Wednesday, December 15, 2010

AIG - Vol and Stock Move Re-visited

AIG is trading $51.75, down small with IV30™ up 1.4%. The LIVEVOL™ Pro Summary is below.

I wrote about AIG on 12-9-2010, in particular, with the stock moving I felt the vol was kinda low. You can read that post below:
AIG - Vol Explodes on Bailout Ownership Changes

We looked at three possible trades to analyze:
1. I'm not usually a premium buyer, but the Dec 46 straddle is priced at
~$2.45 fair value and the stock has moved $4.00 today alone. I dunno, feels like that straddle is kind of cheap.
Buy the Dec 46 straddle for $2.50.

2. Take a little of that premium off with an upside skew sale.
Trade #1 +
Sell the Dec 50 call @ $0.40. This reduces the net debit to $2.10.

3. Trade #2 and sell a put, like the Dec 43. But, I dunno if a $0.20 sale is worth it.

Anyway, they all won simply because the stock moved $6 (or whatever). Let's look at the Skew Tab today (below).

So we see that the front month (i.e. the front 3 days) are very elevated (as usual) compared to the back month. There is a fairly substantial upward bend to the skew to the upside. I've highlighted the 55 strike vol difference (38 points).

Let's look to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see that wild move up from ~$42 to now ~$52 in the last week or so. We can also see that the IV30™ (short-term implied vol) is below the HV20™ (short-term realized vol) and the HV180™ (long-term realized vol). Specifically:

IV30™: 46.97
HV20™: 55.91
HV180™: 50.00

Finally, let's look to the Options Tab.

The question now, is the AIG vol still too low? The Jan ATM straddle is priced at ~ 47 vol, so it's come up ~7% from the Dec ATM straddle in the last post. This feels like one of those trades that will keep working, until it doesn't, with the "doesn't" turning into a painful loser. Let's look at some trades, but keep a close mind on the fact that the IV30™ only looks low because the HV20™ has catapulted up on the AIG stock move of late.

Possible Trades to Analyze
1. Buy the Jan 50 straddle for $6.30 and hope AIG moves a lot. This trade might be a winner intra-month with some stock moves rather than a trade to hold to expo. This would be an "active" trade, not a "sit and watch" trade.

2. Do #1, but sell that upside skew in Dec for a three day scalp.
Sell the Dec 55 call @ $0.36 (85 vol). Note that if AIG rips passed 55, this is a loser.

3. For you risk lovers:
The upside is super bid because of the recent stock move, Do #2 but sell 2 of the Dec 55 calls.

This is trade analysis, not a recommendation.

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