AIG "reversed" collar

This is an out of the box trade. It is not the standard application of a collar. There are additional risks to this trade. You can lose a lot of money if you fail to apply the protective discipline promptly. Also, the trade is very volatile and it whipsaw on your trade and wipe out any profits.

Fundamentals:

It is lousy stock! Without the government support, it should have gone bankrupt. People are buying it because they believe that it cannot fail because they believe the government behind it. They are too big to fail. Also, another irrational argument is that the stock was $1400 two years ago. I have not seen any improvements in the company to justify that it will resume its former glory. On the reverse, I do not respect the management and I think the insurance industry and financial industry are still very vulnerable.

There was a stunning omission from the government's latest list of "problem" banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

Georgian's clean-up will be unusually costly. The book value of Georgian's assets was $2 billion as of July 24, about the same as the bank's deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank's assets. That percentage was almost double the average for this year's 95 U.S. bank failures, and it was the highest among the 10 largest ones.

It failed last week.

What this latest failure reveals is that (a) whatever methodology the regulators are using in their bank reviews, it is disastrously flawed; (b) without mark-to-market accounting, the nature and scale of what actually lurks in the loan portfolios of banks is unknown and unknowable.

The FDIC is now bankrupt, and the $46 billion it hopes to raise by having its member banks pony up their dues for three years in advance is not likely to last out 2010

I think very soon Obama will run out of ammunition and AIG will run out of excuses.

Technicals:

Please refer to the graph below ( Please click on image to enlarge )




o IV can be very high during certain days. Very good for creating credit trades
o Broke support today. Although it bounces back, but no bullish signal.
o MACD and Stoch are negative
o Exhaustion with 3 tops over the last 8 months

Strategies:

My strategies are:

Because this was an ongoing trade, I am not going to give you a detail plan but will articulate my strategies as the trade moves along with time. I will give a summary of the current status and will update as I put in my adjustment. This is an actively managed trade.

I open a synthetic put 2 weeks ago on 31st Aug 2009. ( 300 short stock at 46.82 and a 3 Nov Long call at 47. Since then, I had been able to take advantage of the volatility 3 times by selling a SP when the price dived below 38. I bought the SP thrice and sold it twice before it expired. Current holding an Oct 38 SP. I have captured about $900 in credit.

I am waiting for the stock to fall to <20 before I will close the whole trade.

If it is being called out by October at 38, I will make around $1000. But I may roll down the put to keep the Oct SP at 38 intact. If it is not assigned, I will continue to short put to reduce cost while holding the long call and short stock. Once the stock reaches below 20, I will close my trade if there is support.

IF the trade goes against me, I have my protective call. I can still close it at breakeven or a slight loss. My bet is the probability that it will collapse before end of November.

If the stock market pushes up another leg to November, I will roll my Nov Call to Feb or March. I may want to keep the synthetic put intact until I reach my target. Unless, the market show real signs of turning around by next year I will close my position. Currently, because of the SPs, I am almost risk free if I continue to manage the trade timely.

I think if the market goes through a correction, this stock can drop to <20 anytime.

Because it is so volatile, you have to very quick to capture credit when the stock is down by selling puts. I may be called out before I can close the trade but that is fine because I will make some money but not my maximum target.