Tuesday, December 15, 2015

AIG Analysis

The insurance company American International Group Inc. (AIG), headquartered in New York City, closed below its 20-day price channel on Monday. With high implied volatility relative to its 12-month range and low odds of successful bear signals, it is a candidate for a non-directional trade.

[AIG in Wikipedia]


I shall use the JAN series of options, which trades for the last time 31 days hence, on Jan. 16.


Implied volatility stands at 35%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. AIG’s volatility stands in the 73rd percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

AIG has completed five bear signals in the past year. The successful signal yielded 1.8% over 52 days. The four unsuccessful signals on average lost 4.6% over 16 days. The resulting success rate is 20%. That record makes AIG a candidate for a direction-neutral play.

AIG was one of the main casualties of the collapse of capitalist finance in 2007, and the chart shows that, with a massive dive from nearly $1,500 in June 2007 down to below $7 in March 2009. The company has since stabilized and has been in an uptrend since Oct. 2011, peaking at nearly $55 on July 24 and moving into a wide-swinging sideways trend. The price has been in a downward leg since early December.

The analyst consensus on AIG is bearish, collectively coming down at a negative 18% enthusiasm rating. Four out of 11 analysts give traders a strong recommendation to buy the stock.

The options grid is difficult to work with. My practice is to set the short strikes at a level that provides an 80% chance or greater of the options expiring out-of-the-money, i.e., with maximum profit.

The AIG calls jump from a 78.6% probability to a 90.9% probability, with nothing in 80s in between. Puts jump from a 77.2% probability direction to an 86.2% probability.

The result, as the prospective trade below shows, is an extremely low premium and an extremely high risk/reward ratio.

Iron condor, short the $65 calls and long the $67.50 calls,
short the $52.50 puts and long the $50 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money

The premium is $0.23, which is 9% of the width of the position’s wings. The stock at the time of entry was priced at $59.40

The risk/reward ratio is 9.9:1.

The zone of profit in the proposed trade covers a $12.50 move either way and is close to the one standard deviation range.

Decision for My Account

I am declining the trade. The options grid makes it impossible to construct the a position that meets my preferences.

-- Tim Bovee, Portland, Oregon, Dec. 15, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.

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