September 16th, 2008Interesting covered call on AIG - 150 percent return
I wouldn’t touch AIG 6 months ago or even 6 weeks ago, but with the shares as low as they are today, at the same time of such incredibly high implied volatility, there is one AIG play worth looking at. AIG closed today at 3.75, after bottoming out for the day at 1.25, and AIG shares are likely to be just as volatile over the next few days. But take a look at the October options for AIG: (option chain from end of day)
AIG may very well be completely insolvent. It’s just to hard to tell what is really going on, and you are not likely to get any straight answers from former CEO Martin Sullivan or current CEO Robert Willumstad. But a covered call on AIG at the October 2.50 strike may very well be worth a gamble, based on the risk to reward ratio. From today’s closing price and closing option chain, here is the scenario:
- Buy 100 shares of AIG for $375
- Sell to open (1) contract of the October 2.50 AIG strike for a $275 credit
- Initial total net debit is $100
The risk of this trade, based on the above prices is just $100, and the maximum loss only occurs if AIG tumbles to ZERO prior to October option expiration. If AIG stays above $2.50 at October expiration, then the shares will be called away for $250, and the profit is $150 ($250 for shares called away, minus the $100 initial net debit). Having the covered call exercised would result in a 150 percent return on risk for a covered call held just barely over one month, not counting commissions.
Special Notes: Check the disclaimer and trade at your own risk! Also note that tomorrow’s prices will likely fluctuate greatly for both AIG and the October options.
New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing by Richard Lehman
September 17th, 2008 at 6:42 am
So this means that some wannabe would pay you $275 for the right to purchase 100 shares for $250?
Did you get a buyer?
September 17th, 2008 at 11:12 am
No, it means that at YESTERDAY’S CLOSE, the BID price for the October 2.50 strike was going for $2.75. This was when AIG was significantly higher, at 3.75. Today the 2.50 strike October’s are going for only $.65. Certainly no where near as good of a deal as selling those strikes yesterday, but it is still an interesting gamble on whether AIG will collapse completely or survive and at least stay near or above $2.50.