U.S. News

Options Report: Concerns Linger About Countrywide Financial

Jim Kingsland

There has been a swirl of bearish developments surrounding mortgage lender Countrywide Financial, helping not only to push its stock down from springtime highs, but also prompting increased bearish speculation in put options tied to its stock.

Late yesterday, Countrywide shares were hit by rumors that one of its offices was raided by the Federal Bureau of Investigation as part of a purported investigation into subprime loan fraud. In an emailed statement to the media, Countrywide attempted squash the rumors.

"We are unaware of any such activity taking place and at this time we believe these rumors to be unfounded," the statement said.

Optionmonster.com co-founder Jon Najarian wasn't impressed with the denial. "That’s not quite the same as saying the statements are false," Najarian said in an emailed statement. "Saying they are 'unaware' is like saying 'To the best of my ability Senator, I can’t recall.' "

While Countrywide shares have bounced off the lows of the day, implied volatility on the July 35 puts, bets the stock will fall to at least $35 by the third Friday in July, remained elevated at 45 as speculators bet on further fluctations in the stock.

Overall put options volume in the Countrywide options chain has been running at nearly 2 to 1 against bullish speculators buying calls.

A call option gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.  Put options give the investor the right to sell an underlying security at a specified price within a specific time period.

Prior to the Tuesday rumors, sentiment surrounding Countrywide shares was dampened by the announcement that three former executives agreed to plead guilty to charges they conducted insider trading in shares of the large U.S. mortgage lender, and each reaped tens of thousands of dollars in illegal profits.

Also hurting shares is an ongoing decline in indexes that track the performance of subprime loans and the failure of takeover rumors in recent weeks to turn into a real deal.

The Volatility Index

The widely watched gauge of options market risk, the CBOE Volatility Index, is slumping today after surging Tuesday to nearly 19 or heights not seen since the lows of the year were printed for the stock market in March.

Much of the rise in the VIX Tuesday came following a brief after hours bout of selling in S&P futures.

Even at today's levels, the VIX continues to signal that "investors are pricing in the reality of more risk with a focus on subprime loans and the problems at hedge funds hosted by Bear Stearns", according to Scott Fullman, director of investment strategy at I.A. Englander.

"Basically the market has said we have to account for a possible liquidity crunch."

The most actively traded VIX options remain call options with July and September 20 strikes, bets the VIX will rise to 20 by either July or September, garnering the heaviest volume.

Fullman says some relief from the choppiness in the market may come once the Federal Reserve makes its policy announcement on Thursday.  He also says end of quarter window dressing by fund managers and a generally upward bias in the stock market approaching the 4th of July holiday are potential bullish catalysts in contrast to the breasih VIX surge over the last 2 weeks.

Bullish Bets on Penwest

Drug delivery technology company Penwest Pharmaceuticals' call options have not only been active today following two days of meetings with analysts, but are also rising even as the stock has moved slightly lower.  Generally call options decline when the underlying stock moves lower. 

More than 5,000 August 15 calls, bets the stock will rise from the $12 range all the way to $15 by expiration day in August, have traded.  Even has the stock has slipped by around 10-cents, the options are up 33% to and offer price of 80-cents.

"When calls go up as the underlying goes down, I really think someone knows something and such is the case in PPCO," according to Optionmonster.com's Najarian.