Saturday, March 10, 2007

A Trade On Accredited Home Lenders Holding Co. (LEND)

Dear fellow options traders :

I was alerted to the deterioration of the housing mortgage market when NovaStar Financial, Inc. (NFI), a company which originates, purchases, invests in, and services residential nonconforming loans in the United States, suffered a 41% plunge on 20 Feb 2007 after its disappointing 4th quarter earnings results.

Actually on 16 Feb 2007, Banc of America already commented negatively about the Mortgage Lending group. The firm's report included IndyMac (NDE), Countrywide (CFC), Washington Mutual (WM), New Century (NEW), Accredited (LEND), Novastar (NFI) etc.

I paid attention to Accredited Home Lenders Holding Co. (LEND), one of the sub-prime mortgage lenders, when I read from that shares of "subprime" lenders continued their decline after federal bank regulators asked them to be more cautious when making the high-risk loans and scrutinizing borrowers' ability to repay them.

I further understood that lenders who offer subprime mortgages -- which are higher-interest loans for those with bad credit -- have been forced to set aside more reserves against potential loan losses and have seen their stock prices slashed in January 2007.

Elsewhere, government-backed mortgage giant Freddie Mac (FRE) on Tuesday, 27 Feb 2007, said it would no longer buy subprime home mortgages it deemed most vulnerable to default or foreclosure.

All these news prompted me to buy a OTM Mar 17.50 Put of LEND on 1 March 2007 at $20.00 a contract, to ride on further pessimism of the subprime mortgage lenders market.

On 5 March 2007, more bad news surfaced from the mortgage lenders market, if not already worsened by the 3% plunge of the Japanese stock market earlier that day. Such snippets include : New Century Financial Corp. (NEW) saying on Friday (2 March 2007) that it was facing a federal criminal probe, HSBC HLDGS PLC ADS (HBC) booking $10.6 bln in losses on bad loans and an analyst downgrade on Countrywide Financial Corp. (CFC); were exacerbating problems associated with the sub-prime mortgage market.

Accredited Home Lenders Holding Co. (LEND) joined in the foray too, announcing that it had filed a form NT-10k with the SEC, stating that its 10-K would be delayed until 16 March 2007.

On 5 March 2007, LEND gapped down about -$4.00 to $17.86 when market opened and I sold my Mar 17.50 Put for $150.00 when the stock was hovering around $18.00 at 9.54am EST. LEND went down -$1.80 intra-day to close at $16.00.

If you've managed to find out about the Live Freely! Seminar from my stock options trading blog and subsequently sign up for it, I hope you could do me a kind favour and mention Mr Tony Chai from Batch 14 as the referrer. Thank you for your kindness.

I'm still working towards achieving profitable trades consistently.

Wishing you Profitable in your Options Trading too.

Yours Sincerely,

Tony Chai