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Tuesday, August 26th, 2008
A week ago, we scaled into a few positions in the financial stocks hoping for a quick rebound. In the 8/20 blog I talked about how some of the mid to major financial stocks were getting at their 52-week lows and we could play a quick bounce to the upside.
The danger with trading some of these stocks is that if those 52-week lows are broken they could head even lower. However, we have a pretty good grasp of what’s going on out in the market place and we can now turn our attention to taking some more profits off of the table.
We already closed the Lehman Brothers (LEH, $13.78, up $0.35) trade for a 70% profit in two days and like a tide that lifts all ships, today’s rally has taken our other positions into positive territory as we head to lunch and halfway through the trading session. Fannie Mae (FNM, $5.82, up $0.63) and Freddie Mac (FRE, $4.01, up $0.72) are having another big day, up 11% and 20%, respectively. Here’s our bounce so let’s take advantage of it.
The Fannie May January 5 calls (NJWAA, $3.20, up $0.50) were profiled at $2.40 and are up 33%. The Freddie Mac January 5 calls (FREAA, $1.35, up $0.35) were spotted at $1.20 and are up a little over 10%.
The other two trades we looked at involved Citigroup (C, $17.90, up $0.29) and Wachovia (WB, $14.12, up $0.20).
The Citigroup January 20 calls (CAD, $1.60, up $0.10) were at $1.37 and are showing about a 20% gain. The Wachovia January 15 calls (WBAC, $3.00, up $0.10) are trading exactly where they were profiled at.
How you manage your profits from here is up to you but they should all be closed before Friday regardless of where they are trading at. If you continue to see gains, great. But don’t press your luck with the long holiday weekend coming. The market never dances with the same partner and the risks are too great to expect much more from these plays.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Lahman Brothers
Posted in Company Commentary, Hot Stocks, Market Analysis | No Comments »
Thursday, August 21st, 2008
Yesterday I mentioned that I couldn’t find a compelling reason to go long on Fannie Mae (FNM, $4.40, down $1.61) and Freddie Mac (FRE, $3.20, down $0.92) although the payoff could be huge. The problem was the risk. Even though the long call options were cheap, the fact that bankruptcy is now a much more realization than most people thought makes the trade impossible to go long right now.
An article over the weekend in Barron’s is what got the snowball rolling and it is quickly morphing into an avalanche for these two companies. Sure, there will be some crazy gyrations as any good news might breathe a little life into the shares, but the bankruptcy writing is on the wall.
The more we see this play out the more it looks as though the government will step in and bailout the two firms. The government could issue preferred stock which would wipe out the shareholders of common stock.
Some of you have written to me asking about buying puts for Fannie and Fannie. Sure, that strategy might payoff but both stocks are trading for under $5 so your gains are going to be limited if both go bankrupt. Others have written asking if a company goes bankrupt what would happen to the options? Don’t worry, you will still be able to close out your option positions before the stock is “delisted.” If a company declares bankruptcy, the stock will still trade on the exchanges, if it declares Chapter 11.
The Nasdaq and the New York Stock Exchange may “delist” a company that is in serious financial trouble and/or no longer meets their minimum listing requirements, but if the company is still doing business it can trade “over the counter.” However, if it’s a Chapter 7 bankruptcy, you time frame for getting rid of the stock or option will be much shorter.
Six months from now we will have a clearer picture for Fannie and Freddie but for now I think it’s best to take a “neutral” position on both companies and any trades up or down, calls or puts, should be played with limited time frames.
Rick Rouse
Rick@OptionsMentoring.com
Tags: bankrupt stocks, Fannie Mae, Freddie Mac
Posted in Company Commentary | No Comments »
Wednesday, August 20th, 2008
The ride for the financial stocks has accelerated to the downside over the past few weeks and some big names are trading near 52-week lows again. We all know that there are some trading opportunities that come with these names and we have played them both ways.
The option gains have ranged anywhere from 50%-100% and we have used both calls and puts. I’m not sure if it’s time to go long again but here’s what we’re watching:
Citigroup (C, $17.13, down $0.06) hit a high of $20.50 a week ago and is down 15%. The January 20 calls (CAD, $1.37, down $0.12) were profiled at $1.25 and sold at $2.60 the first time around. Let’s target an entry price of $1.25 again.
Merrill Lynch (MER, $23.65, down $0.15) has been good to us on the long side so far but it remains a question mark if we can go long again on this company. We made a 50% profit buying the January 35 calls (MERAG, $0.87, down $0.06) at $1.90 and got out in the $2.65-$2.75 range. There’s no way I’d get back into these particular calls but I’m feeling like Merrill has more skeletons in the clost. The January 25 calls (MOJAE, $3.55, down $0.05) look expensive to me and Merrill looks like it’s wants to go below $20.
A week ago, Fannie Mae (FNM, $5.02, down $0.98) was at $9 and Freddie Mac (FRE, $3.44, down $0.73) was at $6. These two have been the headline makers again and have dropped roughly 50% on renewed concerns of a government bailout. The option activity is insane for Fannie and Freddie and the jury is still out on wheather or not they survive. The Fannie May January 5 calls (NJWAA, $2.40, down $0.60) would be a monster trade if Fannie can get back to $10. The Freddie Mac January 5 calls (FREAA, $1.20, down $0.15) would double if Freddie trades up to $7.50. That is a big “if” for both of these trades.
Wachovia (WB, $13.99, down $0.31) is back below $15 and we made a 50% profit on the January 15 calls (WBAC, $3.00, down $0.30) at lower levels. Out of all of the financials, I like Wachovia the best and still think it will be the first to go as far as an acquisition target. If Wachovia can back to $20 these calls could double.
There are plenty more brand names out there to trade in the financials. Lehman Brothers (LEH, $12.60, down $0.47) looks cheap down at these levels. The January 20 calls (LYHAD, $1.40, down $0.15) look mouth-watering. I’d buy them here and try to sell them at $2.00 for a quick 40% profit.
Pick your entry points for these plays carefully and set stops early on any gains.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Merrill Lynch
Posted in Company Commentary, Sectors | No Comments »
Thursday, July 10th, 2008
Fannie Mae (FNM, $13.49, down $1.82) and Freddie Mac (FRE, $7.64, down $2.59) are having a tough week as concerns about the two needing a government bailout have come to a head. The outlook is so bleak for both companies that Capitol Hill is meeting today to discuss contingency plans should they be unable to raise funds.
Both companies are government-sponsored enterprises but they are expected to need billions of dollars in capital to support their balance sheets. And it’s not going to come in the open market. While Fannie and Freddie had some luck in raising $20 billion last year, the instability in their stock prices will cause investors to run for the hills this time around.
There is simply no support in the financials right now and the other shoe is falling as we speak. Fannie started the week off at $18.76 and is down from a 52-week high of $70. The July 13 puts (NJWSO, $1.90, up $1.25) are up 190% today as bears take positions looking for a drop below $10. The August 10 puts (NJWTJ, $2.00, up $1.15) are up 135% and are the most active in the August put chain.
Freddie started the week off at $14.53 and has been hit the hardest of the two. Its 52-week high is $67. The July 10 puts (FRESB, $2.75, up $1.50) are up 140% and are the most active of the July puts as 16,000 contracts have traded so far. The August 5 puts (FRETA, $1.00, up $0.45) are up 82% as open interest continues to climb.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Fannie Mae, Freddie Mac, Government bailout
Posted in Company Commentary | No Comments »
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Financial Stocks Rally
Tuesday, August 26th, 2008
A week ago, we scaled into a few positions in the financial stocks hoping for a quick rebound. In the 8/20 blog I talked about how some of the mid to major financial stocks were getting at their 52-week lows and we could play a quick bounce to the upside.
The danger with trading some of these stocks is that if those 52-week lows are broken they could head even lower. However, we have a pretty good grasp of what’s going on out in the market place and we can now turn our attention to taking some more profits off of the table.
We already closed the Lehman Brothers (LEH, $13.78, up $0.35) trade for a 70% profit in two days and like a tide that lifts all ships, today’s rally has taken our other positions into positive territory as we head to lunch and halfway through the trading session. Fannie Mae (FNM, $5.82, up $0.63) and Freddie Mac (FRE, $4.01, up $0.72) are having another big day, up 11% and 20%, respectively. Here’s our bounce so let’s take advantage of it.
The Fannie May January 5 calls (NJWAA, $3.20, up $0.50) were profiled at $2.40 and are up 33%. The Freddie Mac January 5 calls (FREAA, $1.35, up $0.35) were spotted at $1.20 and are up a little over 10%.
The other two trades we looked at involved Citigroup (C, $17.90, up $0.29) and Wachovia (WB, $14.12, up $0.20).
The Citigroup January 20 calls (CAD, $1.60, up $0.10) were at $1.37 and are showing about a 20% gain. The Wachovia January 15 calls (WBAC, $3.00, up $0.10) are trading exactly where they were profiled at.
How you manage your profits from here is up to you but they should all be closed before Friday regardless of where they are trading at. If you continue to see gains, great. But don’t press your luck with the long holiday weekend coming. The market never dances with the same partner and the risks are too great to expect much more from these plays.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, Fannie Mae, Freddie Mac, Lahman Brothers
Posted in Company Commentary, Hot Stocks, Market Analysis | No Comments »