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May 3, 2013  Fri 11:00 AM CT

MBI: SEE CHART GET CHAIN FIND STRATEGIES
MBIA is rebounding from multi-month lows today, but one large trader is selling calls in the mortgage-insurance company.

A trader sold 12,600 June 18 calls in one print for the bid price of $0.13, optionMONSTER systems show. This is clearly a new trade, as open interest in the strike was just 1,971 contracts before the session began.

These deep-out-of-the-money calls may have been sold naked in a trade that would have an initial bearish bias but would profit with MBI anywhere below $18.13 at expiration. Alternatively, they could have been tied to long shares in a covered call position, which would be bullish up to the strike price, but most traders do not use calls that far out of the money for this purpose. (See our Education section)

MBI is up 9.8 percent to $9.97 in early afternoon trading, a day after reaching its lowest levels since Feb. 5. Shares were above $13 in early March.

More than 36,000 MBI options have changed hands so far today, already about twice its full-session average in the last month. 
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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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