Selling our NEW Position For a Gain of 850%

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March 13, 2007 | SIN Picks | | Author Asif

I am going to sell our remaining May 2007 $35 put options (NEWQG.X) on the mortagage lender New Century Financial (NEW) at $34.20 per contract and realize a gain of 850% in less than 5 months. Trading in New Century was halted yesterday and today the NYSE suspended trading in the stock altogether. This also lead to a halt in options trading yesterday but since the stock is now trading on the pink sheets, the puts are also trading again and I see over 200 contracts traded today at $34.20 according to Yahoo Finance.

I will be updating this post shortly but wanted to get something out before the market close today.

Update March 15, 2007: It took me a little longer than expected to update this post. New Century Financial, which is now trading under the ticker symbol NEWC.PK on the pink sheets, fell once again yesterday to close the day at 68 cents, providing yet another opportunity to get out of the put options with a very handsome profit. It looked like New Century was priced for bankruptcy after Morgan Stanley withdrew a $265 million credit facility that it had granted to New Century just the week before and Barclays Bank (BCS) asked the company to immediately buy back $900 million of mortgage loans. Instead of waiting for bankruptcy and exercising the put options in May, I decided to sell them on Tuesday and book our gains.

The whole subprime mortgage lender sector rebounded strongly today on news of potential buyouts and New Century Financial jumped up 68 cents or a whopping 101.49% to close the day at $1.35 per share. Other mortgage lenders liked Accredited Home Lenders Holding (LEND) and Countrywide Financial (CFC) also posted gains of 56.13% and 3.14% respectively. While there is a chance that LEND may be acquired, I do not believe New Century Financial can escape bankruptcy at this point and I doubt any of the large banks that are struggling with their own mortgage portfolios are going to buy Countrywide Financial.

To learn more about why I decided to buy put options on New Century Financial and Countrywide Financial, check out my blog entry titled The Effect of Housing Weakness on Mortgage Lenders and a section in the November 2006 edition of the investment newsletter titled Hedging The Economy Through LEAP Puts.

Full Disclosure: I currently hold put options on Countrywide Financial in both the SINLetter model portfolio and my personal portfolio.

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