Originally posted by NDQnCA
did you ever get into the FNM/FRE position- i have been holding it, taking some heat, but i will NOT let the market and the sucker moves shake me out- in fact i have been making money trading the good moves (50-70 cents!!) to pay for holding the position (well, some of the cost) Its down to a 2 year low and the pair usually has a spread price of around 11 dollars. so, historically it is a very attractive buy with the very realistic probability of it reverting to the 11 average spread price. the only thing that concerns me is the worries about FNM and interest rate risk being higher than that for FRE- (the other worry is that MER is telling their clients to sell their FNM and buy into FRE- you can obviously see stronger buyers in FRE intraday than FNM- but you can make good money when FNM gaps up and prints it.) so FRE isn't getting whacked as hard as FNM- FNM makes crazy prints all day and has been hard to hold in a 1:1 ratio last week- i have switched from trading it 8 to 10 to 1:1 because if the market rebounds next week, which i feel we will get some upside retracement from the previous lows, then FNM will rebound more significantly to the upside than FRE. both stocks are in the EXACT same business and i don't think that FNM has significant risk over FRE- so it is stupid that people are selling FNM more heavily- i feel the pair will return to fair value and i've been holding it (3000 x 3000) when it reverts back to the historical mean, i will make a nice profit, but unitl then, i feel confident in holding it (3000 both) and also scalping the good moves on 1000 shares to make some decent gains. what are your thoughts (or anyone else) on this pair???
I have been trading FNM FRE on and off for a while. I always trade it in a ratio of 4 FNM for every 5 FRE, or 6:7. I always start with 400 and 500 shares respectively, and either take a profit intraday if it goes my way, or add to the position (in the same ratio) at key intervals if it doesn't go my way.
I too noticed FRE becoming way out of line with FNM and couldn't resist taking a position in FNM/FRE late on Wed the 18th. It didn't go my way initially as I expected, so I decided to add near the close and take it home. The next day, FNM gapped down and FRE was slightly up - I was down $1200 on the open, which for me is a little more then I am willing to risk on a pair trade. I didn't panic and managed the position the best I could to try to contain the damage, as I will do sometimes, if at the point of extreme pain, I step back and realize that if I were looking at this trade afresh, I may take it in the same direction as the direction that I am currently in. Well, I managed to recoup about $400 on the trade, but then I saw that when FNM started to go up, FRE would be right there with it. I got out because I do not like to be in pair trade where I lose money on one side of the trade when both stocks are going down, and at best break even or lose money when both stocks are going up [or vice versa] - to me and my time frame on these things, that is the definitive answer - you are in a bad pair.
The next day there was a terrific article in the WSJ about FNM and FRE. If you haven't already, I suggest you read it.
I commend you for the balls and conviction that you have in staying with this spread with the size that you did on it. In fact, as I look at FNM/FRE now, I would be looking to get in again real soon - just not here.
One last thing - I do not know what the ultimate answer to holding a pair is in relation to risk. For example, everything in my being says that this spread has to come back in line, but I feel that the risk of it staying away from par is just too great at this point. On the other hand, I know of an example where Bob Bright held MRK/LLY as it went against him, continued to add to it with the tenacity of a Bullmastiff until he was down $2,000,000 on the pair, only to make $4,000,000 in one day when LLY cratered - but only month(s) later. I do not have this kind of staying power or this much risk tolerance...
nitro
