Options Traders Respond To Big Pop In AIG, CIT Shares

Waves of traders made their way to the options market Wednesday to take positions in American International Group Inc. (AIG) and several other companies whose beaten-down stocks managed to surprise investors with dramatic moves to the upside.

Options traders rallied around AIG as the company's stock rocketed nearly 63%, gaining $8.48 to close at $22. Traders made a beeline for bullish contracts in the insurance company, hoping that whatever propelled the stock higher would continue to drive future moves.

By the end of the session, traders had picked up 228,000 calls that allow them to buy AIG stock and 152,000 puts that allow them to sell it, marking a five-fold increase in trading volume, according to Trade Alert.

The activity coincided with rampant speculation about why AIG shares had popped higher. Some options strategists said AIG could report better-than-expected results when it reports quarterly earnings Friday, while others said the company could be mulling the sale of one of its units.

"I think people are starting to recognize that these troubled companies might not just go off the board," said William Lefkowitz, options strategist with vFinance Investments.

Strategists also said traders who had sold the stock short were scrambling to buy the shares back, fueling additional gains.

Similar activity took place in CIT Group Inc. (CIT), Fannie Mae (FNM), Freddie Mac (FRE) and Radian Group Inc. (RDN). Shares in all four companies bolted higher Wednesday following several months in which they had been pummelled.

In each case, options traders made a mad dash toward the call contracts, hoping to gain from further moves higher or looking to hedge short positions.

-By Tennille Tracy, Dow Jones Newswires; 212-416-2183; [e-mail]