I just purchased a put spread on embattled insurance company AIG (AIG). I’m now long the October $45 puts, and short the October $43 puts. Since I never bet big money in options trades, this isn’t a large position for me.
In a nutshell, here’s why I pulled the trigger:
1) The stock went from $12 to $55 in a month on a combination of short covering and momentum traders driving it up. I think those traders are set to flee soon. The stock is down hard today, and I think anyone buying the dip will get crushed as the momo guys exit the name.
2) There are questions as to whether the stock is even worth anything:
As AIG's shares have more than doubled in the last nine sessions, the company's bonds still trade at levels that indicate the company's shares may be worthless, according to Peter Boockvar, an equity strategist at Miller Tabak & Co. "The value of the company is still the same," he said. "AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government."
3) The Financial Select Sector SPDR (XLF) is up nearly three-fold from its March lows, and the sector looks very frothy. We’ve seen some economic indicators come in better-than-expected, but is the economy heading back to growth mode? I don’t think so. Back-to-school could be absolutely BRUTAL.
FYI – I also recently went short Sony (SNE).