Here we go…

Bank of America BAC(7.84 +0.39) might buy Coutrywide CFC(0.00 +0.00) – here is the link to the yahoo finance story.

Big Ben wants to lower rates – here is another link, again yahoo finance

However… American Express is warning that 2008 looks a little bleak – yahoo finance.

What does it all mean!??

Well, I think it means that the mortgage industry, specifically Countrywide is about to get shored up.  This, coupled with Ben’s commentary I think has slowed down the fears that we are doing to fall apart.  With Bank of America thinking about purchasing Countrywide, that speaks to the fact that this might be the worst of the worst as far as subprime and mortgages go.

Anyhow, the American Express comes as no big surprise, the consumer is slowing down a bit, and rightfully so.

Anyhow, now that the markets have closed, I’ll sit down this evening and do some work in the analysis page of thinkorswim, I’ll post a few screen shots and give you my thoughts and plan on the current RUT(831.11 +0.00) position.

Good luck, and trade smart!

Somebody grab the band-aids, we need to stop the bleeding!

Wow, today just sucked.  I had been checking in now and again throughout the day to see how things were going and things looked great.  The bulls had started to rally again and it looked like we were ready for a nice bounce back up… Then the CEO of AT&T blabbed…

Ouch, it was rough.  The Dow was down 238, the RUT 19, NASDAQ 59 and the S&P 500 down 26!  Holy sea of red. Well, now it is time to take a good solid look at what is happening.  This sort of downward movement is unnerving.  The markets have pushed into truly bearish territory.  I’m still a long term bull on this market, I think that 2008 will end higher than it started, however given the current crushing drop through all technical supports it is time to start playing it safe.

The markets have been closed for about 2 hours and the current after market data is showing the S&OP futures up.  Ideally, tomorrow has a bit of a relief rally following today’s dramatic sell off.

Okay… so lets talk about the RUT(831.11 +0.00).

The RUT is a small cap index.  Small caps get hurt when the economy gets hurt. The rumor mill around Countrywide and the comments today by AT&T sent stocks tumbling, and small caps tumble really, really fast.  It must have to do with some arcane law of gravity or something…  Okay, it likely has to do with fundamentals and the stuff that drives stock values.

So, now that the RUT has busted through support at 730 and then followed that by a critical breakdown past 705, what do we do? Today – nothing. I’m going to sit tight for a few more sessions and watch.  670 is still a long way away.  I’m not saying that it isn’t possible.  In fact, according to my trusty tools from thinkorswim, there is approximately a 15.96% change that the RUT will expire at or below my break-even price.

So, this is quite a jump up from the 6ish percentage chance we’ve been looking at.  Personally, I’d agree that the chances have doubled.  We have just come crashing down, a long way down.  Let’s not forget to look at how far it can go in one drop!

The plan

First of all, I’m not going to break the rules.  If the RUT comes crashing down through 680, I’ll start to unroll my positions – quickly.

Ideally, the RUT moves up nicely and we can let time decay work in our favor.  If the index is able to get a strong move to the upside, and I can unravel the position for about $0.15 or so I’m going to.  In fact, I’m going to go ahead and put an order out today to buy back the position for $0.15.  I don’t expect that I will get filled anytime soon, however it will be there if the swing comes my way.

If the RUT rockets back upwards 40 points or so (un-likely) I’ll cancel my buy order before it is filled and let time work for me.

Basically, it is a little bit of wait and see.  I think there is still money to be had here, but it is definitely time to pay attention!  Figures… I’m traveling next week.

Good luck!

Ouch!  Rumors are flying today that Countrywide Financial is going to file for bankruptcy!  The stock has just be slaughtered today – CFC(0.00 +0.00).

Well, I’m quite happy now that I didn’t actually sell those puts.  It would be an ugly margin day in the account as we would be covering all of the intrinsic value of the options, along with about 20% of the stock price! Not to fun at all.

So I guess that play didn’t quite work out.  If this was my real money on the line, I would have to do some serious research right here.  If CFC actually does file for bankruptcy this week, I don’t know that would do to the stock.  It is possible that the bankruptcy filing has been priced in and it wouldn’t do much.  If that is the case, holding through expiration might be a valid play.  The problem of course is the risk that you will lose more, on a percentage basis – a lot more.  If they don’t file this week, I’d guess that the stock pops back up to above $7.50.

I don’t have any analysis to back up my thoughts here, this is all off the cuff, reading the news and making a play type of work.  I haven’t done any major charting work, fundamental or technical analysis of this stock.  Personally, I still like the idea of the synthetic covered call – this just looks like it is going to turn out to be a bad month to try it on CFC.

Anyhow, good luck- and always trade smart!

So there are times that I am glad I didn’t actually put on a position.  This is one of them.  Take a look at the current state of CFC(0.00 +0.00).  This stock is just getting hammered, again!  Today it dropped $0.78 or 9.6% – there wasn’t really any real news!

Personally, I’d be getting a little shaky here.  There are roughly 9 days left till expiration and CFC is really, really close to the break-even on this trade.  I’m not exactly sure what will happen, so I’ll keep posting updates as we move along.  Remember, this is not a trade that I recommend by any stretch… This was simply an interesting idea on a weak company to build a synthetic covered call by selling a put on CFC.

As a company CFC(0.00 +0.00) has a lot of problems.  It could go bankrupt and you would be liable for $750 for each contract you shorted.  If you’re selling insurance, just realize that sometimes you have to pay out! Anyhow, fun times.  Lets see how it plays out.

This is not a trade I am putting into either account. Papermoney, or my real account. This is simply an idea that I’m looking at.

I was looking through some of the older thinkorswim chats and they had a discussion about covered calls. Now I don’t typically trade covered calls. Not that there is anything wrong with them, they just are not my typical type of trade.

However…

Here is an interesting little play, a little on the riskier side, but I like it… Not a covered call, a synthetic covered call – a naked put.

• Sell 50 CFC January 2008 $7.5 Puts @ $0.25
• Credit: $1,250.00
• Commissions: $84.95
• Total Credit: $1,165.05
• Risk: 28.67%
• Commission required: $5,125.00
• Percentage profit (of required margin): 22.7%
• Maximum Risk:$37,500

Hmmm… Why on earth would I want to do this? It’s Countrywide Financial!

This stock has been beaten down left right backwards and forwards. There is still some talk of countrywide going bankrupt and well it’s just generally a questionable company right now. The reason that I’m looking at it is because the implied volatility of CFC is still so high, there appears to be money on the table here. In this situation, I don’t mind playing insurance company. For $0.25 per contract (insurance premium), I’m happy to ensure Countrywide for 15 days at $7.50 – I don’t think they are about to announce bankruptcy, at least not before their earnings call around the 28th of Jan – after my theoretical options expire worthless.

Just a few other things to look at here… The Open Interest in CFC Jan 2008 7.5 Puts is 67,932 contracts, so there is plenty of room here for me to get in and sell a few contracts, implied volatility is at 119.13% with only 15 days left until expiration, and 2,346 contracts traded on Jan 2nd… again, plenty of room to make a bet. The theoretical price (according to my trusty tools from thinkorswim) is about $0.28, so a theoretical fill at $0.25 doesn’t seem to be way out there.

Let’s pretend to put it on and see what happens… I’m not even comfortable yet putting this into the papermoney account, so – if you read this and think it is a great idea. Let me know, I’d love to hear how it turns out for you and about your actual fills.