Shorting Sub-Prime Credit Card Vendor CompuCredit

The Trade:

04/09/2008
+ 1 CCRT July 08 7.5 Put @ $1.43
-$143

04/10/2008
+1 CCRT July 08 7.5 Put @ $1.58
-$158

These two purchases average out to:

+2 CCRT July 08 7.5 Put @ 1.50
- $301

UNREALIZED PAPER PROFITS:
As of 04/24/2008

2 CCRT July 08 7.5 Put @ 1.65
+ $29 (9.63%)

I still have 85 days till expiration and I believe I will be able to lock some decent profits (+20%) in the near future.

I have plenty of time to claim a realized gain (3 Months). Currently my position is up, the contracts are selling for $1.65 as of (03.24.2008 Premarket). The stock is at 7.42, so I'm already in the money. I learned many things with this option, which I will be discussing. In addition, I believe that I should hold on to these contracts longer in order to lock up a realized gain because of the following:

1) CCRT is a player in the Sub-Prime lending fiasco. Their main business is distributing credit cards to Sub-Prime individuals. Their 52 week range is 38.57 - 7.02. That being said, 7.50 is not the lower bound, and I have left myself plenty of time to be well into the money. Currently the market is actually making some positive moves, but CCRT is still in a slump. With a BETA of 1.34, when the market hits a bearish dip (caused by some overreaction to earnings, news, oil prices, or simply 'cause traders are bored and can't find anything worthy to buy in the current marketplace), CCRT will tank even harder. This will be followed by more analyst downgrades, which will add to the downward momentum.

2) It was downgraded on February and March by Credit Suisse and Jeffries, respectively. Yet, the rating is still "Hold" and "Neutral" by both these firms. This tells me that they still haven't admitted that this stock was a huge dud and that they goofed up big time. Interesting to note that these downgrades changed their opinion from a "Buy" and "Outperform", after the stock went from some ~38 highs to ~7 lows within a year. I can't wait to see what these analysts think about this company, their insight is so valuable...

3) Although my original notion was correct, it is much harder getting large profits with this stock's option. Why? Major reason, I think, is that it has a 351 Million market cap, which puts it in the small cap category. Consequently, CCRT options aren't traded that heavily and have relatively low open interest (number of contracts actually on the market). This makes it a not so liquid option, thus causing the spread between the bid and the ask to be very high. For example, as the current stock price is 7.42, the July 08 7.50 Put Option has a Bid of 1.90 and an Ask of 1.65. That means that you are facing a 13.15% loss as soon as you purchase the option because of the spread. Also, the delta is very low, so it requires a large change in the stock price for a gain in the option price.

Finally, as I stated before I am waiting for a down day in the market where financial are hit hard. I believe this will cause CCRT, a sub-prime credit card company (wow, talk about the wrong business to be in right now), to reach new 52 week lows, cause a spike the volatility, hopefully gain open interest, and will be my selling point for my puts. The trend wasn't hard to find, it had just crossed its 50 day moving average early March.