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Tuesday, July 22, 2008

The "derivative" plays on BAC

Were Prudential (PRU 66.62) +5.06 today (looks to go to 72) and AIG (28.14 +1.61). You had it here Monday morning: As advertised!

American International Group (AIG 25.07) and Prudential Insurance (PRU 61.67) are the derivative play on BAC's earnings.

And if you are short these numbers, and you don't know why that is, you haven't been doing your homework!

You have can still cover these numbers at these prices, and consider it a gift. Or you can wait until they report and get crushed!

http://aaronandmoses.blogspot.com/2008/07/noose-tightens.html

It looks like former AIG Chairman Greenberg's civil case against him is going to be resolved, which will be beneficial for the relationship that he has with his former company.
http://online.wsj.com/article/SB121677326854675627.html?mod=yahoo_hs&ru=yahoo

And the options on AIG are still cheap, especially going into earnings. The August 30's are a bit more than a buck, and the August 32's are at .50. The stock doesn't have any resistance until 34. AIG said they didn't need any more capital after they sold 197 million shares at 38 on May 16 and I'm sure some of those underwater buyers would part with their shares at a 10% loss. So I'm saying 34ish is short term resistance though the chart indicates higher.

And judging by the way the banks have moved after earnings, I think the volatility premium on these calls are too low.

Along with AIG's stock price.

I say it goes to the low 30's before earnings. You should then be able to sell part of your call position with the volatility pumped into them, to get the earnings play for free.

Just call it the Greenberg relief rally!

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