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Bearish Betting Heats Up as MBIA Inc. (MBI) Tests Support

MBI skeptics bought front-month put options

by 4/3/2013 9:43 AM
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Since touching a two-year high of $13.70 less than a month ago, bond insurer MBIA Inc. (NYSE:MBI - 10.18) has come back down to earth. The stock is now testing support atop a psychologically significant moving average, but some option traders are gambling on a steeper pullback in the near term, as evidenced by the growing affinity for long puts.

During the course of Tuesday's session, MBI saw roughly 11,000 puts change hands, representing a 76% mark-up to its average daily volume. Digging deeper, traders established new positions at the out-of-the-money April 8 put, which saw open interest increase by more than 1,000 contracts overnight, Plus, the majority of the puts traded on the ask side, hinting at buyer-driven volume.

The puts crossed the tape at a volume-weighted average price (VWAP) of $0.10, meaning the buyers will begin to make money if MBI breaches the $7.90 level (strike price minus VWAP) within the next couple of weeks. In order to hit breakeven, though, the shares of MBIA Inc. would need to perforate support in the round-number $10 region, home to the stock's 200-day moving average. This formerly resistive trendline contained MBI's pullback in late February, and could once again limit downward momentum. Nevertheless, the most the put buyers are risking is the initial premium paid for the contracts.

Daily Chart of MBI since November 2012 With 200-Day Moving Average

That's not to say the options were cheap, however. The stock's Schaeffer's Volatility Scorecard (SVS) sits at just 3, implying that MBIA options are rather expensive right now, relative to the probability of an outsized move on the charts.

From a broader sentiment standpoint, put buying has become par for the course for MBI. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 1.19, which ranks in the 88th percentile of its annual range. In simpler terms, option buyers have picked up MBI puts over calls at a faster-than-usual clip during the past couple of weeks.


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