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MGIC Falls Again: Time To Speculate With $1 Calls

|About:MGIC Investment Corporation (MTG)

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.

MTG ChartMTG data by YCharts

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.

Stocks: MTG