8/28/08

Out of Fannie Mae

I bought some Fannie Mae (FNM) calls ten days ago. I just sold them for a 35.71% profit. They might go higher, but the original plan was for Fannie to be between $7 and $8 a share. It did that this morning. I put a stop limit at $0.95 when the calls traded for $1. I got stopped out at $0.95 shortly thereafter.

Lessons learned:

1. Don't jump into the trade right away. I should have waited a bit. For two days after I bought, FNM went down by double digit percentages. I could have bought the same calls at $0.50 or even $0.45 instead of $0.70.

2. Closer to the money calls would probably be a better idea. I bought the $0.70 calls (Dec '08 12 strike) because they traded below the 13 strike (that was rather strange) and because I didn't want to lose much if they ended up going to zero. In retrospect, I probably should have bought fewer calls at the 6 or 7 strike. I'd probably save on commissions.

Overall, though, I'm happy with my little gamble. Thank you Barron's for the scary article that'll probably turn out correct in the next couple of months. I wouldn't be surprised, though, if a government bailout rescues FNM and FRE shareholders. This country has always had a socialize the losses policy for "too large to fail" institutions.

Update: The December '08 12 call closed at $1.49. My 35.7% gain is pretty good, but had I waited a while longer, I'd have doubled my money. Oh well. There will be other opportunities for gambling. If FNM goes over 10, I'm going to see about buying puts.