The Wall Street Journal-20080212-Traders See More Woes for AIG

Return to: The_Wall_Street_Journal-20080212

Traders See More Woes for AIG

Full Text (227  words)

The tea leaves of the options market suggest American International Group's woes are long term in nature -- another sign investors expect the credit crunch to linger.

Yesterday, the insurance and financial-services giant said it may face a large write-down on credit protection it provided for debt linked to the housing market. The protection derivatives -- credit- default swaps -- are effectively guarantees with payouts triggered by defaults on the underlying debt.

In the options market, the action on AIG was pessimistic, and observers were surprised at the extended time horizon of some bets against the stock.

"People are not just bearish, but bearish that they're not going to come out of this mess in the near future," said Randy Frederick, director of derivatives for Charles Schwab. "If people think it's a short-term speed bump, they trade the near-term option; if they think it's not going away," they push the horizon out, Mr. Frederick said.

Overall, about 215,600 put contracts traded, compared with roughly 116,800 calls -- a ratio that reflects negative sentiment. In no other session this year so far had more than 160,000 AIG options aggregate changed hands, according to TrackData.

The bulls came out in force for Yahoo, however, as the firm rebuffed a $45 billion buyout offer from Microsoft as too low. Demand was strong for the March 30 and March 32.50 calls.