Trade Update AIG: Taking Profits & Closing 2nd Half Of Jan Call Spread

by Dan October 12, 2012 11:54 am • Commentary

Trade Update Oct 12th 2012 at 11:54 am:  With financials taking a breather on WFC and JPM’s results this morning, I am going to close out the balance of my AIG Jan 35/40 Call Spread for a gain and look to re-enter the bullish view on the next pull back.  Earnings are expected on Nov 1st, and the implied move is already 4%, with the stock up 6% since initiating back in Sept, and trading very near 52 week highs, I may get a better entry point prior to the print.

Action: Sold 2nd half of AIG ($35.25) Jan13 35 / 40 call spread at $1.63 for $0.46 gain



Trade Update Oct 4th 2012 at 11:35 am:  Since buying this Jan Call Spread over 3 weeks ago, AIG has rallied about 5%, and the spread is worth about 35% more than what I paid.  I am now going to sell half, to take some money off of the table, but would look to add on any weakness in the coming weeks/months.  


Action: Sold half of AIG ($34.90) Jan13 35 / 40 call spread at $1.60 for $0.43 gain, leave other half long


Original Post Sept 11th, 2012: AIG: A Way to Play the Fed’s “Clean-Up” Trade

Overnight, the U.S. Treasury sold $18 billion (or about 554 million shares) of their stake in AIG, leaving about 317 million shares. Shares most expect the Govt to exit by the end of Q1 2013, or possibly as soon as year end.

As I mentioned yesterday in the Chart of the Day, given the known overhang of shares, and the Govt’s intention to dispose of them, the stock has traded amazingly well year to date up 42.5% despite buyers having to digest almost 900 million shares from the Feds since May.

From a pure technical level, the stock trades fantastic, and the I have to assume that the “clean-up” trade will be treated like a “hot IPO” as there will be very little shares set aside for “cherry pickers” as those holders who have been there early and often, on top of the company which will surely get the lions share.  

From a fundamental standpoint, many analysts see the company poised to move from a restructuring story back to a company poised to grow earnings rapidly from a very low base.  In a note to clients yesterday, Sanford Bernstein analyst Josh Sterling, who rates the stock a Buy with a $45 twelve month price target had the following to say:

With improving long-term prospects from the firm’s turnaround and the sector’s increasing pricing power, we would buy AIG’s stock, for in this uncertain and binary macro-driven environment, a de-levered and de-risked AIG offers investors a particularly attractive risk / return. With clear catalysts to outperform in a stable market as the Treasury exits, and yet less downside than many more levered financial names, AIG is our favorite “risk-on” trade.

AIG will soon graduate from a restructuring to an earnings story—and as their earnings turnaround takes hold at Chartis, and ROEs improve to high-single digits, we expect they will eventually trade more in line with peers at levels much closer to book – offering compelling value over many years. With substantial leverage to improved underwriting performance, and the breadth of initiatives which gives us confidence management is heading in the right direction, we suspect that when the tailwinds from buyback accretion,the unwind of the overhang and the ‘re-discovery of AIG’ by investors begin to decline, growing earnings power, and momentum from positive earnings revisions will begin to take up the slack, and long-term investors will in-time, enjoy a two, or even three-bagger from here.


MY VIEW:  This is not an easy company to analyze from a fundamental standpoint, as there are a lot of moving parts, so frankly I am not going to really try to add value on that front.  From purely a sentiment front it seems like there could be a trade into the new year, at or around the completion of the Govt exiting their stake.  Technically the stock has tried to get through $35.00 on a few occasions this year, at some point a break-above that level could see the stock make new multi-year highs.

[caption id="attachment_16494" align="aligncenter" width="490" caption="2 yr AIG chart from Bloomberg"][/caption]
TRADE: AIG ($33.15) Bought the Jan 35/40 Call Spread for 1.17

-Bought 1 Jan 35 Call for 1.53

-Sold 1 Jan 40 Call at .36

Break-Even on Jan Expiration:

-Profits btwn 36.17 and 40, make up to 3.83, max gain of 3.83 at 40 or above.

-Losses of up to 1.17 btwn 35 and 36.17 with max loss of 1.17 at 35 or below.


TRADE RATIONALE:  To realize the maximum gain in this spread, I will need a fairly substantial rally in the shares over the next 5 months (break-even up 9% and max gain up 20%), and given the stock’s ytd performance I can certainly see how  some may be skeptical.  I would suggest that the stock falls more under the “special situations” category and with the float increasing fairly dramatically as a result of the Govt’s exit of their stake, we could see an odd supply/demand dynamic play out among investors looking for earnings growth stories.