Strategy braces for selloff in MBIA

optionMONSTER

MBIA has been limping higher, but one trader thinks it might get cut off at the knees.

optionMONSTER's Depth Charge monitoring program detected the purchase of 5,000 November 9 puts for $0.18 and the sale of a matching number of November 12 calls for $0.14. Volume exceeded open interest at both strikes, indicating that new positions were initiated.

The investor probably owns shares in the financial guarantor, which was spent almost four years attempting to recover from the 2008 subprime-mortgage crash. He or she now has locked in a minimum exit level of $9 and a maximum sale price of $12, protecting themselves from a big drop over the next four weeks but also relinquishing gains in the event of a big rally.

The option trade cost $0.04 and is known as a collar because it programs sales above and below the current price range. (See our Education section for other hedging strategies.)

MBI declined 4.72 percent to $10.29 on Friday. It's scheduled to report third-quarter earnings on Nov. 9, so the trader may want to protect his or her position against a weak set of numbers.

More than 14,000 contracts traded in the session, almost twice the daily average, according to Depth Charge.

Disclosure: I own MBI shares.

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