Regulators announced late last week their intention to begin a crackdown on subprime home mortgage lenders as two major lenders are having difficulties with large losses.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_03_05_Subprime.mp3
In addition, New Century Financial Corp. (NEW) stated last week it has become the subject of a federal criminal inquiry. The company also expressed “substantial doubt” about its ability to stay solvent if new debt waivers and funding are not secured.
News today restated the position as the company admitted it would breach financial covenants with some of its financial backers. As a result, investors are running from the company. In a USA Today article today, Chris Flanagan of JP Morgan stated, “It will be a very severe correction (in the subprime market), and I think it will last anywhere from six to 12 months, during which many of the lenders who have operated in this market will gradually get pushed out of business.”
Investment Opportunities:
This could be a good time to go short position on subprime lenders as it could mean the entire industry will slump.
Fremont General (FMT) is down over 20% in trading today and looks vulnerable to suffer further losses.
HSBC Holding (HBC) is about even on the day after suffering around 10% of losses over the past month.
Competitors:
Competitors for HBC include: Barclays plc (BCS), Citigroup Inc. (C), and Lloyds TSB Group plc (LYG).
Competitors for FMT include: Bank of America Corp. (BAC), Countrywide Financial Corp. (CFC), and Wells Fargo Home Mortgage (private).
If you believe these companies will continue to decline, you can use the PowerOptions search tools to identify trades, like the examples below.
Potential Trades:
All of the following option trades have 47 days until expiration. HSBC Holding is currently trading at $86.24 and Fremont General is currently trading at $6.36. These trades were discovered using the powerful suite of option search tools found at PowerOptions.
| Bear-Put Debit Spread — HSBC Holding (HBC) $86.24 (47) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Opt |
Strike Info |
Bid Price |
Buy Option |
Strike Info |
Ask Price |
% Return |
Break Even |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HBCPQ | 07 APR $85.00 | $1.80 | HBCPS | 07 APR $95.00 | $10.40 | 16.30% | $86.40 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bear-Call Credit Spread – Freemont General (FMT) $6.36 (47) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Opt |
Strike Info |
Bid Price |
Buy Option |
Strike Info |
Ask Price |
% Return |
Break Even |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FMTDA | 07 APR $5 | $2.20 | FMTDB | 07 APR $10.00 | $0.40 | 56.30% | $6.80 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The HSBC Holding bear-put debit spread is an in of the money trade. This trade offers 16.3% potential profit if the stock lands below $85.00. If the stock increases above the break-even price of $86.40, the investment will begin to lose money. If the stock price goes above the higher strike price of $95.00, the entire investment is lost. The max risk of this trade, per 100 options, is $870.00.
The Freemont General bear-call credit spread is an in the money trade. This trade offers 56.3% potential profit if the stock lands below $5.00. If the stock increases above the break-even price of $6.80, the investment begins to lose money. If the stock price goes above the higher strike price of $10.00, the entire investment is lost. The max risk of this trade, per 100 options, is $320.00.
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
PowerOptions‘ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags] USA Today, Chris Flanagan, JP Morgan, Wells Fargo Home Mortgage, BAC, BankAmerica Corp., C, Citigroup Inc., CFC, Countrywide Financial Corp., DE, Deere & Co., FMT, Fremont General Corp., HBC, HSBC Hldgs. PLC, NEW, New Century Fin. Corp., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]