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Profiting From the AIG Short Squeeze

|Includes: American International Group Inc (AIG)

"Climax Syndrome" is the term I use to describe the behavior of a stock undergoing accelerated buying or selling. If you haven't see it yet, take a look at the article I wrote two months ago.  This week, AIG fell prey to the phenomenon, giving us all an opportunity to make a few dollars... but only if we played it safe.

Since its reverse stock split (you get 1 new share for 20 old shares) AIG has done little but drop.  Its shares have been hard to borrow to short, but old shorts have held.  For some reason, probably related to its upcoming earnings report, AIG began to experience some buying.  In retrospect, I suspect a leak of information at the company, and even some insider trading.  In the future we may see some investigation, but that is just speculation on my part.  At any rate, the price began to rise, and in a stock with such an extreme short interest there is always the possibility of a short squeeze as funds holding AIG short begin to decide to cover their position.  That is what happened, apparently.  But the cause is almost irrelevant - the key is to identify the acceleration in price, and follow a plan.

The story is the same. The four tactics still work. 

(1) Play the initial surge.  Once you have confirmed that acceleration is happening, buy in.  Wait for the first large wave of selling, one which can drop the price at least 5%, and sell out.

(2) Short the first selloff.  Cover before the end of the first day.  This method would have been a bit scary this time, but would have still paid off.

(3) Go fishing.  Put in a limit buy order halfway between the day's peak and the initial support.  In this case, it would have been about $19. Unfortunately, the selloff before end of day only got to $19.5, so we would not have gotten any shares this time from the daytraders unloading with their market orders.

(4) Buy at close, sell at open on the 2nd day.  This would have netted a nice profit.

In summary, none of the 4 tactics would have lost money, and two would have paid quite well indeed.  I used method 1 myself.  Playing Climax Syndrome cases really does take some practice, and some discipline, but for fast thrills it can hardly be beat.  Please be sure you don't play more money than you can afford to lose.

by Skymist