Trading Cash Secured Puts On MBIA

May. 4.12 | About: MBIA Inc. (MBI)

In my arsenal of option trading weapons the cash secured put strategy is my second-favorite strategy to employ, with deep in the money calls being my favorite. The strategy is not a hard one to use and allows investors to get paid to wait. The cash secured put strategy is one where an investor will sell an out of the money put and collect a premium. If the stock you are selling a put on doesn't go to the strike price of the put sold then investors will get to keep the premium and not be obligated to buy the stock. For current examples please click here and here.

As with any option strategy there should always some rules to follow when using the cash secured put strategy. First, I would only want to use this strategy on stocks that you want to own. Collecting a premium and getting paid to wait is nice, but you have to be prepared to own the stock if assigned. Secondly, this is a good income investing strategy for existing shareholders who want to purchase shares, but want to collect a premium and wait for your stock to drop to a desired level at where an investor wants to purchase stock. Lastly, for investors who want to buy shares of stock this strategy can be seen as an easier way to acquire shares and if the shares do not drop to the put price that is being sold, then investors will get paid for waiting. Hence, there are a lot of traders who will often say that they are winning either way by selling cash secured puts. However, in my opinion this is often easier said than done.

One stock that I have paper traded and have sold cash secured puts on in the past is MBIA Insurance Corporation (NYSE:MBI). MBIA is a monoline insurer that provides financial guaranty insurance, advisory and portfolio services. MBIA has faced a number of challenges over the last five years as MBIA seeks to stabilize/re-build its business. Some of these challenges include lawsuits, legal costs and CDO/CMDS risk reduction.

Recently, since the beginning of the year MBIA has traded in a range from the mid 13's in January to a low of $8.85 as MBIA had some legal rulings go in its favor, but still has some legal hurdles ahead. MBIA will get its day in court on May 14, 2012, against Bank of America (NYSE:BAC), Natixis and Societe Generale (OTCPK:SCGLY). The trial is expected to last four weeks and a positive ruling for MBIA could have the potential to drive shares higher. Rulings in the past have helped MBIA shares jump higher, since the stock does have a high beta of 2.4

Chart forMBIA Inc.

MBIA also has an upcoming earnings report for Q1 2012 on May 10 where the consensus is expecting 0.18 in an estimate range from 0.13 to 0.23. MBIA's last earnings report for Q4 2011 wasn't pretty since MBIA delivered a negative surprise of (-3.23) on a consensus estimate of 0.21

With the recent legal challenges and upcoming earnings report for MBIA there will most likely be volatility for MBIA for some time. Volatility can be similar to a double-edged sword. On one side volatility is good if an investor is on the right side of the trade, but if an investor is on the wrong side of the trade with a stock that has a lot of volatility, this could be damaging to your trading account.

The volatility that can be seen in MBIA's stock can also be seen in the options market. Currently, for put sellers MBIA does provide an attractive premium for investors who can stomach some volatility. I believe for current investors who own shares of MBIA and are unsure if they want to add to their position, the cash secured put strategy may be the way to go.

Trade Details: Sell (1) June 16 2012 $9 Put For 0.80 or (0.80 x 100 = $80)

Premium Received = $80

Amount Of Cash Required = Current Share Price $10.84 x 100 = $1,084

Breakeven = Strike Price Sold 9 (-) premium received 0.80 = $8.20 Investors will be protected until $9, but won't realize a loss until $8.20

In conclusion, investors may also look out to father dates to collect even more premium and have a lower breakeven point, but I prefer to have a short-term time frame and then evaluate my next move. While MBIA is likely to have further issues down the road, this trade above gives investors $1.84 of protection and MBIA would have to drop 24% until investors realized a loss. In the short term MBIA is showing support at the mid $9 level. While the premiums are attractive on MBIA for selling puts, newer investors who are unfamiliar with MBIA should do their homework and due diligence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.