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• Why one trader is selling calls in Encana
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• MBI 100% Rate It

MBIA has been churning, and one investor is looking for a rally.

optionMONSTER's Heat Seeker tracking program detected the purchase of 10,000 August 12 calls for $0.27 and the sale of 3,750 November 8 puts for $0.78. Volume exceeded open interest at each strike.

The position cost about $22,500 to open, or just $0.02 per call contract bought. Selling longer-dated puts generated more income and allowed the trader to purchase more calls , resulting in extreme leverage if the stock rallies in the next two months.

He or she is apparently expects a move before or after the next earnings release on the morning of Aug. 10. The trader also faces downside risk all the way until November because of the puts sold short. (See our Education section)

MBI rose 3.16 percent to $10.12 yesterday and has mostly been churning in a range since March. The financial guarantor has struggled against bad mortgage obligations since the subprime bubble collapsed almost four years ago. But short interest accounts for more than one-quarter of the float, which could potentially fuel a rally.

Yesterday's bullish strategy occurred in giant blocks during the final five minutes of trade, indicating that it was the work of a single large institutional investor. The transaction pushed total option volume to 6 times greater than average.

Disclosure: I own MBI shares.

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