A Trip through History with MBIA (MBI)

We’ve undertaken a number of trades over the last four months using options on bond insurer MBIA Inc. (NYSE:MBI), a company whose stock is prone to some very sharp zig-zags and therefore has great profit-making potential.

And as it turns out, we’ve won some, and we’ve lost some.

Today, however, we’re not trading shares of MBIA. Today we are making an interim summing up of the matter.

We ask for your patience, as it’ll take a minute or two. Indulge us, please, and follow along.

We’ll start at the beginning.

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The first trade in question was opened on the 15th of April in a letter called Banking on a Spain vs. Scotland Trade. There we urged you to open two separate spreads using MBI against the Select sector SPDR Financial ETF (NYSE:XLF), a proxy for the financial sector as a whole. In both cases we were betting on MBI’s inherent volatility making for wilder swings higher and lower than XLF over the next four months.

But alas, it didn’t work out the way we planned.

With both the PUT spread and the CALL spread we came up short and forfeited $0.33 for every quartet traded.

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Fast forward, however, to our letter of May 27th, and you’ll see we had far better results.

That one was called Volatility Melting, and there we argued that there was enough immediate support below MBI stock to sell a hefty round of PUTs and collect some premium to offset the first trade’s losses.

And so we did.

We sold ten June 11 PUTs for $0.13 each, for a total credit of $1.30 per round traded, and the entire wham-doggy monster moolah bath was ours.

So much for the initial loss.

But it didn’t end there!

Again, on July 22nd, in a missive called Recovering Premium from a Lost Island Trade, we urged you to sell the MBI August 9 PUTs for $0.26 each.

Our rationale was clear –

“We’re going to attempt a repair here to recover the losses we expect to incur [from our first MBI trade back in April], by selling PUTs…. [W]e’re maintaining that a new, risk-oriented cadre of shareholders has now stepped into the fray… and that a turnaround for the shares is at hand. We may not get a steep rise, but even a slow drift higher will serve our purposes. With that in mind, we’re selling near-term MBIA PUTs below the $9.20 lows, and in so doing, generating some funds against a trade that we see little hope of recovering.”

As of last Friday’s expiry, of course, MBI was trading well above the $9 mark, and we pocketed 100% of the trade’s premium.

You’ll note that in our recommendation, we didn’t specify the number of PUTs you should short, and certainly those who went in whole hog more than added to their overall profit position in MBIA. But those who even sold off a single MBIA PUT also added to their winnings, and we congratulate all who jumped in and elbowed their way to more meaningful profits on the trade.

Last MBIA Train Now Boarding

There was one more MBIA initiative that we launched this summer. It was on June 17th, and the letter was called Insuring a Winner.

This one was less successful, and we therefore want to outline a couple of different courses of action for our readers.

But before we do, let’s take stock of where we stand with respect to the first three trades.

1. Our April initiative resulted in a loss of $0.33,
2. Our May trade fetched a profit of $1.30,
3. Our July sale garnered an additional $0.26 (or more, if multiple PUTs were sold),

Leaving us with a profit of at least $1.23 for the three trades cumulatively.

Which brings us to the grand finale.

On June 17th we recommended you sell ten MBI August 11 PUTs, then priced at $0.17, for a total credit to you of $1.70.

Those options expired last Friday in-the-money, meaning that we’re now long ten board lots of MBIA stock, which we purchased at $11 per share, for a total cash outlay of $11,000.

But MBIA is only trading at $10.48, and that means we’re underwater $520 on the trade, less our initial premium collected, $170, or $350 in the hole ‘net’ on the current initiative.

LISTEN CAREFULLY –

Coupled with the earlier $125 profit from the three prior MBIA initiatives, our total loss vis-à-vis the stock is $225 if we close our long MBIA position today.

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We believe that everyone should take a look at the chart and be aware of the risks and potential rewards offered by the trade before making that decision.

We therefore turn to the daily chart of MBIA to get a read on the situation.

Have a look here –

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It’s clear from the last few days trade that something new is afoot (red arrow). Increased volume and a bullish breakout that coincided with a very cheerful Q2 earnings report seems to have enlivened the stock. And both RSI and MACD are adding to the technical solidity of the picture.

RSI bounced from a severely oversold reading in early July to a comfortable position well above its midway ‘waterline’, giving us a tentative bullish posture for the shares. When MACD confirms with its own surfacing, we’ll have a full-on bull call for MBIA once again.

And that development might not be so far off. Should we get two or three positive days for MBI this week, we could see a bounce that carries all the way to the bunched moving averages in the $12 range.

Yippee!

Not so fast.

Although a $12 price tag would put us back in the black by some $1300, we have to urge caution.

Yes, price has bested the last interim high at $10, and that’s constructive. But we could yet see a retreat before the climb recommences. A jump of 16% like we saw over three days last week could well result in a brief pause, and investors have to consider that.

In short, we see the stock higher in three weeks and three months, but not necessarily in three days.

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The Profit Hunter therefore recommends all but the most risk-oriented investors to sell their MBIA stock at the market and take a $225 loss on the trade. For those who are prepared to take on some short-term risk, we’ll continue to monitor the trade for you.

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The Profit Hunter therefore recommends all but the most risk-oriented investors to sell their MBIA stock at the market and take a $225 loss on the trade. For those who are prepared to take on some short-term risk, we’ll continue to monitor the trade for you.

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With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, The Profit Hunter

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