Washington Mutual (WM) problems are getting worse

Posted Nov 7th 2007 1:16PM by Brent Archer
Filed under: Major Movement, Bad News, Washington Mutual (WM), Options, Technical Analysis, Economic Data, Housing, Federal Reserve

Washington 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.

Tags: housing, inthenews, options, Washington Mutual, WashingtonMutual, WM

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Reader Comments (Page 1 of 1)

11-07-2007 @ 4:25PM

MIKE WELCH said...

PLEASE DON'T THROW THE BABY OUT WITH THE BATH WATER? THIS HEDGE WILL BE SOME WHAT PROTECTED BY THE FEDERAL RESERVE. THEY HAVE PLENTY OF CASH TO KEEP THEM SOLVENT THROUGHOUT MANY A MONTH.WE SEEM TO FORGET THEY STILL HAVE'NT CUT THEIR DIVDEND! DARN GOOD TIME TO BUY THIS STOCK IF WE ARE NEAR A BOTTOM? BUT THEY ARE LOOKING FORWARD INTO NEXT YEAR FOR IT IS POSSIBLE THAT THE DECK ISN'T CLEAN AS OF YET. THE STOCK HAS TAKEN A BEATING AND DOESN'T DESERVE IT!

11-07-2007 @ 6:31PM

Jim Pascale said...

It's about time the stupidity of this bank cratered its stock price. I spent 45 minutes waiting to refinance my home (I have an 803 experian credit score) and the Wamu "lobby guy" tells me that he cannot help me with this--says I have to go to another branch across town specializing in refinancing...

Meanwhile he's continuing to spend about 40 minutes with a new customer who is debating whether she can afford 5 or 10 a month in her xmas club account...

Yep, I should have shorted the stock with my refinance proceeds that I got from a real bank-- Wells Fargo. Wamu looks good at 1.75 per share.

11-07-2007 @ 8:52PM

GIMPEL said...

I wouldn't go near WM until the dividend is cut. I'd buy when share price is yielding 8% on the adjusted dividend and hold for the long term.

M.H. ISRAEL

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