Trade of the Day: MBIA Inc. (MBI)

Get paid twice with a buy-write on this bond insurer

   
Trade of the Day: MBIA Inc. (MBI)

After closing Wednesday’s FOMC meeting, Federal Reserve Chair Janet Yellen spooked markets by stating that the central bank could begin to increase its key overnight lending rate in the first half of 2015. You’ll recall that the rate has been at 0.25% since the mortgage crisis in late 2008, and this was considered to be an open-field fumble by bond traders looking for the usual grey-area language about a vague, “data-dependent” timeline.

Commodities were lower on the news, while the U.S. dollar rallied against most other currencies. Bond yields also shot higher, but most other sectors closed lower. While sparking a bout of knee-jerk selling in the short term, Yellen’s stance is being taken with respect to an improving economy and better employment data. The benchmark 10-Year Treasury note stands at 2.77% as of Monday morning — still a very tame rate considering where it could have traded if Wednesday’s upward momentum in yield had carried over.

Economic improvement can be seen in February’s building permits and industrial production, which beat expectations, as well as in the initial jobless claims numbers that have been lower than forecast over the last two weeks. More of that good news was reported on Thursday, with leading indicators for February coming in at 0.5% versus the 0.2% consensus, and the Philly Fed reading on regional manufacturing coming in at 9.0 versus the 2.0 consensus estimate.

On the housing front, while home prices rose 9.1% from a year earlier, there was a slowdown in existing-home sales since the middle of 2013, which is reflective of a pickup in borrowing costs, declining affordability and bad weather. Contract closings on existing properties fell 0.4% to a 4.6 million annually, which was in line with the median projections from the National Association of Realtors. Faster job growth and bigger incomes will be needed to spur demand and allow housing to contribute more effectively to the economy.

The bulls love this kind of news…not too hot, not too cold, but right down the middle — growth at a reasonable price. In general, investors are buying the dip and putting political concerns from home and abroad on the sidelines until further notice.

When there’s a momentary pause like we’re seeing now, it’s the perfect time to implement my favorite short-term covered-call strategy (also known as a “buy-write”). As with other trades I’ve recommended, the idea is to buy a stock low and put in a limit order to sell some covered calls against it. That way, when the share price starts to pop, we’ll bring in cash in the form of option premium… and get paid again at expiration day after the shares have rallied through our chosen strike price.

Today’s covered-call pick involves bond insurer MBIA Inc. (MBI), which gapped higher after the company blew past Q4 earnings estimates of $0.06, posting heady results of $0.68 per share. The stock tagged $15.25 before pulling back to its current low- to mid-$14 level. I deem the stock a “buy” at this time, as its 20-day moving average sits just underneath this point.

Recommendation: For every 100 shares of MBI you own or purchase around $14.40, use a limit order to sell to open 1 MBI Apr. $15 call at $0.50 or more per contract, good till canceled.

The stock was a $70 name before the 2008 financial collapse and is just now getting up some speed. This is MBIA’s second big beat on earnings in a row and should provide the shares a shot at trying for $16 in the next few weeks. Once it does, the buyer of our MBI calls is sure to “call away” our shares come April option expiration. (After all, why not buy them at $15 from us when you can do so at a discount to the market price?)

When he or she does, we’ll have earned a quick return of nearly 8%. Our exit price is essentially $15.50, including both our strike price and the $0.50 call premium. So if we purchase MBI shares low around $14.40, that makes for a 7.6% return in just under a month. Not bad, considering that the larger S&P 500 is just squeaking out a 1.6% gain in the same timeframe.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/03/bond-trade-of-the-day-mbia-mbi/.

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