For Bond Insurers, A New Wave of Fresh Hell in Ambac's Wake

This morning’s earnings miss by bond insurer Ambac (ABK) rekindled still-smoldering solvency fears in the bond insurer space.

While the company’s interim CEO tried to allay investor concerns by claiming that “the worst” the crisis – be that what it may – is in rear view, neither option traders nor the broader market seemed becalmed.

While shares in Ambac dropped nearly 39%, the loss at MBIA (MBI) was similarly acute, down 29.5% to $9.35. Option implied volatility in MBIA, which isn’t due to report earnings until mid-May, rose more than 65% on the session – almost more than any other ticker on our platform, to 146.7%.

The rush to seek protection from further share price declines through front-month puts has become second-nature to option traders in the bond insurance space, and so it went with MBIA today as traders bought puts at strikes of 7.50, 10 and 11. So is the worst really over for these bond insurers? Using the distribution of open interest in all MBIA options suggests not.

It’s worth noting in this regard that the densest option positions in MBIA are deep out-of-the-money puts at the $5.00 in the August and January contracts – more than 22,000 lots are currently held by option traders at each respective strike.

Rebecca Engmann Darst contributed to this report.

Comments

[fxtrader07]

what does that tell us? MBI got slaugthered on ABK's news, not for its own problems and either hedges or speculative positions have been built at the $5 mbi puts.
As things stand, there is a very good chance that these will expire worthless. I don't see many retail folks selling naked otm puts on monoliners - but some pros obviously do big time.
time will tell but being long these puts is a sucker's bet imho