Bulls shifting to financial insurers

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Different kinds of financial institutions have rallied back at different times since the mortgage bubble collapsed in late 2008. First were the big securities firms, such as Goldman Sachs and Morgan Stanley. Then came the megabanks such as JP Morgan and Bank of America, followed by regional lenders such as BB&T and Regions Financial.

Now the bulls are turning to the financial guarantors that had written insurance on billions of dollars worth of bad home loans. Although attention has been riveted on AIG since the credit crisis began, many smaller insurers have also come under increasing scrutiny since then.

AGO Chart OptionMonster's tracking systems have detected an uptick of call activity in companies such as Assured Guaranty and MBIA, which have both been pushing higher on signs their finances are turning a corner.

In Assured Guaranty, for instance, a trader yesterday [Thursday 8/11] exited a position in the October 15 calls and replaced them with October 19 calls. This trade allowed the investor to take profits from the stock's recent run and to position for more gains. The activity was consistent with a pattern of the last 20 sessions, when calls on average outnumbered puts by almost 3 to 1.

Trading has been equally bullish in MBIA recently, with call volume typically dominating the orders. Most of the activity over the last month has concentrated on the August 8, August 9, and August 10 contracts, which investors bought and sold as the financial guarantor staged a 36 percent rally from a low of $5.24 on July 1.

Both MBIA and Assured Guaranty have recently benefited from fewer bad loans and better-than-expected earnings. Assured Guaranty is also gaining a foothold in the market for insuring the debt of U.S. cities and states, where MBIA was the leader before it lost its top-notch AAA credit ratings.

MGIC Investment has also seen a steady flow of call buying recently, even as the shares fell from a peak late last month. The mortgage insurance company reported a profit of $0.13 a share on July 20, stunning investors who had expected a $0.63 loss. However, management warned that gains will come more slowly for the rest of the year.

Radian Group, another company that backs home loans, has seen call buying over the last month as well. Its finances have not yet shown significant improvement, and its shares are trading near their lows for the year.

(Chart courtesy of tradeMONSTER)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Options


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