Given the volatility and depressed price of Countrywide Financial (CFC), it seems like there is opportunity here, although not for the squeamish.

I seem to remember an M* article a month ago where CFC was a recommended play by selling a put. I believe it was the Apr8@20 put. Given the price action and publicity recently, this is a good example of needing a iron gut to stay the course. I wonder how many people who opened a position like this got burned by closing early.

How about buying LEAPS on CFC? If you believe in a turnaround, seems like a good time.

Anybody else looking at this opportunity?

Steve

 

Hollowcave, you asked "Anybody else looking at this opportunity?" I imagine several million investors are watching CFC like hawks or vultures, so I doubt whether it's possible to exploit any market inefficiencies. Look what happened Friday when CFC surprised to the upside and the stock climbed 32% to $17.30. As for a turnaround, home foreclosures in California (CFC's biggest market)have doubled since last year and continue to increase, casting doubt on some of the statements made by CFC's management. Chief Executive Angelo Mozilo, the subject of an SEC investigation, was quoted in the Wall Street Journal as saying "We do see substantial opportunities for us to...pick up market share." Why buy trouble? There are safer ways to make money.

At the Value Line Options survey, Jan 2010 $30 calls have historical volatility of 31% and implied volatility of 61%. The estimated value of the premium is $1.19 vs last bid of $3.

So I wouldn't do Jan 2010 leaps. Nor would I do front months covered calls. 

Which is why selling the volatility is probably the smartest play of any on CFC.  Selling OTM puts would be how I would play it.  I don't think CFC goes BK - there is real value in their mortage holdings, they made plenty of good 30 yr fixed loans along with their ARMs, and you can get a 55%+ annualized return by selling a Dec 12.5 put.   I'd be a seller of the volatility rather than a buyer. 

I totally agree that selling volatility is the way to go with CFC.  If the puts expire out of the money, you have made the premium without the risk of owning the underlying. If they are exercised, you end up with the stock.

 

Remember, volatility costs.  CFC will probably be an excellent stock to buy, but if you want to play financials that are beaten down, consider JPM or WFC, both somewhat hammered, both strong, and far less risky. Or MBIA, which has a great income stream.  

 

The market is risk. . CFC is big time risk. At current levels, you might triple your money in  five years or lose half of it.  No way around risk.