It was a bad day on Wall Street with the Dow dropping 504 points but it was even worse for American International Group (AIG, $4.76, down $7.38). The company said it would need $40 billion or more to fix its balance sheet and New York regulators gave AIG special access to $20 billion of cash held by its subsidiaries. On August 26, I mentioned we could see AIG’s stock fall and that the September 18 puts (AIGUS, $13.05, up $6.35) looked good at around $1.30. That was an understatement as the put options have now returned 885%.
Although AIG’s shares have fallen with the rest of the financial stocks, AIG has a significant amount of quality assets it can sell. The stock fell 45% last week and today’s 60% drop is being viewed by Wall Street as an “overreaction.” Call it what you want but when a stock falls from $70 to under $5 it’s hard to rally behind it.
What was really funny is the analyst who downgraded the stock to “Hold” from “Buy,” and lowered its price target on AIG to $14 from $25.50. While there’s a good chance AIG will survive I wouldn’t recommend getting into the stock at any level. The financial stocks have all taken a beating and it has a lot of individual investors worried to the point where they are selling everything. That’s sad because even though the Dow fell 500 points we have been making a mint by buying puts.