Allied Irish Banks popped on bailout speculation, but volatility
traders apparently think that the move will be short-lived.
optionMONSTER's tracking systems detected heavy selling of both
calls and puts in the beaten-down Irish lender, which has lost 80
percent of its value in the last year. It rallied 13 percent to
$1.18 yesterday and is up 42 percent in the last six sessions as
buyers stepped in following the long decline.
The May 1.50 calls were the busiest strike, trading 5,793 times
against open interest of 3,449 contracts. They were heavily sold,
mostly for $0.20. The November 1 puts were also active, fetching
$0.05 on volume of 1,198--roughly twice open interest.
Overall option volume in AIB was 11 times greater than average,
with short activity dominating the tape.
Yesterday's speculation focused on the possibility that European
Union's bailout funds for Ireland may be channeled to the country's
banks. The country is facing a large budget crisis similar to that
experienced by Greece and Portugal earlier in the year. That could
trigger a sharp recession or cut access to short-term funds, both
of which could prove fatal to banks.
The panic has driven up implied volatility in AIB to about 125
percent from 70 percent in September, pushing up premiums. Selling
options is a common strategy to exploit such a situation.
A common pattern since debt crises began sweeping the markets in
2008 has been for financials to suffer huge losses, then stage
brief and violent rallies before settling into a long period of
relative calm. Yesterday's traders may expect a similar trend in
(Chart courtesy of tradeMONSTER)
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