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American International Group (AIG, $35.45, down $4.20) fell 10% yesterday after a Credit Suisse analyst downgraded the stock from “Neutral” to “Underperform”.  Their research pointed to the fact that “near term monetization of value of businesses suggests little to no value for common equity.”

 

For those of you who have followed me for a while know I profiled a monster put option trade in AIG last year that returned over 850%.  The stock was at $20 on August 26th, 2008 and by September 15th, the stock was at $4.  The next day AIG hit a low of $1.25.

 

Because I have followed the stock for years, I know how to take advantage of the market’s love affair for the shares.  I have been saying since that 2008 Blog that AIG was a dog. 

 

To make a long story short, AIG was under a buck when it did the 1-for-20 stock split back in July.  I profiled two put options on July 8th that returned 71% and 132%, respectively, as AIG fell back below $10.

 

I saw another opportunity for a strangle option trade last month:

 

On August 20th here were my thoughts with that day’s option price:

 

“American International Group (AIG, $33.49, up $6.85) is up 25% today and it’s hard to believe the stock has rebounded from a low of $13 since the beginning of August.  Incredible.  The September 35 calls (IKJII, $4.10, up $3.05) have soared nearly 300% after opening at $1.22.  There is a combination of a lot of things going on with AIG right now and although I don’t trust this dog to go long, there may be a chance for a STRANGLE option trade.  The September 25 puts (AIGUY, $1.65, down $1.05) have dropped 40%. 

 

The stock is up on some CEO fluff who believes he can “maintain shareholder value”.  Good grief.  Give me break.  He failed to mention that his company did a 20-to1 reverse stock split and right now the shorts are getting hammered.  I’m going to do some more research on this one but a strangle trade is when you play both sides of the ball hoping for a big move.” (END)

 

A week later on August 27th, I gave two updates on AIG and had this to say about the AIG call options.  This was before the market opened that day: 

 

“If AIG continues to shoot to the moon then the calls will continue to go higher and they could triple again if AIG goes to $50.  They would be worth $15.” (END)

 

This was the afternoon blog:

 

“AIG has hit $50 today and is currently up 30%.  The call options I’m talking about are the September 35 calls (IKGII, $15.00, up $9.55) which closed yesterday at $5.45.  As Biggie Smalls would say..”It Was All a Dream”…but this dream has come true.  Bam, The September 35’s are right at $15, up 175%.  Folks, they opened at $7.50 and have doubled.” (END) 

 

One day later on the 28th:

 

“As far as specific stocks, make sure you close the AIG (AIG, $49.81, up $1.97) call options today.  The stock hit a high of $55.90 this morning which represented the perfect opportunity to sell the September 35 calls (IKGII, $15.80, up $1.70) which printed $21.00 today. ” (END)

 

The total return for the call side of the strangle trade would have been 400% from $4 to $20.  The point is you would have made more than enough to cover the put side of the option trade even if it expires worthless!

 

Now, the September 25 puts (AIGUY, $0.55, up $0.20) were picked up for $1.65 so they are still DOWN 67% but they gained over 55% yesterday.  With yesterday’s downgrade, these put options have a chance of making it back to the entry price and who knows?  You may even be able to squeeze out a profit on this side of the trade as well.

 

The total cost of the trade would have been $5.75 ($4.10 for the calls and $1.65 for the puts.  If you sold the calls at $20 and sell the puts for 50 cents or $1.00 then you are still looking at a return of over 400%!

 

I know that was long winded and it probably made for some good bathroom reading material but I wanted to review this trade to show some of our new subscribers how strangle trades really work. 

 

My question is, where was Credit Suisse when the stock was at $55?

 

Once you follow a stock and learn how it trades, how it reacts to news and if it’s overvalued or undervalued; you will then learn how to find some really nice trades.  There are other high-flying stocks that make great strangle candidates but you still have to do the homework and find the right options.