Fannie and Freddie Spell F-I-R-E!

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

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