When there’s smoke that usually means fire and that was my theme for Fannie Mae (FNM, $7.39, down $5.81) and Freddie Mac (FRE, $4.23, down $3.77) yesterday. Today’s headline is courtesy of the deep sell-off that both stocks are experiencing this morning.

This latest debacle stems from the growing concerns the government would have to bail out both mortgage companies. Yesterday the two companies came under fire on remarks that they were “insolvent” and may need a government bailout. Treasury Secretary Henry Paulson just spoke and said the government is not planning an imminent bailout of Fannie or Freddie.

I profiled the Fannie Mae July 13 puts (NJWSO, $6.00, up $4.63) at $1.90 yesterday and I sure hope you guys were on that like grass on dirt as they are up are up 200% in one-day. The August 10 puts (NJWTJ, $5.00, up $3.20) are up 150% from yesterday’s $2.00 entry price.

As for Freddie, the July 10 puts (FRESB, $6.00, up $3.40) were profiled at $2.75. The August 5 puts (FRETA, $2.40, up $1.45) were a steal a $1.00 and they are up a solid 140%. It would be wise to take these quick one-day gains off the table but you could sell half of three-quarters of your position and let the rest ride.

Rick Rouse
Rick@OptionsMentoring.com