- 15,000 January 32 calls were purchased for $3.90.
- 15,000 January 28 puts were sold for $2.45.
- 15,000 January 40 calls were sold for $1.42.
In total, the trade costs just $0.03 and will earn up to 26,000% if shares of AIG climb to $40 by expiration. The trade will lose money if AIG is trading below $28 at expiration.
In a previous article, I already stated why I believe the U.S. Treasury share sale is a buying opportunity. In addition to the reasons I provided, hedge fund manager Whitney Tilson has also turned bullish on the troubled insurer.
I believe this options strategy might be the best way to play it. There are a few reasons for this. Firstly, the sale of January 28 puts makes sense because the downside is most likely limited because the government will be reluctant to sell below this price as $28 is considered the "break even" price. At the same time, the sale of January 40 calls makes sense because if the price rallies further, the U.S. Treasury will likely look to sell more shares. The overhang of stock sales will likely put a limit on the upside for AIG shares.
Overall, selling the January 28 puts and January 40 calls to finance the purchase of the January 32 calls makes a lot of sense given the current situation facing AIG.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AIG over the next 72 hours.