American International Group Inc AIG shares are down 35.1% in the past year, but at least one larger option trader is betting on more downside ahead from the insurance giant after the Federal Reserve said interest rates would remain near 0% through at least the end of 2022.
The Trade
On Tuesday morning, Benzinga Pro subscribers received an option alert related to an unusually large AIG trade.
- At 9:33 a.m., a trader bought 500 AIG put options with a $50 strike price expiring on Aug. 21 at the ask price of $15. The trade represented a $750,000 bearish bet.
Why It’s Important
Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.
Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.
Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of Tuesday’s AIG option trade, it could certainly be institutional hedging.
AIG’s Uncertain Outlook
There doesn’t seem to be any company-specific news that could have triggered the large put buy on Tuesday, suggesting the buyer may simply be concerned about the negative impact of 0% interest rates and potential COVID-19 related life insurance claims.
Earlier this month, Bank of America analyst Joshua Shanker reinstated coverage of AIG with a Neutral rating and a $31 price target. Shanker said AIG’s exposure to coronavirus risk is still uncertain.
“A key bi-directional risk comes from the greater clarity as to whether or not the industry receives government assurance that it is not responsible for many categories of virus claims, similar to the government shield from terrorism claims following the 9/11 tragedy,” he said.
Benzinga’s Take
The $750,000 put purchase expires on Aug. 15, roughly a week after AIG is expected to report second-quarter earnings. For life insurance investors concerned about AIG’s potential near-term risk, Bank of America prefers Principal Financial Group Inc PFG and Globe Life Inc GL as top stock picks in the space.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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