Stock Option Investment Advice

Trouble for Housing Market and Mortgage Lenders – Bear Call Credit Spreads

News reports on Thursday stated mortgage lender Countrywide Financial (CFC) has siphoned off an $11.5 billion credit facility to fund its operations as they are having an increasingly hard time raising money. This news prompted Fitch (a stock rating agency) to lower Countrywide’s long-term default rating from A to BBB+.

Audio Podcast:
An audio podcast of this article is available at:

Signup now for PowerOptions free 14-day trial

Countrywide has already lost over 20% in trading on the New York Stock Exchange today. Yesterday, the stock plummeted 18%.

Signup now for PowerOptionsApplied 30-day risk free trial

The firm has also stated it will be more cautious in determining which loans to fund. Countrywide recently said 90% of its loans will be prime credit; these are loans with historically lower default rates. Funds in the secondary mortgage market have become increasingly scarce as lenders fear more borrower defaults and homeowners being forced to sell a home worth less than is owed.

In the press release announcing the drawing down of funds, David Sambol, Countrywide’s president stated, “For many years, Countrywide’s liquidity management framework has focused on maintaining a diverse, multi-layered assortment of financing alternatives. A primary component of this framework is a committed, unsecured credit facility of $11.5 billion provided by a syndicate of 40 of the world’s largest banks. In response to widely reported market conditions, Countrywide has elected to draw upon this entire facility to supplement its funding liquidity position.”

An LA Times story on the lending market woes quoted Merrill Lynch analyst Kenneth Bruce as saying, “If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break.”

Some are predicting “chicken little” type scenarios where the world will crumble as the US housing market collapses. Other market experts, possibly with cooler heads, are thinking this is all part of the long predicted housing correction. Either way, it’s a very interesting puzzle from an investor’s standpoint.

Countrywide, for their part, has been fairly open in announcing its position. Last week in a regulatory filing, the company said, “Unprecedented disruptions” could lower their earnings and financial condition. The report also stated, “The situation is rapidly evolving and the potential impact on the company is unknown.”

Countrywide makes 1 in 7 of the home loans in America. If they did go into bankruptcy, it could be difficult for US economy to go unaffected.

Looking at this news from an options trading perspective:
Below the assumption is made an investor thinks the long term trend in the housing lending market is down. Building on this, we will take a look at bear call credit spreads. This is a trade where one call option is bought and another is sold at two different strike prices. The net effect is a net credit.

With a bear call credit spread, the maximum profit is the difference between the ask and the bid price of the options (listed below as the net credit). The maximum risk is difference between the strike prices of the options minus the maximum profit.

For more information about bear call credit spreads or any other option trading questions, visit the website at or call us at 877-992-7971

Potential Trades:
All of the following option trades have either 37 days until expiration. These trades were discovered using the powerful suite of option search tools found at PowerOptions.

Bear Call Credit Spreads





CFC $18.79 CFCID 07 SEP 20.0 (37) $3.80 CFCIE 07 SEP 25.0 (37) $1.90 61.3 $1.90 $21.90
CFC $18.79 CFCIX 07 SEP 22.5 (37) $2.75 CFCIE 07 SEP 25.0 (37) $1.90 51.5 $0.85 $23.35
CFC $18.79 CFCID 07 SEP 20.0 (37) $3.80 CFCIX 07 SEP 22.5 (37) $3.00 47.1 $0.80 $20.80
CFC $18.79 CFCIX 07 SEP 22.5 (37) $2.75 CFCIY 07 SEP 27.5 (37) $1.20 44.9 $1.55 $24.05
WM $32.62 WMIG 07 SEP 35.0 (37) $1.50 WMIU 07 SEP 37.5 (37) $0.80 38.9 $0.70 $35.70
CFC $18.79 CFCIE 07 SEP 25.0 (37) $1.85 CFCIY 07 SEP 27.5 (37) $1.20 35.1 $0.65 $25.65
HOV $11.76 HOVIV 07 SEP 12.5 (37) $1.45 HOVIC 07 SEP 15.0 (37) $0.80 35.1 $0.65 $13.15
ETFC $12.92 EUSIC 07 SEP 15.0 (37) $0.95 EUSIQ 07 SEP 16.0 (37) $0.70 33.3 $0.25 $15.25
CFC $18.79 CFCIE 07 SEP 25.0 (37) $1.85 CFCIF 07 SEP 30.0 (37) $0.70 29.9 $1.15 $26.15
TOL $20.74 TEPIX 07 SEP 22.5 (37) $1.05 TEPIE 07 SEP 25.0 (37) $0.50 28.2 $0.55 $23.05
IMB $17.99 IMBIX 07 SEP 22.5 (37) $1.40 IMBIE 07 SEP 25.0 (37) $0.85 28.2 $0.55 23.05
(For more details click the ticker symbol above)

Competitors for CFC include: Bank of America Corporation (BAC), Wells Fargo & Co. (WFC), American Home Mortgage Investment Corp. (AHM), Fieldstone Investment Corp. (FICC), Fremont General Corp. (FMT), Fannie Mae (FNM), Freddie Mac Corp. (FRE), MortgageIT Hldgs. Inc. (MHL), Indymac Mortgage Hldgs. (NDE), New Century Fin. Corp. (NEW), Ocwen Financial Corp. (OCN), and PHH Corp. (PHH).
Competitors for WM include: Bank of America Corporation (BAC), Wachovia Corp. (WB), Wells Fargo & Co. (WFC), Countrywide Financial Corp. (CFC), Downey Financial Corp. (DSL), Greater Bay Bancorp (GBBK), Indymac Mortgage Hldgs. (NDE), Washington Federal Inc. (WFSL), and Zions Bancorp. (ZION).
Competitors for HOV include: DR Horton Inc. (DHI), Lennar Corp. (LEN), and Pulte Homes Inc. (PHM).
Competitors for ETFC include: Charles Schwab Corp. (SCHW), TD AMERITRADE Holding Corporation (AMTD), and FMR Corp. (private).
Competitors for TOL include: DR Horton Inc. (DHI), Hovnanian Enterprises Inc. (HOV), Pulte Homes Inc. (PHM), and WCI Communities Inc. (WCI).
Competitors for IMB include: Bank of America Corporation (BAC), Countrywide Financial Corp. (CFC), and Wells Fargo & Co. (WFC).
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] FMR Corp., AMTD, Ameritrade Hldg. Corp. Class A, BAC, BankAmerica Corp., CFC, Countrywide Financial Corp., DHI, D.R. Horton Inc., DSL, Downey Financial Corp., FMT, Fremont General Corp., FNM, Fannie Mae, FRE, Freddie Mac Corp., GBBK, Greater Bay Bancorp, HOV, Hovnanian Enterprises Inc., LEN, Lennar Corp., OCN, Ocwen Financial Corp., PHH, PHH Corp., PHM, Pulte Corp., SCHW, Charles Schwab Inc., WB, Wachovia Corp., WCI, WCI Communities Inc., WFC, Wells Fargo & Co., WFSL, Washington Federal Inc., ZION, Zions Bancorp., bear call credit spreads, covered call investment strategy, investment strategy, iron condor, options trading, poweroptions, stock option trading, stock options [/tags]

Leave a Reply

Your email address will not be published. Required fields are marked *