Puts Cast a Pall on AIG

The bias to puts in world’s largest insurer AIG (AIG) ahead of tomorrow’s earnings continued apace today.

Today’s action extends a trend that has been intact all week – making the modestly bullish bets we observe last week look like a flash in the pan as shares today stage another 3% decline to $46.89. Implied volatility on all AIG options rose more than 12% to 48.7%. The price of the $47 straddle suggests option premiums are pricing in about a $3.80 (8%) move on back of the earnings, but with 4 times as many puts moving as calls, it’s clear that the consensus here favors the downside.

May 43 puts are trading at more than triple the open interest, most of these going to the middle of the market for 44 cents. Besides two-way traffic in puts at strikes 44 and 45, fresh buying (i.e. exceeding open interest) has been noted at the 47 and 48 strikes. AIG’s 1.5 million-lot open interest is virtually evenly split between puts and calls – when you observe that kind of rigorous balance in the open interest, it lends particular weight to a day like today when there’s a preponderance of fresh trading in puts.