http://seekingalpha.com/article/974...a-light-at-the-end-of-the-tunnel?source=yahoo
Fannie Mae (FNM) and Freddie Mac (FRE) shares saw extreme volatility and heavy call volume Thursday. Shares of Freddie traded between $1.30 to $2.95 before settling the day down 3 cents to $1.86. In the options market, 115,000 calls and 21,000 puts traded on Freddie Thursday. Meanwhile, FNM traded between $1.09 and $2.76 before closing the day up 20 cents to $1.94. 131,000 FNM calls and 25,000 puts have traded on Fannie Mae.
At Thursdayâs closing prices, FRE is up 238 percent on the week. FNM is up 181 percent. The heavy call volume and big gains come as a surprise because the two companies were seized by the government and placed into a conservatorship earlier this month.
There are a few possible explanations for the bullish trading in both Freddie and Fannie. First, buying is being fueled by heavy short covering in both names after the exercise of puts at expiration resulted in many failure to delivers and many buy ins. The problems arose during the September options expiration due to the Securities and Exchange Commission ban on short selling, announced Friday morning before the options expiration, which resulted in a lack of stock to sell short to handle the assignment at options expiration.
Hopes for more government intervention seem to be playing a role as well. Senator Barney Frank said Wednesday that a government bailout of the two banks could hurt smaller banks by devaluing preferred FNM and FRE, perhaps raising hopes the government will take steps to protect their shareholders. Fannie Mae shares also rose Wednesday afternoon after it said it did not request money from the Treasurys borrowing facility.
Thursday, shares seemed to get a lift after Dow Jones Newswires reported that that the two GSEs might be included in the governmentâs toxic debt removal program. Finally, some investors seem to be betting that the two companies could eventually move out of conservatorship and, if so, common shareholder rights will be fully restored sooner than expected if the early results from the bailout plan prove to be working as policymakers hope.
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http://blogs.wsj.com/marketbeat/200...fannie-freddie-options-activity/?mod=yahoo_hs
News of the agreement for a $700 billion bailout pact for major financial institutions spurred a lot of jostling in options of the government-sponsored (or government-held) enterprises, Fannie Mae and Freddie Mac.
The pact, hammered out by lawmakers, had shares of the GSEs â already slated to be put in a conservatorship by the U.S. government â all over the map, as both companies traded in wide ranges throughout the session. As this happens, âeverybody begins to reevaluate the cost of these things, what the equity of these things are truly worth,â says Chris Rich, Newedge Group senior options strategist.
The volatility provided an opportunity for those engaging in certain options strategies to get active in the market. As stocks with low share prices, Fannie and Freddie are optimal for individual investors who want to engage in covered-call writing, a strategy that helps limit the downside for investors.
âIndividuals love these low-priced stocks,â says William Lefkowitz, chief options strategist at vFinance Investments. âIndividuals like to buy 5,000 or 10,000 shares of low-priced stocks â you canât buy 10,000 shares of Mastercard, Apple, or Google.â
For instance, shares of Fannie Mae were trading around $2. More than 31,000 October call options at the $2.50 strike changed hands, recently bid at about 60 cents each. So an investor can buy the shares at $2, write (that is, sell) the calls at 60 cents. As the investor collects that 60-cent price on the call, they reduce their cost â and potential loss â to $1.40.
If the stock goes up, and the option gets called, forcing that investor to sell their shares at $2.50, theyâve still made 60 cents on the call option and an additional 50 cents on the stock â thatâs a $1.10 return on a cost of $1.40. Furthermore, even if the shares donât move, the investor has still made money on the call option written. Similar action was evident in Freddie Mac options, where heavy trading was seen in October options at a $3 strike price.
Mr. Rich says some investors, in situations like this, will hold a $2 stock for several months while writing calls each successive month, eventually making back the cost of the stock through call-writing. âSome people spin it that way â theyâre getting a dividend and still own the stock,â he says.
Again, the greatest risk comes from the possibility of the stocks going to zero. But since the Treasury is not eliminating the common stock, that seems to be a low probability. In any case, that downside has been effectively mitigated.
*************************
Then you add:
* buyins
* lack of shorting to keep a lid on these prices
* momentum
* general delusion that the common is worth more than $1
Fannie Mae (FNM) and Freddie Mac (FRE) shares saw extreme volatility and heavy call volume Thursday. Shares of Freddie traded between $1.30 to $2.95 before settling the day down 3 cents to $1.86. In the options market, 115,000 calls and 21,000 puts traded on Freddie Thursday. Meanwhile, FNM traded between $1.09 and $2.76 before closing the day up 20 cents to $1.94. 131,000 FNM calls and 25,000 puts have traded on Fannie Mae.
At Thursdayâs closing prices, FRE is up 238 percent on the week. FNM is up 181 percent. The heavy call volume and big gains come as a surprise because the two companies were seized by the government and placed into a conservatorship earlier this month.
There are a few possible explanations for the bullish trading in both Freddie and Fannie. First, buying is being fueled by heavy short covering in both names after the exercise of puts at expiration resulted in many failure to delivers and many buy ins. The problems arose during the September options expiration due to the Securities and Exchange Commission ban on short selling, announced Friday morning before the options expiration, which resulted in a lack of stock to sell short to handle the assignment at options expiration.
Hopes for more government intervention seem to be playing a role as well. Senator Barney Frank said Wednesday that a government bailout of the two banks could hurt smaller banks by devaluing preferred FNM and FRE, perhaps raising hopes the government will take steps to protect their shareholders. Fannie Mae shares also rose Wednesday afternoon after it said it did not request money from the Treasurys borrowing facility.
Thursday, shares seemed to get a lift after Dow Jones Newswires reported that that the two GSEs might be included in the governmentâs toxic debt removal program. Finally, some investors seem to be betting that the two companies could eventually move out of conservatorship and, if so, common shareholder rights will be fully restored sooner than expected if the early results from the bailout plan prove to be working as policymakers hope.
*************************
http://blogs.wsj.com/marketbeat/200...fannie-freddie-options-activity/?mod=yahoo_hs
News of the agreement for a $700 billion bailout pact for major financial institutions spurred a lot of jostling in options of the government-sponsored (or government-held) enterprises, Fannie Mae and Freddie Mac.
The pact, hammered out by lawmakers, had shares of the GSEs â already slated to be put in a conservatorship by the U.S. government â all over the map, as both companies traded in wide ranges throughout the session. As this happens, âeverybody begins to reevaluate the cost of these things, what the equity of these things are truly worth,â says Chris Rich, Newedge Group senior options strategist.
The volatility provided an opportunity for those engaging in certain options strategies to get active in the market. As stocks with low share prices, Fannie and Freddie are optimal for individual investors who want to engage in covered-call writing, a strategy that helps limit the downside for investors.
âIndividuals love these low-priced stocks,â says William Lefkowitz, chief options strategist at vFinance Investments. âIndividuals like to buy 5,000 or 10,000 shares of low-priced stocks â you canât buy 10,000 shares of Mastercard, Apple, or Google.â
For instance, shares of Fannie Mae were trading around $2. More than 31,000 October call options at the $2.50 strike changed hands, recently bid at about 60 cents each. So an investor can buy the shares at $2, write (that is, sell) the calls at 60 cents. As the investor collects that 60-cent price on the call, they reduce their cost â and potential loss â to $1.40.
If the stock goes up, and the option gets called, forcing that investor to sell their shares at $2.50, theyâve still made 60 cents on the call option and an additional 50 cents on the stock â thatâs a $1.10 return on a cost of $1.40. Furthermore, even if the shares donât move, the investor has still made money on the call option written. Similar action was evident in Freddie Mac options, where heavy trading was seen in October options at a $3 strike price.
Mr. Rich says some investors, in situations like this, will hold a $2 stock for several months while writing calls each successive month, eventually making back the cost of the stock through call-writing. âSome people spin it that way â theyâre getting a dividend and still own the stock,â he says.
Again, the greatest risk comes from the possibility of the stocks going to zero. But since the Treasury is not eliminating the common stock, that seems to be a low probability. In any case, that downside has been effectively mitigated.
*************************
Then you add:
* buyins
* lack of shorting to keep a lid on these prices
* momentum
* general delusion that the common is worth more than $1