Is MBIA ready to weather storm?


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MBIA has taken a beating, but one big investor remains a believer.

optionMONSTER's monitoring programs detected the purchase of 5,000 November 13 calls for $0.32 and the sale of a matching number of August 10 puts for $0.42. Volume was more than triple the previous open interest in each strike, which indicates that new positions were initiated.

The investor collected a credit of about $0.10 and now controls the equivalent of 500,000 shares in the financial guarantor. He or she will earn huge profits from a rally but will also be on the hook to buy stock for $10 if it drops under that level. While such combination trades are common, today's strategy is unusual because it uses different expiration months. (See our Education section for more on long calls and short puts .)

MBI fell 2.44 percent to $10 yesterday and is down 22 percent in the last month. The stock has been falling amid litigation against Credit Suisse and as investors worry about its exposure to Puerto Rican debt following a Moody's downgrade of the territory's credit rating.

Yesterday's trader is placing a major bet that the company will weather that storm and hold the $10 level. If it doesn't, he or she will face potential losses of as much as $5 million.

There was also bearish put buying yesterday in related company Assured Guaranty, with 10,000 January 21 contracts purchased for $1.19.

Total option volume in MBI was more than triple its daily average.

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

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

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