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Allied Irish Banks gets volatility trade

By: optionMONSTER
Posted: 11/16/2010 7:05:00 AM
Referenced Stocks: AIB

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.

AIB 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 AIB.

(Chart courtesy of tradeMONSTER)