Subprime lenders are in the business of lending money for mortgages to borrowers with poor credit. During the heyday of low interest rates, the loan requirements of many subprime lenders were too lax as many of the subprime loans made during that time period are in default or behind in payments.
The subprime mortgage industry will be in the bear’s house for some time to come, as there will probably more fallout from poor loan quality and interest rates won’t be coming down for a while, maybe a long while, so we’re bearish on the subprime mortgage lenders.
With PowerOptions‘ tools we searched for bearish positions using bear call credit spreads for subprime lenders and found the following positions with stock options expiration in March of 2006.
| Bear-Call Credit Spread Search Results | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Sym |
Stock Price |
Sell Option |
Expire/Strike | Bid | Buy Option |
Expire/Strike | Ask | % Return |
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| NEW | 15.93 (-0.61) | NEWCD | 07 MAR 20.0 (22) | 0.3 | NEWCX | 07 MAR 22.5 (22) | 0.15 | 6.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEND | 22.84 (-0.76) | QFWCE | 07 MAR 25.0 (22) | 0.55 | QFWCF | 07 MAR 30.0 (22) | 0.1 | 9.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NFI | 8.71 (-0.63) | NFICB | 07 MAR 10.0 (22) | 0.35 | NFICV | 07 MAR 12.5 (22) | 0.1 | 11.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AHM | 28.99 (-1.02) | AHMCF | 07 MAR 30.0 (22) | 0.8 | AHMCG | 07 MAR 35.0 (22) | 0.1 | 16.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The potential returns for these positions range from +6.4% to 16.3%. As long as the stock price remains below the short stock option’s strike price at option expiration, each position will be fully profitable. As the stock price crosses the short stock option’s strike price, the positions become less profitable and start experiencing a loss. A position will experience a total loss (minus the initial credit) if the stock price is higher than the strike price of the long option at option expiration.
Competitors:
Competitors for NEW include: Countrywide Financial Corp. (CFC), Pacific Premier Bancorp Inc. (PPBI), American Home Mortgage Investment Corp. (AHM), Accredited Home Lenders Inc. (LEND), and NovaStar Financial Inc. (NFI).
Competitors for LEND include: New Century Financial Corp. (NEW), ACC Capital Holdings (private), Long Beach Mortgage Company (private), and Ocwen Financial Corp. (OCN).
Competitors for NFI include: Hanover Capital Mortgage Holdings Inc. (HCM), New Century Financial Corp. (NEW), and AmNet Mortgage, Inc. (private).
Competitors for AHM include: Countrywide Financial Corp. (CFC), New Century Financial Corp. (NEW), and Champion Mortgage Co. (private).
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the subprime lenders bear call credit spreads investment strategy.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a bear call credit spreads investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing bear call credit spread options positions.
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[tags]ACC Capital Holdings, Long Beach Mortgage Company, AmNet Mortgage, Inc., Champion Mortgage Co., AHM, American Home Mortgage Investment Corp., CFC, Countrywide Financial Corp., LEND, Accredited Home Lenders Inc., NEW, New Century Fin. Corp., NFI, NovaStar Financial Inc., OCN, Ocwen Financial Corp., bear call credit spreads, investment strategy, iron condor, option income, poweroptions, selling naked puts, stock option trading, stock options[/tags]