Tuesday, January 4, 2011

MGIC Investment (MTG) - Mortgage Insurer and Company Specific Risk

MTG is trading $10.55, down 2.1% with IV30™ up 14.6%. The LIVEVOL™ Pro Summary is below.


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I wrote about another major mortgage insurer (MBI) on 12-30-2010. Here's that post:
MBIA (MBI) - Stock Pops with Vol on Court Rulings.

The news at the time was:
MBIA won a key ruling in a New York court that promises to reduce the time and cost of gathering evidence it needs to prove that Bank of America fraudulently induced the company to insure billions of dollars worth of mortgage bonds originally issued by Countrywide.
Source: Forbes

The news today:
Banking giant Bank of America (NYSE: BAC) reached an agreement today to buy back $3 billion worth of loans from Fannie Mae and Freddie Mac. The government-backed finance companies were seeking billions from Bank of America on claims that its Countrywide unit had sold loans that didn't meet Fannie's and Freddie's standards. It seems everyone found something to cheer in the settlement, as Bank of America shares gained 6%, Fannie Mae climbed 9%, and Freddie Mac tacked on 5%. In addition, PMI Group and its fellow mortgage insurers seemed to be rallying on the news. Along with PMI's 10% jump, Radian Group (NYSE: RDN) was up 7% and MGIC Investment (NYSE: MTG) added 5%.
Source: The Motely Fool

But, as of this writing, MTG (and PMI) is down, selling off with the market.

MTG has traded over 44,000 contracts on total daily average option volume of just 6,750. Calls have traded over 43,000x, yielding a nearly 34:1 call:put ratio. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action - the Jan 12.5 calls have traded more than 34,000x and are mostly opening (compare OI to trade size). These look like purchases to me.

The Skew Tab snap (below) illustrates the vols by strike by month.

We can see the Jan upside is bid from the order flow, though Feb and Mar are not. The Jan 14 calls are just a $0.02 bid, so don't get too excited about that vol.

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 rise and most notably, the vol spike. It turns out that MBI and PMI actually have lower vol today, so MTG is acting on it's own which points to some company specific news and risk.

Possible Trades to Analyze
1. Spread the months and the skew to the upside:
Sell 1 MTG Jan 12.5 call @ $0.13 (~73 vol).
Buy 1 MTG Feb 12 call for $0.47 (~67 vol).
Pay $0.34 for some upside AND get yourself some earnings vol for less than front month vol. A pretty cool trade and vol irregularity...

2. A little more risk and little more interesting:
Do #1 but sell 2 Jan 12.5 calls yielding a net debit of $0.21.

3. Any kind of call spread between the front two months that buys the earnings month for cheaper than the front month seems like a reasonable trade to analyze.

This is trade analysis, not a recommendation.

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1 comment:

  1. Last year was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.

    home buyer