Last week AIG reported Q3 results that by most accounts were a mixed bag with a murky outlook that sent the shares down 6.5% on Thursday. The one day decline was the largest in more than a year, and comes just a couple weeks after making new 3 year highs.
This price action off of the highs on fundamental news is not that alarming when you consider the stock is still up 38% ytd, and as one of the largest components of the XLF, has actually outperformed many of the large banks stocks in the ETF over the last couple months.
Without focusing too much on the near term fundamentals, and in a market backdrop that appears to have a bid for the year to date winners, AIG’s earning’s gap from last week could be an attractive looking gap fill opportunity of the stock were able to find its footing and hold the uptrend line that has been in place since last fall.
If the stock can stabilize here, and attempt and breakout above the $50 (resistance level (red line), then a defined risk play toward the prior highs near $53 (green line) would make sense if you are positively disposed to the idea of a rally into the end of the year.
Despite the earnings gap, implied volatility (blue line below) is trading at 2 year lows, making calls fairly cheap on relative basis.
I am not going to put the trade on this moment, as the stock is up and making the payout for a spread mildly less attractive, but this is the sort of trade I will look to put on when I pull the trigger:
Name That TRADE: AIG ($49) Buy Dec 49/52.50 Call Spread for 1.10
-Buy 1 Dec 49 Call for 1.40
-Sell 1 Dec 52.50 Call at .30
Break-Even on Dec Expiration:
Profits: btwn 50.10 and 52.50 make up t0 2.40, with max gain of 2.40 above 52.50, or 7% higher.
Losses: btwn 50.10 and 49 lose up to 1.10, with max loss of 1.10 below 49