Fannie and Freddie Continue Surge

Fannie Mae (FNM, $6.48, up $0.86) and Freddie Mac (FRE, $4.75, up $0.78) each gained 15% and 20%, respectively, on Wednesday. After the closing bell, Fannie Mae restructured its management team as traders continue to ride the massive price swings of both stocks. This week alone, Fannie shares are up 30% while Freddie’s stock has zoomed nearly 70%.

The catalyst today were the comments out of Merrill Lynch saying the companies may not need to raise additional capital to stay within levels mandated by regulators. The fact that Freddie was able to sell $2 billion in notes on Monday and Fannie was able to do the same on Wednesday was seen as a positive.

The girations these stocks are making is incredible and there are a lot of people making money from the volatility of both stocks. We’re one of them. The Fannie May January 5 calls (NJWAA, $3.30, up $0.55) were profiled at $2.40 and are up 38%. The Freddie Mac January 5 calls (FREAA, $1.70, up $0.35) were mentioned at $1.20 and are now up over 40% with yesterday’s 22% gain.

There’s also an interesting debate going around that maybe the two companies should merge. I’m not sure how feasable that would be but it doesn’t look the goverment is going to bail either of these companies out anytime soon. In the meantime, I still think we will have more opportunities to keep playing both stocks. Keep an eye on your exit points for the current trade and make sure you are out by Friday either way.

Rick Rouse
Rick@OptionsMentoring.com

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