short aig ahead of the warrants?

Discussion in 'Trading' started by billyjoerob, Jan 8, 2011.

  1. Sometime next week, holders of AIG will be issued one warrant for every two shares, so roughly 75 million warrants will be hitting the market. The buyers of those warrants will be shorts hedging their position. They will buy the warrants and short the stock, creating more supply. The shorts are the same banks handling the share offering. Each short is a promise to buy shares, so the Treasury will go into the offering knowing that buyers are already lined up to cover their shorts. And the shorts know that with 75 million warrants struck at $45 floating around, hedging won't be very expensive.

    So the best trade is to buy puts/short now, during the squeeze, ahead of the warrants. There are 1.5 billion Treasury shares coming to market, the warrants were issued to pump up the common shares and give banks an opportunity to short ahead of the share offering.

    Think about it, 1.5 billion shares coming to market . . . that's quite a pig in the python.

    Long 45 May AIG puts
  2. Why issue the warrants in the first place? To squeeze the shorts and give banks an opportunity to short ahead of the offering. The warrants serve as an embedded leverage, the shorts are not only short the common they're short options struck at $45. The shorts got far more than they bargained for. Who wants to be short options? Hence AIG at $62, which puts the market cap somewhere north of $100 billion.
  3. Well the short trade worked. Will still work next week I think. IV should also lighten up with the new supply.
  4. Excellent trade. It's nice to see some legit trading threads on ET.