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January 3, 2013  Thu 9:05 AM CT

AIG: SEE CHART GET CHAIN FIND STRATEGIES
A short-term put spread tops the action in American International Group even as it trades near two-month highs.

A trader bought 2,550 January 36 puts for $0.38 and sold 5,100 January 35 puts for $0.14, according to optionMONSTER systems. This spread is in the new Weekly options for next week, so there was no open interest in either strike.

This put vertical cost $0.10 to open, which is the maximum at risk if AIG remains above $37. The maximum gain on this ratio spread would come if the stock is right at $36, while below that the trader is effectively long stock. (See our Education section)

AIG is up fractionally this morning at $36.53. Yesterday's close was the insurance giant's highest since Oct. 18, as shares have run up from support at $31 over the last six weeks.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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