American International Group, Inc (AIG) is an insurance company providing a range of financial services to customers around the world. The stock is currently trading around $50.00 in a 52 week range of $32.10-$53.33. The stock has been outperforming the market this year adding nearly 42% to share prices year to date. Activity in AIG options today however suggests the run in AIG may be coming to a close. Earlier in today’s trading session we saw a trader sell 9,000 AIG Dec 50 straddles for $1.97. This trader is collecting nearly $1.8 million worth of premium in this trade and is exposing himself to unlimited risk. The size and risk level of trade suggest a relatively high level of conviction. While we believe this order is worth taking note of we would not want to be selling straddles along with the block trader. Instead we will look at a strategy known as an Iron butterfly. This allows is to take the same view as the block trader but without the risk of blowout.
Trade: The AIG Dec 48-50-52.5 Iron Butterfly for $1.45 Net Credit
(Selling the Dec 50 Straddle to buy the Dec 48-52.5 Strangle)
Risk: $105 per 1 lot
Reward: $145 per 1 lot
Breakeven: $48.55 and $51.45
