Interesting AIG Put And Call Options For August 8th

The article details specific options strategies for American International Group Inc. (AIG), currently trading at $84.06, offering distinct risk-reward profiles for investors. Selling an out-of-the-money $83.00 put provides a potential 1.53% annualized yield if it expires worthless, or a discounted entry point for those aiming to acquire shares. Alternatively, selling an out-of-the-money $85.00 covered call on existing AIG holdings can generate a 5.05% annualized yield if not exercised, while limiting upside potential. These examples illustrate how options can be utilized to enhance yield or manage cost basis around AIG's current valuation, with implied volatility aligning with historical levels.

Analysis

The article presents two distinct options strategies for American International Group Inc. (AIG), which is currently trading at $84.06 per share. The first strategy involves selling an out-of-the-money put option at the $83.00 strike price. This generates an immediate premium of 15 cents per share, which translates to a 1.53% annualized yield if the option expires worthless, an event with a stated probability of 59%. Alternatively, if the stock price falls below $83.00, this strategy commits the investor to purchasing shares at an effective cost basis of $82.85, a discount to the current market price. The second strategy is a covered call for existing shareholders, involving the sale of an $85.00 strike call for a 50-cent premium. This approach caps the total return at 1.71% if the stock is called away but offers an annualized yield boost of 5.05% if the option expires worthless, which has a 51% probability. A key insight is that the implied volatility for both options is approximately 25%, perfectly aligning with AIG's actual trailing twelve-month volatility. This alignment suggests that the options market is not pricing in abnormal future price swings, making the premiums a fair reflection of recent historical risk.

Key Decisions for Investors

• Investors seeking to initiate a position in AIG can consider selling the $83.00 put to either acquire shares at a discounted cost basis of $82.85 or collect a 1.53% annualized yield.
• Current AIG shareholders aiming to enhance income could sell the $85.00 covered call to generate a 5.05% annualized yield, but must accept a capped upside and the obligation to sell their shares if the price exceeds the strike.
• Given that implied volatility of 25% matches historical volatility, these option premiums do not appear unusually inflated or depressed, indicating the strategies are based on fair market pricing of recent risk rather than an expectation of heightened future turbulence.
• Investors should note the inherent risks: the put seller is exposed to downside price risk below the effective purchase price, while the covered call seller forgoes any potential stock appreciation beyond $85.00.