Whipsaw World

November 17, 2010

In a few minutes the CEO of Human Genome Sciences (HGSI) will be on CNBC.

In the “good old days” that would be worth a half a point bump up in price.  But an FDA positive recommendation from the review panel on a drug for a disease with no effective treatment usually is good for several points at least.  Today the stock already traded down by more than 10% at its low.

To me, with my short strangle in November options, I got out of the options positions profitably (in every position), though not with perfect timing.  I also legged into a short $25 straddle for December, again with less than optimal timing.

Still, with over $4 per share in option premium taken in, with the really big binary question (mostly) answered, and the stock seeming to stabilize between $25 and $26, the volatility sale still makes sense.  As before, I am biased long, with holdings in the underlying stock, and a ratio straddle on in the options.

Between last night’s after hours optimism that took the stock up to $28 to $29, and today’s premarket short seller onslaught that took it down below $22, it does look like the stock will stabilize and these options premiums will decay away nicely.  The liquidated November options positions gave me over $5 per share in profits vs. my long stock position, so when I add in the $4+ in December option premiums, I can now look at this whole adventure as being profitable anywhere from $15 to $35 per share, and resolved in just 30 days.



And Then There Were None

November 17, 2010

Jody Shenn has an interesting article out this morning that shows how the monster banks are cranking up the pressure on independent mortgage brokers.

The article tells us how Wells Fargo and BankAmerica have increased the minimum FICO score for FHA loans they buy wholesale from other lenders.  What’s interesting, I think, is the fact that they haven’t raised the minimum FICO score for lending by their own loan officers.

The difference is dramatic.  In-house lending for FHA guarantee loans carries a 600 FICO minimum at these banks.  With this change, WFC and BAC join JPM, which already had a 640 FICO floor for third party origination.

How does this compare with lending before the crisis?

According to the article, before 2008, a whopping half of FHA’s new loans either had FICO scores below 620 (popular cutoff for “subprime”) or no scores at all.  Today, just 3.8% of FHA loans fall into that category.  In other words, FHA already tightened credit standards substantially.

The “layering” of another 20 FICO points by these three big banks basically cuts 15% off the independents’ volume.  If you happen to be one of those 6.8 million people with a credit score between 620 and 640, you won’t be able to get a loan funded by Wells Fargo unless you’re talking to Wells directly (or Chase, or BankAmerica).

The big get bigger.