American International Group (NYSE: AIG) has pulled itself out of penny-stock territory after its shareholders approved a 1-for-20 reverse stock split on Tuesday. However, the shares are swallowing some losses today nonetheless, as investors reshuffle their portfolios following the adjustment. AIG opened today at $19.65 after falling as low as $13 in premarket action.
CEO Edward Liddy reassured shareholders at the company's annual meeting that he's confident a new CEO and chairman will be named shortly. The bailed-out insurance issue also named some new directors to its board, at least seven of whom were recommended and approved by the U.S. Treasury Department or its trustees.
It seems that investor anger toward AIG has waned, perhaps because some traders simply cut their losses and moved on. In any event, few shareholders at the meeting took the opportunity to air their grievances with management. When they did, Liddy was appropriately remorseful -- "I am sorry for what's happened to you," the CEO told a woman whose retirement account was eroded by heavy AIG losses.
Option traders on Tuesday seemed relatively upbeat about the prospects for AIG. During the course of the session, investors on the International Securities Exchange (ISE) bought to open 11,892 calls on the stock, compared to just 1,445 puts that were purchased.
But, what becomes of those options now that AIG's completed its reverse split? According to our friends at the Options Clearing Corporation (OCC), pre-split contracts will not have their strike prices adjusted; however, they now have a deliverable of just five shares, as opposed to 100.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
7-01-2009 @ 12:18PM
perhapsalittleresearch? said...
That is some absolutely abysmal reporting.
Firstly, option contracts will also have their underlying price calculated as .05*AIG, to make the adjustment you mention make sense. Simply reading the OCC memo from their site would tell you that.
Secondly, inferring anything at all from call vs. put volume is idiotic. Long call + short stock = long put. Basic.
I've never once posted anything on the internet. This kind of stupidity is tough to swallow, particularly on a financial news site. Stop posting.
7-01-2009 @ 12:37PM
Elizabeth Harrow said...
I apologize for the confusion. In my post, I stated that pre-split options will not have their STRIKE prices adjusted. However, the memo clearly states that the new deliverable is, in fact, 5 shares of AIG common stock.
Additionally, short interest on AIG has dropped during the past month and the past reporting period, so I didn't feel it pertinent to cite the potential of short sellers hedging via call purchases.
Thanks for the comment!
7-01-2009 @ 1:11PM
Sheldon L said...
Liz,
Still confused..........Perhaps a little more explanation is in order. Are you saying that that if the pre-split price on put options had a strike price of $1.00, it stays there, and that only the number of shares changes. That means the guy with $1.00 strike price has a sure thing unless the stock drops back down below a dollar?
If the strike price is not adjusted then before if the stock was 99 cents he gets nothing, but now if its $19.80 he does, since it is above the dollar mark?
7-01-2009 @ 1:20PM
Elizabeth Harrow said...
Sheldon,
It sounds like I need to clarify strike price vs. price of the underlying. The strike price is 1, 2, 3, etc. - those are not being adjusted, per OCC.
However, the price of the underlying is adjusted at a rate of .05*AIG, as the reader above noted. If AIG is at $19, the options will be priced as though it were only trading at $0.95.
Confusing? No doubt. But hopefully that sheds some light on the situation!
Elizabeth
7-01-2009 @ 1:28PM
Sheldon L said...
Liz -- much clearer.
7-07-2009 @ 10:53PM
LJ said...
I had inherited 2000 shares of AIG. With the reverse split, this means I now have 100 shares? Can I take the other 1900 shares as a tax loss? This stock is not worth anything near its relatively recent value of $70 a share, even with the reverse split.
7-09-2009 @ 4:17PM
Allen said...
AIG will seek yet another government bailout, as its exposure to losses is expected to worsen. If the government fails to infuse more money, AIG will file for bankruptcy.
If shareholders seek someone to blame, they should look to Martin Sullivan, former CEO, and Joe Cassano, who headed the unit which was responsible for the problems. Sullivan is a high school dropout who will go down in history as the worst CEO in history. Cassano was totally clueless, a fact he now admits, having no idea as to the nature of the risks AIG was taking.
7-14-2009 @ 1:42AM
Tee said...
i do not understand the purpose for the R/S other then helping the hedge funds and the likes to short this stock to oblivion .. to Elizabeth: i'm still not clear on how the options will be converted after R/S... i read the article, it says strike price and contracts # stays the same, but each contract controls 5 shares instead of the 100 shares normally.. so lets say i have 100 contracts (10000 options) of pre-split options at $5, and it was valued at about 0.15 ... so what would i end up with after the split? 500 options at the same $5 strike? if so, shouldn't the value of those premiums sky rocket due to the stock price change? does not make much sense.. or would the option holders lose big time here? AIG is such a scam, it makes me sick to my stomach.. i'm holding alot of leap options presplit.. thanks