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October 4, 2012  Thu 12:07 PM CT

MBI: SEE CHART GET CHAIN FIND STRATEGIES
MBIA sits in the middle of its recent range, but a big option trader is making a long-term bearish bet on the financial stock.

MBI is up 2.91 percent to $10.80 this afternoon. Shares of the company, which backstops municipal and asset-backed debt, was down at $9 in early August but touched $12 three weeks ago.

An institutional trader bought 14,000 January 2014 5 puts for $0.57, according to optionMONSTER's Depth Charge tracking system. This is clearly a new position, as open interest in the strike was just 69 contracts at the start of the day.

The put buying isn't obviously tied to any trading in the stock today, and it seems unlikely that someone would be looking for a hedge with longest-term contracts that are 50 percent out of the money. So this appears to be a straightforward bearish bet that MBI will fall back to prices last seen in 2009. (See our Education section)
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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