Trading Tools to Build Your Portfolio: Call Buyers Converge on MBIA Inc. (MBI)

              

In last week's edition of Trading Tools, we analyzed retail titan Macy's Inc. (M), thanks to a wave of pre-earnings option activity highlighted by the Schaeffer's Most Active Options screener. Employing the same filter for today's article, a different equity piqued my curiosity: insurance issue MBIA Inc. (MBI: sentiment, chart, options), which was a favorite target among call traders on Thursday.

For an explanation of the contrarian stance that makes Schaeffer's so unique, check out a recent version of Trading Tools.

During the course of Thursday's session, MBI saw roughly 7,800 calls cross the tape – almost tripling its average daily volume of fewer than 3,000 calls, and nearly 10 times the number of MBI puts traded. The primary catalyst behind the influx of bullish bets was likely speculation that the government will extend the home-buyer tax credit – news that fueled shares of mortgage and life insurers higher yesterday.

Garnering the most attention was the stock's at-the-money November 4 call, which saw close to 3,200 contracts change hands. Most of the volume appears to have been the initiation of fresh bullish positions on MBI, as call open interest at the November 4 strike skyrocketed from fewer than 700 contracts to roughly 3,500 contracts overnight. Plus, 98% of the calls traded at the ask price – suggesting they were purchased – and the option's implied volatility jumped 37.2% in the wake of escalating demand.

As a result of yesterday's bullish bombardment, the equity's Schaeffer's put/call open interest ratio (SOIR) inched lower overnight. The stock's SOIR now rests at 0.60, implying that calls outnumber their put counterparts among options slated to expire within three months. What's more, the security's SOIR ranks in the 31st percentile when compared to similar readings taken during the past year, indicating that short-term speculators have been more optimistically aligned toward MBI only 31% of the time during the past 52 weeks.

Taking a closer look at MBI's front-month open interest configuration reveals just how lofty option players' expectations are for the shares.

While most call speculators on Thursday centered on the at-the-money November 4 strike, peak call open interest in the November series stands at the out-of-the-money 6 strike, with nearly 12,200 contracts in residence. In addition, the overhead 5 and 8 strikes harbor a notable accumulation of bullish bets, with roughly 7,200 and 9,600 open call positions, respectively.

Technically speaking, while the shares of MBI rallied amid broad-market optimism yesterday, the advance did little to negate the stock's recent challenges on the charts. During the past 20 trading sessions, the equity has underperformed the broader S&P 500 Index (SPX) by 38%. In fact, since breaching double-barreled support from its 10-day and 20-day moving averages on Oct. 1, the stock has more than halved itself, and is currently flirting with the $4 level.

From a longer-term perspective, the shares of MBI could now be facing the wrath of their 10-month moving average, which has contained the majority of the security's rally attempts since mid-2007. After two consecutive monthly closes above this moving average, the equity is once again hovering beneath this trendline, which is currently stagnating in the overhead $5 neighborhood.

In conclusion, the shares of MBI have a surplus of potential chart challenges lying just overhead. Not only does the stock have to contend with its 10-month trendline, but it could also face additional layers of options-related resistance thanks to the glut of out-of-the-money call open interest in the November series.

Furthermore, the insurance issue is approaching a key fundamental crossroads as well. More specifically, the company is slated to step into the earnings confessional after the closing bell on Monday, Nov. 9. According to Thomson Reuters, MBI has a rather humdrum history in the earnings spotlight, poster a steeper-than-expected per-share loss in three of the last four quarters.

Nevertheless, despite MBI's status as a broad-market laggard and a risky earnings prospect, front-month option speculators remain hopelessly devoted to the stock. However, this abundance of optimism in the option pits could actually weigh on the shares in the near term, should the equity continue its descent or the company post another disappointing earnings report. Should these bullish bettors begin abandoning ship, a reversal in sentiment among option traders could exacerbate MBI's recent journey into the red.