Filed under: Earnings reports, Deals, Good news, Bank of America (BAC), Countrywide Financial (CFC), Options, Technical Analysis
Countrywide Financial Corp. (NYSE: CFC) shares are rising today even though the company posted a fourth-quarter loss of $421.9 million, or 79 cents per share, much worse than analysts’ predictions of a loss of 32 cents per share. However, shares are trading higher as some analysts have speculated that by simply reporting and showing that it is still in business, CFC might be able to keep potential buyer Bank of America (NYSE: BAC) from rescinding its buyout offer. In fact, BAC CEO Ken Lewis stated after CFC’s earnings release that “everything is a go to finish this transaction.” If you think that the company won’t fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CFC.
After hitting a one-year high of $45.19 in February, the stock hit a one-year low of $4.25 last week. CFC opened this morning at $6.35. So far this day the stock has hit a low of $6.07 and a high of $6.46. As of 11:45, CFC is trading at $6.21, up $0.26 (4.4%). The chart for CFC looks neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a March bull-put credit spread below the $5 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just two months as long as CFC is above $5 at March expiration. Countrywide would have to fall by more than 18% before we would start to lose money.
CFC hasn’t been below $5 by more than a few cents in the past year and has shown support around $5.75 recently, now that BAC has expressed interest. This trade could be risky if the Fed doesn’t take bold action tomorrow, but even if that happens, this position could be protected by the support the stock might find around $5 where it has started to form a bottom.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BAC or CFC.
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