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March 21, 2013  Thu 12:20 PM CT

MBI: SEE CHART GET CHAIN FIND STRATEGIES
Financial guarantors like MBIA have been explosive this year, and the bulls think they still have room to run.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,000 November 14 calls for $1.53 and the sale of an equal number of November 20 calls for $0.43. Volume was more than 11 times open interest at both strikes.

Known as a bullish call spread, the trade cost $1.10 and will earn a maximum profit of 445 percent if the shares rally to $17 by expiration. That would represent a move of only about 50 percent for the stock, which shows the kind of leverage that can be generated with options.

MBI is down 1.82 percent to $11.35 in afternoon trading but is up 44 percent so far this year. The stock peaked above $13.50 earlier in the month before pulling back, which could be leading some traders to think that a bullish trend is taking shape.

Financial guarantors are among the most volatile companies in their sector because of losses on mortgages ensured during the subprime bubble. That caused most of them to lose more than half their value when the crisis hit in 2008, but they've been rallying this year as market conditions improve. (See our proprietary researchLAB monitoring system for more on the group.)

Total option volume in MBI is slightly below average so far today, with calls outnumbering puts by 5 to 1.

Disclosure: I own MBI shares.
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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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