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MGIC Investment Corp. (MTG) Sell-Off Lures Option Bears

MGIC Investment Corp. has landed on the short-sale restricted list

by 7/11/2014 10:41 AM
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MGIC Investment Corp. (NYSE:MTG) gapped lower this morning -- and was last seen 11.8% south of breakeven at $8.15 -- after the Federal Housing Finance Agency last night proposed tighter standards for insurers that conduct business with Fannie Mae and Freddie Mac. As a result, MTG has landed on the short-sale restricted list, and speculators have rushed to the options pits to find a way to bet bearishly on the mortgage insurer.

In early trading, roughly 7,700 puts have already been exchanged on MTG -- about 31 times the intraday average, and more than double the number of calls on the tape. Especially active is the out-of-the-money July 7.50 put, where option bears are buying to open contracts at a volume-weighted average price (VWAP) of $0.19.

In short, these traders anticipate MTG will descend below $7.31 (strike less VWAP) by next Friday's close, when front-month options expire. Additional profits will accrue with each notch lower the stock is sitting, while the most the buyers will lose is the initial premium paid, should the shares be hovering above the strike at expiration.

Separately, MGIC Investment Corp. (NYSE:MTG) is slated to enter the earnings confessional next Wednesday morning -- three sessions before the aforementioned options expire. Looking back, the company has bested the consensus per-share profit estimate in five of the past eight quarters. Post-earnings price action, however, has been volatile. For example, following MTG's last two reports (both beats), the shares lost 7.2% and gained 4.6%, respectively, in the subsequent three trading days.


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