Tuesday, January 11, 2011

MBIA (MBI) - Insurer Pops on Appeals Ruling

MBI is trading $13.46, up 9.6% with IV30™ up 13.3%. The LIVEVOL® Pro Summary is below.


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I wrote about MBI on 12-30-2010:
MBIA (MBI) - Stock Pops with Vol on Court Rulings.

This morning, MBI popped big, came back about half of the way, and now sits up ~10%. I've included the tick chart showing the pop and retreat (Jan vol is on the bottom).

The news from Reuters is included below:
NEW YORK, Jan 11 (Reuters) - A divided New York appeals court handed bond insurer MBIA Inc (MBI.N) a crucial win in the legal battle over its restructuring plan, dismissing a 2009 challenge to the plan by a group of banks.

The banks sued MBIA, arguing the plan left MBIA Insurance Corp undercapitalized and potentially unable to pay out on the banks' claims.

MBIA moved to dismiss the suit, arguing in part that the banks should have instead challenged the restructuring in an administrative proceeding since it had been approved by New York's insurance superintendent.

A lower court dismissed MBIA's motion. The appeals court on Tuesday reversed the lower court. The appeals court ordered that the motion be granted and the banks' suit dismissed.

MBIA shares rose 12.4 percent to $13.80 in midday trading. Earlier in the session they rose as high $14.86, their best level since September 2008.
Source: UPDATE 1-MBIA wins key ruling on restructuring

Well, there you go.

The company has traded over 43,000 contracts on total daily average option volume of just 11,776. Trading has been scattered around, though calls have traded on a 1.4:1 ratio to puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action.

Note how the vol has jumped; up 16 points in Jan and 8.3 in Feb. The Skew Tab snap (below) illustrates the vols by strike by month.

After the small stock retreat, the skew looks flattish. Certainly not an obvious upside bias. The front month (red) is quite a bit above the back (yellow) for you calendar spreaders.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has jumped from under $10 to as high as ~$15, and now to $13.50 (ish). The IV30™ has remained elevated throughout, and has jumped again today. As of this moment, you could make an argument that vol is too high in the front. You could also make the argument that the stock has just moved 40% in a few weeks so vol is low... How helpful was that?...

Possible Trades to Analyze
Tread carefully, but here are a few ideas to examine.

1. Spread the Months:
Sell Jan 14 straddle @ $1.60 (~85 vol)
Buy the Feb 14 straddle for $2.70 (~75 vol)
Pay $1.10, but note the strike - $14 carries a delta.

2. Buy write:
Buy 100 shares MBI for $13.46
Sell 1 Jan 14 call @ $0.53
NB: This is the same thing as selling the Jan 14 put @ $1.07.
Alternatively, you could Buy write with the Jan 12.5 calls.

3. Sneaky delta bet:
Since Feb hasn't reacted quite as much and the stock may be retracing a touch:
Buy the Feb 11/12 put spread and pay ~$0.33. That's a small bet with a 2:1 MaxGain:MaxLoss. This feels like a reasonable cheap bet for small if you believe the stock will retrace further in the next 6 weeks (ish).

This is trade analysis, not a recommendation.

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