Call Options Or Put Options On American International Group (AIG)?

| October 3, 2012 | 0 Comments

AIG optionsAmerican International Group (AIG) is an American insurance company.  The company was heavily involved in the 2008 financial crisis.  And it only survived with the help of a massive multi-billion dollar bailout from the US government.

AIG currently trades for $34.23 per share.  The shares are up 78% from the 52-week low of $19.18 and are trading near the 52-week high of $35.42.

Is this an opportunity to buy call options on AIG as the government reduces its stake in the company?  Or should you buy put options on AIG before they get designated a systemically significant financial institution?

The bulls make a convincing argument…

Prior to the 2008 financial crisis, AIG was a powerhouse in the financial world.  But a credit downgrade in September of 2008 caused a severe liquidity crisis.  The company turned to the government as a lender of last resort when they were unable to raise the money in the private market.

The Federal Reserve Bank and US Treasury came to their aid with a direct investment and credit lines of $152 billion.  The bailout came at a steep price.  The government received ownership of 79.9% of the company.

Since then, AIG has sold off subsidiaries and assets in an effort to repay those debts. 

Just last month the US Treasury announced they would be selling $18 billion worth of AIG stock.  And following the sale, they would be a minority stake holder in the company. 

Obviously, AIG’s come a long way in order to reduce the US government’s ownership from 80% of the company to a minority stake today. 

What’s more, AIG will be repurchasing $5 billion of the stock the Treasury sells.  This is a massive buyback and should provide a big boost to earnings per share going forward.

Despite these positive developments, AIG’s stock continues to trade at a major discount to their peers.  However, the completion of the Treasury’s sale could provide the catalyst to send the stock soaring in the weeks ahead.

But the bears have a compelling case as well… 

Operational improvements and share buybacks aside, AIG is still a risky bet.  And it has nothing to do with what’s on their balance sheet…

AIG will always be synonymous with the 2008 credit crisis in the eyes of investors.

This is a major psychological hurdle for many investors.  It’s why it trades at a discount to its peers today.  And it’s why it will continue to trade at a discount going forward.

What’s more, AIG is under review by federal regulators to be designated as a systemically significant financial institution (SSFI).  And that’s not a good thing…

Being deemed a SSFI comes with boatloads of regulations and higher capital requirements.  And while that may be good for the safety of the financial system as a whole, it could slow down the company’s recovery and earnings growth. 

Honestly, nobody really knows how the new regulations will impact the SSFIs.  But it certainly adds a layer of uncertainty that many investors won’t want to deal with.

The bottom line is these psychological hurdles and the added uncertainty of being designated a SSFI will likely weigh the shares down in the weeks ahead.

If you think the bulls are right, take a look at buying the AIG January 2013 $36 Call for around $1.25. 

If you think the bears are right, take a look at buying the AIG January 2013 $32 Put for around $1.25.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.