Minutes for Diamond Lake Investment Club January 10, 2008 plus the aftermath on Friday
The Diamond Lake Investment Club meeting on January 10, 2008 occurred on a day during which rumors
were circulating that Countrywide Financial might be purchased by Bank of America. The price of CFC
stock went up during the day. The following chart shows the price action during the week:
On Thursday night, we talked about how Countrywide financial had so much debt that perhaps they are
worth a negative amount of money in a buyout. The stock did in fact go down on Friday because the buyout
price was less than the market had anticipated. Sometimes investors call this a "takeunder" rather than a
takeover, because the price is "under" the market price. This "takeunder" plus bad comments about
American Express and McDonald's cast a pall over the whole market, which lost badly on Friday.
We talked about Countrywide stock on Thursday night and how one might make money with puts. Here are
the January CALs on the left and the PUTs on the right. Prices are as of the close on Friday, Jan 11, 2008.
It turns out that one could have made money by shorting any calls or buying any puts except for the $2.5
and $5 strike price PUTs. Since I purchased the $5 PUT, I lost money.
If you look at the volumes, you will note that I was not alone. The following are the 2008 FEB options.
Again, the only losing choices were the $2.5 and $5 PUTs.
On Friday, those $5 FEB PUTs traded between a nickel and 55 cents, which tells you about the volatility
and uncertainty involved in the US financial markets at this point. Kyle sold his for 15 cents which turned
out to be a mistake. But who could have known in such a volatile market? The fact that they closed the day
at 35 cents shows the amount of doubt left in people’s minds that the deal will fall through. The total value
of CFC is the worth of their owning 23% of the mortgage business in the US plus their financial position
given their holdings. This latter part is a net negative, as we said Thursday night. Housing values are
continuing to fall and some people with prime mortgages established at peak California prices are now
under water in spite of having made a decent down payment.
To more clearly illustrate the market’s belief that CFC stock might still go to zero, note the CALs and PUTs
for January 2010:
The PUTs for JAN 2010 $2.5 strike price are exchanging hands at 50 cents. That should tell us something.
Now let us back up to January 2009:
The PUTs for JAN 2009 $5 strike price actually went up a nickel to $1 on Friday. Open interest is 83,112
which says a lot for my theory of CFC having a negative net worth. I even had the right strike price, just the
wrong year.
Energy
We also discussed energy.
For a summary on this, please see: Energy Summary and Energy Options Index
Follow-up notes
The Diamond Lake Investment Club meeting on January 10, 2008 occurred on a day during which rumors
were circulating that Countrywide Financial might be purchased by Bank of America. The price of CFC
stock went up during the day. The following chart shows the price action during the week:
On Thursday night, we talked about how Countrywide financial had so much debt that perhaps they are
worth a negative amount of money in a buyout. The stock did in fact go down on Friday because the buyout
price was less than the market had anticipated. Sometimes investors call this a "takeunder" rather than a
takeover, because the price is "under" the market price. This "takeunder" plus bad comments about
American Express and McDonald's cast a pall over the whole market, which lost badly on Friday.
We talked about Countrywide stock on Thursday night and how one might make money with puts. Here are
the January CALs on the left and the PUTs on the right. Prices are as of the close on Friday, Jan 11, 2008.
It turns out that one could have made money by shorting any calls or buying any puts except for the $2.5
and $5 strike price PUTs. Since I purchased the $5 PUT, I lost money.
If you look at the volumes, you will note that I was not alone. The following are the 2008 FEB options.
Again, the only losing choices were the $2.5 and $5 PUTs.
On Friday, those $5 FEB PUTs traded between a nickel and 55 cents, which tells you about the volatility
and uncertainty involved in the US financial markets at this point. Kyle sold his for 15 cents which turned
out to be a mistake. But who could have known in such a volatile market? The fact that they closed the day
at 35 cents shows the amount of doubt left in people’s minds that the deal will fall through. The total value
of CFC is the worth of their owning 23% of the mortgage business in the US plus their financial position
given their holdings. This latter part is a net negative, as we said Thursday night. Housing values are
continuing to fall and some people with prime mortgages established at peak California prices are now
under water in spite of having made a decent down payment.
To more clearly illustrate the market’s belief that CFC stock might still go to zero, note the CALs and PUTs
for January 2010:
The PUTs for JAN 2010 $2.5 strike price are exchanging hands at 50 cents. That should tell us something.
Now let us back up to January 2009:
The PUTs for JAN 2009 $5 strike price actually went up a nickel to $1 on Friday. Open interest is 83,112
which says a lot for my theory of CFC having a negative net worth. I even had the right strike price, just the
wrong year.
Energy
We also discussed energy.
For a summary on this, please see: Energy Summary and Energy Options Index
Follow-up notes
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