Out with the old, in with the new. There will be a change in one of the Dow stocks as Kraft Foods (KFT, $33.31, up $0.66) will replace American International Group (AIG, $2.40, up $0.35) as one of the Dow’s 30 components. The change will take place next Monday.

Well, it’s about time. Although AIG does not have a big percentage weight on the Dow (currently at 0.16%) now, it’s freefall in its stock price did have an affect on the market. Thank goodness they replaced it with a food company rather than another financial stock (sly grin).

AIG is being removed because of the Federal Reserve’s $85 billion emergency bailout. Kraft was a “safe” pick and if you will recall, spun off by Altria Group (MO, $20.53, up $0.67). It looks like Warren Buffett has done it again. He is Kraft’s biggest stakeholder and controls about 10% of the company. Mr B. has about, oh, 138 million shares worth a cool $4 billion. Wow.

The Dow is staying above water, up 61 points to 10,671 but a lot of technical damage has been done. The VIX (VIX, 36.68, up 0.46) has spiked above 30 this week and that is usually a good sign that we may be nearing a bottom. However, it’s quite possible that the VIX could headed to the 40’s if the market continues lower.

Rick Rouse
Rick@OptionsMentoring.com

It was a bad day on Wall Street with the Dow dropping 504 points but it was even worse for American International Group (AIG, $4.76, down $7.38). The company said it would need $40 billion or more to fix its balance sheet and New York regulators gave AIG special access to $20 billion of cash held by its subsidiaries. On August 26, I mentioned we could see AIG’s stock fall and that the September 18 puts (AIGUS, $13.05, up $6.35) looked good at around $1.30. That was an understatement as the put options have now returned 885%.

Although AIG’s shares have fallen with the rest of the financial stocks, AIG has a significant amount of quality assets it can sell. The stock fell 45% last week and today’s 60% drop is being viewed by Wall Street as an “overreaction.” Call it what you want but when a stock falls from $70 to under $5 it’s hard to rally behind it.

What was really funny is the analyst who downgraded the stock to “Hold” from “Buy,” and lowered its price target on AIG to $14 from $25.50. While there’s a good chance AIG will survive I wouldn’t recommend getting into the stock at any level. The financial stocks have all taken a beating and it has a lot of individual investors worried to the point where they are selling everything. That’s sad because even though the Dow fell 500 points we have been making a mint by buying puts.

Rick Rouse
Rick@OptionsMentoring.com