AIG option players brace for more share turbulence

By Doris Frankel

CHICAGO (Reuters) - Option players on Monday braced for more share price turbulence in American International Group (AIG.N) with many circling the insurer's put options, betting on more share losses as concerns grew about the impact of the credit crisis on the U.S. economy.

Shares of AIG, once the world's largest insurer by market value, skidded more than 57 percent to $5.16 on the New York Stock Exchange near the close.

The company made an unprecedented request to the Federal Reserve for $40 billion in short-term financing, according to media reports.

AIG was one of the top implied volatility gainers in the options market, which is a key driver of an options price.

Overall implied volatility on all of AIG options stood at 456.3 percent -- a 71.8 percent gain from Friday's closing levels and up sharply from its historic volatility of 120.8 percent, according to Interactive Brokers Group data.

"The sky-high option volatility suggests almost three times the perceived risk to AIG shares as the company faces an unpredictable outcome," said Interactive Brokers Group equity options analyst Rebecca Engmann Darst.

Option volume swelled in AIG, with 765,000 contracts in play, five times the normal daily volume, Trade Alert data show. AIG put options have been active all day, as roughly 446,000 puts traded compared to 319,000 calls.

A put option conveys the right to sell the stock at a preset price within a specified time period while a call option conveys the right to buy the stock at a given price and time.

"Earlier option activity appeared to closing of existing put positions in the $18 and $20 strike puts in the October and November contracts," said Henry Schwartz, president of option analytics firm Trade Alert.

Then late in the day, investors turned to soon-to-expire September $5 AIG puts on concerns that the insurer may not be able to obtain the balance of their capital needs, Schwartz said. September options expire after the close on Friday.

The September $5 strike attracted more than 76,000 contracts at $1.52 a contract. The implied volatility for that option alone reached "an astounding 1,000 percent," Schwartz said.

Buyers of those puts are betting that AIG could suffer a fate similar to U.S. investment bank Lehman Brothers Holdings Inc LEH.N which filed for bankruptcy this weekend, Schwartz said.

(Reporting by Doris Frankel, Editing by Chizu Nomiyama)