Last October, I began looking for ways to profit from the collapse in the housing market. My best idea -- posted in December -- was to short shares of NovaStar Financial (NYSE: NFI) which dropped from $116 to $7.19. This post got the attention of a reporter from NPR's MarketPlace who dropped by my office this week to interview me about where the next opportunities for short profits might lie.

My answer is that I don't know. That's because the hedge funds, endowments, pension funds, and insurance companies that buy the mortgage backed securities (MBS) constructed from the loans that NovaStar and its peers originate are not disclosing the value of their MBS holdings. To identify short selling opportunities, I'd like to know this information because many MBS holders will be wiped out.

AHM made $59 billion in loans last year, many of them with adjustable-rates. Many of the company's loans were to the middle part of the housing market and were no sub-prime mortgages.

Another lender, Accredited Home Lenders (NASDAQ: LEND), also showed signs of distress yesterday. After closing at $8.35 on Wednesday, shares fell as low as $3.98 Wednesday.

The mortgage lending fall-out is much likely to get much worse. While many of the problems with sub-prime mortgage problems have now been exposed, loans to more credit-worthy borrowers are likely to fall apart fairly fast.

A large number of adjustable-rate mortgages made in the last year will moved to higher, fixed rates over the next 24 months. Some consumers will not be able to make the larger payments. With home inventory rising and prices falling, they may also find it impossible to sell their homes, unless they want to take a large loss.

The mortgage troubles today may only be the beginning of a much uglier period.

Douglas A. McIntyre is a partner at 24/7 Wall St.com.

Rohm and Haas (NYSE:ROH) volatility stays elevated after reporting 2Q earnings of $161M. ROH operates five business segments: powder coatings, salt, electronic materials, performance materials and specialty materials that generated sales of $2.19 billion in the second quarter. ROH is recently up $.40 to $60.74. Goldman Sachs CO says "ROH continues to prove the benefit of its portfolio and geographic diversification as strength in Asia and Europe offset the weakness in the US. ROH August option implied volatility of 30 is above its 26-week average of 22 according to Track Data, suggesting larger price risks.

Daily Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

MOST NOTEWORTHY:

• Openwave Systems Inc (NASDAQ: OPWV) was downgraded to Underperform from Buy at Needham, as the firm no longer believes the company's assets and balance sheet are worth $11/share and expects the franchise to be again disrupted due to layoffs and asset sales. Openwave was also downgraded to Neutral from Overweight at JP Morgan, to Hold from Buy at Wedbush after no superior bid emerged to Harbinger's, and to Sector Underperformer from Outperformer at CIBC World Markets, which cited reduced prospects of a buyout.

• Trump Entertainment Resorts Inc (NASDAQ: TRMP) was downgraded to Underperform from Peer Perform at Bear Stearns citing valuation as upside from a takeout at current levels is remote.

• Accredited Home Lenders Holding Co (NASDAQ: LEND) was downgraded to Market Perform from Outperform at Keefe Bruyette & Woods following its acquisition by Lone Star for $400M.

• Bebe Stores Inc (NASDAQ: BEBE) was downgraded to Market Perform from Outperform at Friedman Billings citing new merchandise that lacks a significant casual component to drive business, tough comps, aggressively planned inventory levels for 2H, and the potential for sustained negative comps during the next few quarters.

• Friedman Billings also downgraded Aladdin Knowledge Systems Limited (NASDAQ: ALDN) to Market Perform from Outperform based on valuation and challenges in the U.S. market.

• General Mills Inc (NYSE: GIS) was downgraded to Peer Perform from outperform at Bear Stearns on valuation and concerns with the turnaround plan for Big G cereal division.

Maybe not.

There are brave hedge funds and private equity funds that are moving aggressively into the sector.

The latest deal: Lone Star Fund V L.P. has agreed to shell out $400 million for Accredited Home Lenders Holding (NASDAQ: LEND). Then again, the stock was about $50 a share about a year ago.

Over the past few months, I'm sure management at Accredited has had lots of sleepless nights. They've been able to snag $230 million in financing from hedge fund Farallon Capital Management. There was also a sale of $2.7 billion in loans.

On the news of the Lone Star buyout offer, Accredited's stock surged 9.88% to $15.12 per share. It's actually about two cents above the offer and is an indication that the Street thinks a higher bid may come to the table.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Morgan Stanley (NYSE:MS) April option implied volatility-Risk stays elevated into EPS.
MS operates its business through four segments: retail brokerage, asset management, institutional securities. Investors expect to hear more about MS plan to spin off its Discovery Card, a company with 50 million card members and four million merchant /cash access locations. MS is expected to report EPS of $1.88 on 3/21 according to Thomson First Call. MS April option implied volatility of 28 is above its 26-week average of 24 according to Track Data, suggesting larger price risk.

Motorola Inc. (NYSE:MOT) volatility and volume Spikes on canceled CEO speech, LBO and PALM chatter.
MOT is recently up $0.46 to $18.74 on LBO speculation. Carl Icahn entities own 1.39% of MOT. The Chicago Tribune reported MOT CEO Edward Zander canceled his keynote speech at the cell phone's industry annual U.S. trade show, CTIA Wireless. Chatter is also circulating that MOT could purchase Palm Inc. (NASDAQ:PALM). MOT call option volume of 35,471 contracts compares to put volume of 18,121 contracts. MOT April option implied volatility of 35 is above a level of 30 from 70-minutes ago. MOT average option implied volatility over the last 26-week average is 29 according to Track Data. Increasing option volume and implied volatility suggests larger price risk fluctuations.

Note: The Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

There are two reasons for thinking there might be opportunities here:

• Investment banking put - Investment banks are putting a floor under the stock price of many subprime lenders. For example, Goldman Sachs Group Inc. (NYSE: GS), Lehman Brothers Holdings, Inc. (NYSE: LEH) and Bear Stearns Companies, Inc. (NYSE: BSC) have all said they may commit more funds to subprime. Yesterday, Accredited Home Lenders Holding Co. (NYSE: LEND) added $3.39, or 56%, to $9.43, helped by apparent takeover speculation in the wake of its statement Tuesday that it would explore "strategic options." On the pink sheets, New Century Financial rose 68 cents to $1.35, more than doubling its share price from a day earlier. NovaStar Financial Inc. (NYSE: NFI) is also up 50% since it bottomed out at $3.43 on Tuesday.
• Picking the long term survivors - Not every industry participant will be wiped out. For example, Countrywide Financial Corp. (NYSE: CFC) -- which only has 7% of its loans in subprime -- added $376 million in cash for a total of $1.4 billion in 2006. Nevertheless, it is far from being out of the woods: it recently reported a rise in bad loans across the board -- i.e., payments were 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by CFC, up from 1.6% a year earlier and payments were late on 19% of subprime mortgage loans [subscription required], up from 15.2% at the end of 2005. If it reports worse than expected damage in future quarters, CFC will drop further, which could represent buying opportunities that lower an investor's cost basis. Despite the medium term pain of such a strategy, if CFC survives until the next housing upturn, investors will profit.

Volatility Index S&P 500 Options-VIX down 1.47 to 15.80

Chicago Mercantile Exchange Holdings, Inc. (NYSE:CME) - April option implied volatility increases on ICE offer for BOT.
CME is recently down $14.94 to $548.78. The ICE announced an offer to issue 1.42 shares for each BOT share. CME and BOT announced a merger on 10/17/06. CME is paying 0.3006 shares for each BOT share. Shareholder votes by CME and BOT shareholders are set for 4/4/07. Smith Barney says: "if the CME/BOT deal does not go through, investors could bid up NMX shares on speculation of a CME/NMX deal." SBSH has a Hold rating on CME. CME April option implied volatility of 31 is above its 26-week average of 29 according to Track Data, suggesting slightly larger risk.

NYSE Group Inc. (NYSE:NYX) call volume heavy on spreaders adjusting on evolving Fundamentals.
NYX is recently up $0.70 to $83.01. The ICE announced an offer to issue 1.42 shares for each BOT share. CME is paying 0.3006 shares for each BOT share. Shareholder votes by CME and BOT shareholders are set for 4/4/07. Smith Barney says "if the CME/BOT deal does not go through, investors could bid up NMX shares on speculation of a CME/NMX deal." NYX call option volume of 38,141 contracts compares to put volume of 10,864 contracts. NYX April option implied volatility is at 33, puts are at 43. NYX 26-week average option implied volatility is 40 according to Track Data. NYX puts are expensive because NYX is difficult to borrow.

Option volume leaders today were: Accredited Home Lenders Holding Co. (NYSE:LEND), NYSE Group Inc. (NYSE:NYX) and Apple Inc. (NASDAQ:APPL).

Volatility Index S&P 500 Options-VIX up 2.30 to 20.43

Sepracor Inc. -(NASDAQ:SEPR) option implied volatility stays low on FDA request for new warnings. SEPR markets Lunesta, a prescription sleep aid and Xopenex, a treatment to prevent bronchospasm. SEPR is down .67 to $48.15. Dow Jones reported "The FDA said Wednesday it's requesting new warnings on 13 drugs such as Ambien and Lunesta." Goldman says "important catalyst for this year include the launch of generic SNY-Ambien on April 21 (which could threaten Lunesta trends) and the initial CMS decision on Xopenex UDV Medicare reimbursement on June 20 (final decision in September)." Goldman has a $55 target on SEPR, down from $59. SEPR call option volume of 3,026 contracts compares to put volume of 9,348 contracts. SEPR April option implied volatility of 35, below its 26-week average of 42 according to Track Data, suggesting decreasing price fluctuations.

Accredited Home Lenders-(NASDAQ:LEND volatility-call volume spikes: LEND rallies on chatter. LEND is a mortgage company originating, financing, securitizing, servicing and selling non-prime mortgages. LEND is recently up $1.61 to $5.61 on unconfirmed M&A chatter. LEND call option volume of 52,058 contracts compares to put volume of 36,681 contracts. LEND April option implied volatility of 210 is above its 26-week average of 63 according to Track Data, suggesting large price fluctuations.

Option volume leaders today were: Accredited Home Lenders (NYSE:LEND), Citigroup (NYSE:C) & Apple (NASDAQ:APPL).