Taking Profits in Subprime

On Tuesday, amid reports of increasing delinquencies and foreclosures, compounded by rumors of bankruptcy, I decided to monetize much of my bearish position in Countrywide (CFC). I had purchased my Jan 27½ puts in August for $4.70 each, I was able to sell them at my target of $20.00; similarly, the Jan 17½ puts, which I purchased in September for $2.60, I sold at $10.00. As Countrywide's share price approached $7.00, the risk-return ratio for these positions became difficult to justify (though the stock still managed to fall below this level to a low of $4.43). Since the summer, this mortgage lender's price has been the story of the triumph of grim market realities over its management's cheerfully optimistic pronouncements.

What now? The volatility of the current situation was highlighted by Thursday's 51% jump in Countrywide's price on talk of a buyout by Bank of America (BAC). Though I am hardly bullish on the stock, at these depressed levels, too many variables could produce violent changes in price -- as was shown today. Though I hold some longer-term puts (which are still well ahead, even after today's action), adding to bearish positions almost becomes a bet that Countrywide will declare bankruptcy -- an event that does not look all that likely at the moment. At the same time, you will not see me buying any of the stock, either. There are better choices, regardless of whether you are a bull or a bear.