIL-AE open interest= 0 current ask $2.80
BUY CALL JAN 5.00 AIL-AA open interest=2421 current ask $2.55
BUY CALL JAN 6.00 AIL-AF open interest= 33 current ask $2.31
BUY CALL JAN 6.00 AIL-AU open interest=2950 current ask $2.01

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 69.8 million


SPDR S&P Oil - XOP - cls: 46.70 chg: +0.95 stop: 42.39

Company Description:
The SPDR S&P Oil & Gas Exploration & Production (XOP) is an exchange traded fund (ETF) that seeks to mimic the performance of its namesake index.

Why We Like It:
The XOP dipped toward its January 2008 lows and bounced. There was some talk today that crude oil may have finally found some support. Meanwhile news out after the closing bell that the government might loan billions of dollars to AIG could put downward pressure on the U.S. dollar tomorrow. Altogether this might be an opportunity to be bullish on oil stocks again. We'd rather not chase a 10% rebound from XOP's low today but we don't have a lot of choices. This should be considered an aggressive play sine we're trying to pick a bottom for the oil stocks, even if it's just a short-term bottom. We're listing a stop loss under today's low. More conservative traders may want to use a stop loss under the afternoon low around $43.70 instead. We have two targets. Our first target is $49.95. Our second target is $53.50.

Suggested Options:
We are suggesting the October calls. Strikes are available at $1.00 increments.

BUY CALL OCT 45.00 XOP-JS open interest= 4 current ask $4.10
BUY CALL OCT 47.00 XOP-JU open interest=20 current ask $2.95
BUY CALL OCT 50.00 XOP-JX open interest=17 current ask $1.80

Picked on September 16 at $ 46.70
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 2.0 million

New Puts

Volatility Index - VIX - cls: 30.30 chg: -1.40 stop: n/a

Company Description:
VIX measures market expectation of near term volatility conveyed by stock index option prices. The original VIX was constructed using the implied volatilities of eight different OEX option series so that, at any given time, it represented the implied volatility of a hypothetical at-the-money OEX option with exactly 30 days to expiration. The New VIX still measures the market's expectation of 30-day volatility, but in a way that conforms to the latest thinking and research among industry practitioners. The New VIX is based on S&P 500 index option prices and incorporates information from the volatility "skew" by using a wider range of strike prices rather than just at-the-money series. (source: company press release or website)

Why We Like It:
We were successful with our bullish play on the VIX spiking to the 30 level. Now we want to play the reversal. The VIX doesn't hang up here around the 30 region for very long so it should be a reasonably (safer) bet that volatility will eventually diminish. Now don't bet the farm because you think this is a "safe" bet. There is always risk. Speaking of risk we are not listing a stop loss. These are crazy times on Wall Street and it would not surprise me to see the VIX spike to new highs before reversing. Fortunately, it always reverses lower again. We're setting our first target at 25.50. Our second target is 21.00. It's up to you if you want to play the October puts or the November puts.

Suggested Options:
We are suggesting the October or November puts. Strikes are available in 2.50 increments between 20.00 and 40.00.

BUY PUT OCT 25.00 VIX-VE open interest=51160 current ask $2.00
BUY PUT NOV 25.00 VIX-WE open interest=2214 current ask $2.70

Picked on September 16 at = 30.30
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = --- million

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