Washington Mutual (WM) problems are getting worse


WM logoWashington Mutual Inc. (NYSE: WM) stock hit a new 52-week low today after the company said that the U.S. housing slump will persist through 2008. WM expects to set aside $1.1 billion to $1.3 billion this quarter for credit losses, and a similar amount or slightly more in the first quarter of 2008. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on WM.

After hitting a one-year high of $46.38 in December, the stock made a new one-year low today. This morning, WM opened at $23.46. So far today the stock has hit a low of $21.87 and a high of $23.46. As of 11:15, WM is trading at $22.00, down $2.23 (-9.4%). The chart for WM looks bearish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.


For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make an 8.7% return in 3 months as long as WM is below $30 at January expiration. WaMu would have to rise by more than 46% before we would start to lose money.

WM has been above $30 as recently as a few weeks ago, but has been plummeting recently and has shown resistance around $30. This trade could be risky if the Fed cuts take hold and "save WM" as some experts are predicting, but even if that happens, this position could be protected by strong negative feelings surrounding this portion of the markets.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent controls a long position in WM.

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Last updated: February 13, 2012: 06:57 AM

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