Huge bullish trade before MBIA reports
David Russell | [email protected]
optionMONSTER's Heat Seeker monitoring program detected the purchase of 10,000 March 14 calls for $0.50. Some 5,000 March 13 puts were sold for $0.38 at the same time, along with 15,000 March 12 puts for $0.11. Volume was more than 8 times open interest at all three strikes, indicating that new positions were initiated.
The investor paid $145,000 to open the position, which controls the equivalent of 810,000 shares in the financial guarantor. Building a similar position with stock would cost at least $11 million and represent about one-quarter normal daily volume.
If it rallies over $14, the correlation would increase to 1 million shares. There is also tremendous downside risk because they sold so many puts--with the potential exposure to 2 million shares in the event of a major drop. (See our Education section for more on long calls and short puts.)
MBI is up 1.34 percent to $13.59 in afternoon trading and has risen 24 percent in the last month. Similar companies such as Assured Guaranty and Ambac Financial have also been strong recently, along with Fannie Mae and Freddie Mac. All of them were battered in the 2008 credit crisis, and now they're rebounding as a group.
The fact today's trader is willing to sell large amounts of puts in MBI reflects a belief that its numbers will be strong Monday afternoon. Investors have already doubled their money in the stock with short-term upside contracts expiring today.
Total option volume in MBI is 9 times greater than average so far in the session, according to the Heat Seeker.