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Three-way trade bets against AIG

David Russell (david.russell@optionmonster.com)

One investor is looking for more downside in American International Group, which has been dropping for the last three weeks.

optionMONSTER's Depth Charge monitoring system detected the purchase of 10,000 February 30 puts for $0.94, which will appreciate rapidly if the insurance giant continues to decline. The trader also sold 10,000 February 34 calls for $1.44 and bought 10,000 February 38 calls for $0.44 with volume exceeding open interest at all three strikes.

Selling the 34s generated income to finance buying the 30s, while owning the 38s limits the amount of money that can be lost if the stock rallies. The net result is that the trader collected a credit of $0.06. He or she now stands to earn infinite profits if AIG goes below $30 and can lose a maximum of $4 at or above $38.

AIG is up 0.31 percent to $32.78 in early afternoon trading and has lost 11 percent of its value since Oct. 18. The company's last earnings report beat expectations, but management dampened enthusiasm by saying it will focus attention on its credit profile rather than redistributing capital to shareholders.

Today's three-way trade has accounted for more than a third of AIG's options so far today and pushed total activity in the name to almost twice its daily average.

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