Goldman Sachs has stated it believes it can get fire sale prices on companies in the subprime-lending market. The investment firm earned higher than expected first-quarter profits and expects to keep generating them by buying companies it feels are a good investment.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_03_14_SubPrime.mp3
In our previous article “Continued trouble for Subprime Lenders – A Look at New Century (NEW), Freemont General (FMT) and HSBC Holding (HBC)” we talked about positions to take prior to the recent crash. In this article we will look for the stocks to go the other direction – up.
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Subprime-lending is a practice where high-risk borrowers are allowed to borrow more than they would normally qualify for by offering them a low initial interest rate. After the first two or three years, the payments and interest rates increase. It is expected most investors will refinance before their rates increase. This form of lending has a high rate of default, especially in housing markets where prices are stagnating or falling, and has led to the collapse of several of the industries key players.
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A couple of options:
Two companies that may be attractive to investors are Accrued Home Lenders Holdings (LEND) and IndyMac (NDE).
Accrued Home Lenders Holdings has been hit hard and its stock has fallen from a high of $58 to its now sub $5 level. Analysts feel this company could go two ways: Bankruptcy or will restructure its debt with loans from other companies. So, the covered calls position we’re talking about is a win all or lose all proposition. An investor might also consider simply purchasing a naked call.
IndyMac in many analysts’ opinions is a good company being brought down by the sector. It is a case of “throwing the baby out with the bathwater.” This stock appears to have an extremely high volatility and may be good for a straddle trade.
Competitors:
Competitors for LEND include: ACC Capital Holdings (private), Long Beach Mortgage Company (private), and Ocwen Financial Corp. (OCN).
Competitors for NDE include: Countrywide Financial Corp. (CFC), Washington Mutual Inc. (WM), Wells Fargo & Co. (WFC), and Impac Mortgage Hldgs. Inc. (IMH).
Potential Trades:
All of the following option trades have 38 days until expiration. Accrued Home Lenders Holdings is currently trading at $4.46. IndyMac (NDE) is currently trading at $26.70. These trades were discovered using the powerful suite of option search tools found at PowerOptions.
| Covered Call – Accrued Home Lenders (LEND) $ 4.46 (38) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPTION | Strike Info |
Opt Bid |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| QFWDZ | 07 APR $2.50 | $2.40 | 53.30% | 19.00% | 19.00% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long Straddle – IndyMac Bancorp (NDE) $ 26.70 (38) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Call | Strike Info |
Call Ask |
Put | Put Ask |
Lower Break even |
Upper Break Even |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NDEDE | 07 APR $25.0 | $4.70 | NDEPE | 3.2 | $17.10 | $32.90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Accrued Home Lenders covered call trade, an in money covered call, offers 53.3% downside protection and a potential profit of 19.0% if the stock remains unchanged or rises. The break-even price of this trade is $2.09. The net cost of this trade, per 100 options, is $209.00. Note this is a risky trade as there is a very real chance this stock will be de-listed if the company declares bankruptcy.
The IndyMac Long Straddle trade requires the investor to buy a put and a call at the same strike price. In this trade the stock must either fall below $17.10 or rise above $32.90 for the investor to begin to see profit. The net cost of this trade, per 100 options, is $790.00.
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.
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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] Goldman Sachs, ACC Capital Holdings, Long Beach Mortgage Company, CFC, Countrywide Financial Corp., FMT, Fremont General Corp., HBC, HSBC Hldgs. PLC, IMH, Impac Mortgage Hldgs. Inc., LEND, Accredited Home Lenders Inc., NDE, Indymac Mortgage Hldgs., OCN, Ocwen Financial Corp., WFC, Wells Fargo & Co., WM, Washington Mutual Inc., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]