Go naked on CFC? Why not? A theoretical look at selling naked puts on Countrywide Financial

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.