Tuesday, August 11, 2009

Options Update: Freddie Mac Short Strangled (FRE, FNM)

From Schaeffer's Research:

Shares of mortgage finance specialist Freddie Mac (FRE) have rallied sharply during the past several sessions, with the stock's surge higher fueled by the company's better-than-expected quarterly profit and its statement that it will not have to request additional financial assistance from the U.S. government. In the wake of the report, at least one options trader is betting that the shares are about to enter a trading range for the short term. The equity saw heavy activity at its August 1 put and August 3 call earlier today, with more than 3,600 contracts crossing the tape at both strikes.

Rummaging through the activity, I found that four blocks, totaling 1,300 contracts, traded on FRE's August 1 put between 9:44 a.m. and 9:48 a.m. Eastern time on the Chicago Board Options Exchange (CBOE) for the bid price of $0.05. Simultaneously, four blocks, totaling 1,300 contracts, of August 3 calls crossed the tape at the same time on the same exchange for the bid price of $0.05. Given this data, it would appear that we are looking at a short strangle position on Freddie Mac.

FRE Aug. 1 put and Aug. 3 call volume details

While a long strangle anticipates a sharp move in the underlying stock beyond the purchased strikes, a short strangle is a strategy that requires the equity to remain pinned between the two sold strikes. Basically, a short strangle is a bet that the security will enter a trading range, thus allowing the sold options to expire worthless, and the trader to retain the entire premium received upon entering....MORE