Despite the surge higher in the broader indices on Friday, shares of MGIC Investment Corp (NYSE:MTG) fell by more than 17%. This decline comes after MTG fell by more than 64% during the previous trading session as the company said it may no longer be able to write new insurance. However, with the stock trading at just 72 cents as I write this, it should be noted that the company has not filed bankruptcy.
Possible Reasons For A Rally
- Oversold: MTG is very oversold at this point and the lack of a bankruptcy filing could be enough to send shares higher.
- Capital Injection: It is possible, but unlikely, that MTG finds a way to raise capital. A possible capital injection could come from companies that specialize in investing in distressed situations.
- Special Approval: It is possible that MTG receives special approval to continue writing insurance in some states.
- Asset Sale: MTG could look to sell a portion of its insurance book to another company in an effort to raise capital.
- Short Covering: With a short interest of more than 18%, it is possible that short sellers decide to take profits in MTG.
Any of the aforementioned actions should lead to at least a temporary rally in MTG.
How To Play It
I would only speculate on MTG using options because the risk remains high that the stock falls further. As I write this, the August $1 MTG calls are trading for 5 cents. If anything positive happens, these call options would likely be worth much more than 5 cents. However, if nothing good happens for MTG, and the stock continues lower, the buyer of the call options will simply lose the 5 cent premium paid.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.