Regular readers of the blog know that I always try and wait to buy options at least 30 minutes after the market opens. What normally happens is that the euphoria of the market can be so high over an event that it has a dramatic effect on stocks and options. The stock and options can become so inflated that you loose half of your investment.

It’s fine to get in a position and then get out based on your assumptions but once they have reached their maximum potential, trading in that particular stock can pose even more risk. Last week, we were in-and-out of the Fannie Mae (FNM, $10.22, down $0.03) and Freddie Mac (FRE, $7.61, down $0.14) trades and I mentioned it’s okay to take one day gains off the table. Both are now too risky to take any trades because they will fluctuate even more as investors try and figure out how much each is really worth.

The Fannie July 10 calls (NJWGJ, $1.75, down $0.70) closed at $2.45 on Friday and opened this morning at $3.90. They traded as high as $4.80 when the stock hit a high of $13.50 but look at them now just two hours after the open.

Freddie’s July 10 calls (FREGB, $0.35, down $0.45) closed at 80 cents on Friday. They hit a high of $1.50 when the stock traded to $9.80 earlier this morning. If you had bought at the open you would have paid $1.00 and while it’s true you could have made money, you would have had to watch the position all morning. Some people don’t have this luxury. If they are still holding they are now down 65%.

We did the right thing by getting out and some people will continue to trade these options right up until expiration. We won’t, at least not with the July options. These have been nice trades but always remember there will be others with much safer entry’s.

Rick Rouse
Rick@OptionsMentoring.com