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.