Put players target AIG after ILFC bid rumors, price-target cut

Udvar-Hazy sold ILFC to AIG back in 1990 and is reportedly keen on the idea of reclaiming the reins from the struggling insurance giant. ILFC's book value is pegged at more than $7 billion, with roughly $30 billion in debt.

Despite this apparently upbeat news about one of AIG's less attractive assets, the stock is pointed lower at last check. Traders appear to be reacting to a steep price-target cut from Sanford Bernstein, which chopped its forecast for AIG from $20 to $12 while backing an underperform rating.

AIG closed Friday at $33.30, so the new price target implies expected downside of roughly 64%. If the stock continues its current downward trajectory, Sanford Bernstein's gloomy prediction could come true: since Oct. 16, the shares have been guided consistently lower by resistance at their 10-day and 20-day moving averages.

In morning trading, option players are favoring puts over calls on AIG. Most active are the stock's Dec. 25 and Dec. 30 strikes, with both of these out-of-the-money options trading volume in excess of open interest -- in other words, it's likely that traders are adding new positions at both strikes.

In fact, some of the volume across these strikes appears to be related. Shortly after 10 a.m., two blocks of 5,000 contracts apiece traded on AIG's Dec. 30 put and Dec. 25 put. While the 30-strike puts changed hands at the bid, suggesting they were sold, the 25-strike puts crossed the tape at the ask, indicating that they were purchased.

The trader in this scenario could be initiating a new, neutral-to-bullish short put spread, in hopes that AIG will remain above $30 through December expiration. Alternatively, the speculator could be rolling down his or her Dec. 30 puts to the lower strike price in order to maximize leverage on a drop in the share price.

Elizabeth Harrow is a senior equities 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.