The Dow pretty much gave back all of its 290 point gain on Monday with yesterday’s 280 point drubbing. The market was nervous after it was reported that Lehman Brothers (LEH, $7.79, down $6.36) had failed to attract a buyer for some or all of its assets and it only got worse with the sell-off in Energy stocks. The Dow made it into positive territory shortly after the open but was back in the red within the first hour of trading. The decline picked-up pace in the final hour and when it was all said and done, all three major indexes lost well over 2%.

The Dow finished Tuesday’s session at 11,230. The Nasdaq fell 60 points, or 2.6%, and ended at 2,209. The S&P 500 took a 3.4% pounding, dropping 43 points to close at 1,224. I said Monday morning before the market opened and the futures were up big-time that although we were headed for a huge rally, it appears traders are selling into them. That was confirmed once again yesterday.

Another point is that we all know triple-digit gains are pretty much the norm these days but have you noticed that we are now getting 200 and 300-point up and down days on the Dow. It’s almost gone unnoticed by the general public because everyone seems to be scared of the market or is not interested.

The fact that the market rallied on the Fannie Mae (FNM, $0.99, up $0.26) and Freddie Mac (FRE, $0.88, unchanged) bailout was our rally but it doesn’t set a good example. Without getting long in the tooth, who’s next? Will it be Lehman? Or will it be Ford Motor (F, $4.40, down $0.15) or General Motors (GM, $10.76, down $0.07)? I could care less about Lehman but why not grab the bull by the horns and give Ford and GM the incentive or cash to bring hybrid cars to the market quicker? The point is “the market can remain irrational longer than you can remain rational.”

Keep this in mind and don’t get too comfortable with any trades. The market could be setting up for an explosion to the upside or an implosion to the downside. Don’t forget we are historically in a lousy couple of months for the market (September and October) and something has to give. The VIX (VIX, 25.47, up 2.83) is heading towards 30 which could be when the bulls make their stand (or their last stand). I’ll talk more about the VIX over the next few days.

Rick Rouse
Rick@OptionsMentoring.com

Fannie Mae (FNM, $0.73, down $6.31) and Freddie Mac (FRE, $0.88, down $4.22) did their best Enron imitation on Monday as both stocks plunged to under a dollar. Sure, the government bailout was huge for the market but check out the true winners from yesterday. The Fannie Mae September 2.50 puts (NJWUB, $1.80, up $1.75) were going for a nickle on Friday and they were up a mind-boggling 3,500%. The Freddie Mac September 3 puts (FREUF, $2.20, up $2.05) were up 1,367%. Crazy.

Now that I have you back on Earth, in other news…Citigroup (C, $20.32, up $1.25) and Wachovia (WB, $18.99, up $2.24) both had a pretty decent day. The Citigroup January 20 calls (CAD, $2.57, up $0.47) hit a high of $3.00 which gave many of you a double on the other half of the open trade. These calls were profiled at $1.37 and we got a 50% return on the first half of our position and now a 100% return. The baby should have been put to bed yesterday as this option trade is now closed.

The Wachovia January 15 calls (WBAC, $6.00) also doubled from our entry price of $3.00. We closed half at $3.80 on 8/29 and the other half should have also been closed yesterday. The calls traded as high as $6.50 and I hated to close this one out. For the 2,347th time, Wachovia is my dark horse to get bought out. Let’s watch the January 20 calls (WBAD, $3.00, up $1.00) and see if they can come back to $2.

Research in Motion (RIMM, $102.67, down $4.28) had a little bounce after yesterday’s afternoon blog, gaining about $2 but still finishing lower for the day. We did the 2-for-1 special, buying two October 120 calls (RULJD, $3.65, down $0.95) for every one October 80 put (RFYVP, $2.07, up $0.87). The calls were at $3.22 so we gained 40 cents. The puts also traded higher from our entry price of $1.82 as the premiums got some extra juice due to volatility.

We are targeting $5.50-$6.00 for the calls and the puts we will have to play it by ear. We don’t want to sell them too early in case RIMM breaks down from here. Keep checking back throughout the day for more updates.

Rick Rouse
Rick@OptionsMentoring.com

It’s official. It what was the worst kept secret on Wall Street Friday after the market closed, the government finally bailed out beleaguered mortgage giants Fannie Mae (FNM, $7.04, up $0.62) and Freddie Mac (FRE, $5.10, up $0.15) on Sunday in a move that came much sooner than anyone anticipated. The government’s seizure of Fannie and Freddie could cost U.S. taxpayers nothing or it could cost us $200 billion.

As far as the stock for both companies, the common and preferred shares will still trade but the dividends have been suspended. The shares for both Fannie and Freddie will still trade but both stocks are likely headed below $5. We can expect a ton of class action lawsuits but the move was done to help the U.S. housing market and stabilize the market.

Fannie and Freddie own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt and the news is great for would-be homebuyers and homeowners looking to refinance. Mortgage rates are expected to drop from 6.35% to under 5.5% or lower which should attract more potential buyers into the market and hopefully stabilize housing prices. There will be many if’s ,and’s or but’s from here on out and this doesn’t mean we are in for smooth sailing.

What it does mean for us though is that there won’t be anymore option trades on these two companies coming from this corner. I look for the market to have a pretty decent rally on Monday but it remains to be seen if it will be able to hold onto any gains that may come from them. “Relief” rallies are nice but they often fade quickly.

Fannie Mae was down 22%, or $1.54, to $5.50 in after-hours trading on Friday. Freddie Mac lost $1.06, or 21%, and ended at $4.04.

Rick Rouse
Rick@OptionsMentoring.com

The market has just opened and the financial stocks look like they will be trading lower. I’ve been mentioning four trades that we have going and how they should be closed today. If you still believe these stocks may go higher then you could sell half of your positions and hold onto the rest.

The four trades we looked at involved Citigroup (C, $18.86, down $0.22), Wachovia (WB, $15.67, down $0.32), Fannie Mae (FNM, $7.38, down $0.57) and Freddie Mac (FRE, $4.82, down $0.46)

The Citigroup January 20 calls (CAD, $1.95, down $0.10) were at $1.37 and had posted gains of 50% before this morning’s slight decline. The Wachovia January 15 calls (WBAC, $3.80, down $0.20) were recommended at $3.00 and should do well as Wachovia remains a buyout candidate.

The Fannie May January 5 calls (NJWAA, $4.00, down $0.10) were profiled at $2.40 and are have posted gains of 70%+. The Freddie Mac January 5 calls (FREAA, $1.85, down $0.15) were profiled at $1.20 and are showing a 50% gain.

Again, I’d close half of each position ahead of the holiday weekend. The market is closed on Monday so I’ll be back Tuesday with some fresh ideas.

Rick Rouse
Rick@OptionsMentoring.com

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

A week ago, we scaled into a few positions in the financial stocks hoping for a quick rebound. In the 8/20 blog I talked about how some of the mid to major financial stocks were getting at their 52-week lows and we could play a quick bounce to the upside.

The danger with trading some of these stocks is that if those 52-week lows are broken they could head even lower. However, we have a pretty good grasp of what’s going on out in the market place and we can now turn our attention to taking some more profits off of the table.

We already closed the Lehman Brothers (LEH, $13.78, up $0.35) trade for a 70% profit in two days and like a tide that lifts all ships, today’s rally has taken our other positions into positive territory as we head to lunch and halfway through the trading session. Fannie Mae (FNM, $5.82, up $0.63) and Freddie Mac (FRE, $4.01, up $0.72) are having another big day, up 11% and 20%, respectively. Here’s our bounce so let’s take advantage of it.

The Fannie May January 5 calls (NJWAA, $3.20, up $0.50) were profiled at $2.40 and are up 33%. The Freddie Mac January 5 calls (FREAA, $1.35, up $0.35) were spotted at $1.20 and are up a little over 10%.

The other two trades we looked at involved Citigroup (C, $17.90, up $0.29) and Wachovia (WB, $14.12, up $0.20).

The Citigroup January 20 calls (CAD, $1.60, up $0.10) were at $1.37 and are showing about a 20% gain. The Wachovia January 15 calls (WBAC, $3.00, up $0.10) are trading exactly where they were profiled at.

How you manage your profits from here is up to you but they should all be closed before Friday regardless of where they are trading at. If you continue to see gains, great. But don’t press your luck with the long holiday weekend coming. The market never dances with the same partner and the risks are too great to expect much more from these plays.

Rick Rouse
Rick@OptionsMentoring.com

Yesterday I mentioned that I couldn’t find a compelling reason to go long on Fannie Mae (FNM, $4.40, down $1.61) and Freddie Mac (FRE, $3.20, down $0.92) although the payoff could be huge. The problem was the risk. Even though the long call options were cheap, the fact that bankruptcy is now a much more realization than most people thought makes the trade impossible to go long right now.

An article over the weekend in Barron’s is what got the snowball rolling and it is quickly morphing into an avalanche for these two companies. Sure, there will be some crazy gyrations as any good news might breathe a little life into the shares, but the bankruptcy writing is on the wall.

The more we see this play out the more it looks as though the government will step in and bailout the two firms. The government could issue preferred stock which would wipe out the shareholders of common stock.

Some of you have written to me asking about buying puts for Fannie and Fannie. Sure, that strategy might payoff but both stocks are trading for under $5 so your gains are going to be limited if both go bankrupt. Others have written asking if a company goes bankrupt what would happen to the options? Don’t worry, you will still be able to close out your option positions before the stock is “delisted.” If a company declares bankruptcy, the stock will still trade on the exchanges, if it declares Chapter 11.

The Nasdaq and the New York Stock Exchange may “delist” a company that is in serious financial trouble and/or no longer meets their minimum listing requirements, but if the company is still doing business it can trade “over the counter.” However, if it’s a Chapter 7 bankruptcy, you time frame for getting rid of the stock or option will be much shorter.

Six months from now we will have a clearer picture for Fannie and Freddie but for now I think it’s best to take a “neutral” position on both companies and any trades up or down, calls or puts, should be played with limited time frames.

Rick Rouse
Rick@OptionsMentoring.com

The ride for the financial stocks has accelerated to the downside over the past few weeks and some big names are trading near 52-week lows again. We all know that there are some trading opportunities that come with these names and we have played them both ways.

The option gains have ranged anywhere from 50%-100% and we have used both calls and puts. I’m not sure if it’s time to go long again but here’s what we’re watching:

Citigroup (C, $17.13, down $0.06) hit a high of $20.50 a week ago and is down 15%. The January 20 calls (CAD, $1.37, down $0.12) were profiled at $1.25 and sold at $2.60 the first time around. Let’s target an entry price of $1.25 again.

Merrill Lynch (MER, $23.65, down $0.15) has been good to us on the long side so far but it remains a question mark if we can go long again on this company. We made a 50% profit buying the January 35 calls (MERAG, $0.87, down $0.06) at $1.90 and got out in the $2.65-$2.75 range. There’s no way I’d get back into these particular calls but I’m feeling like Merrill has more skeletons in the clost. The January 25 calls (MOJAE, $3.55, down $0.05) look expensive to me and Merrill looks like it’s wants to go below $20.

A week ago, Fannie Mae (FNM, $5.02, down $0.98) was at $9 and Freddie Mac (FRE, $3.44, down $0.73) was at $6. These two have been the headline makers again and have dropped roughly 50% on renewed concerns of a government bailout. The option activity is insane for Fannie and Freddie and the jury is still out on wheather or not they survive. The Fannie May January 5 calls (NJWAA, $2.40, down $0.60) would be a monster trade if Fannie can get back to $10. The Freddie Mac January 5 calls (FREAA, $1.20, down $0.15) would double if Freddie trades up to $7.50. That is a big “if” for both of these trades.

Wachovia (WB, $13.99, down $0.31) is back below $15 and we made a 50% profit on the January 15 calls (WBAC, $3.00, down $0.30) at lower levels. Out of all of the financials, I like Wachovia the best and still think it will be the first to go as far as an acquisition target. If Wachovia can back to $20 these calls could double.

There are plenty more brand names out there to trade in the financials. Lehman Brothers (LEH, $12.60, down $0.47) looks cheap down at these levels. The January 20 calls (LYHAD, $1.40, down $0.15) look mouth-watering. I’d buy them here and try to sell them at $2.00 for a quick 40% profit.

Pick your entry points for these plays carefully and set stops early on any gains.

Rick Rouse
Rick@OptionsMentoring.com

Fannie Mae (FNM, $13.49, down $1.82) and Freddie Mac (FRE, $7.64, down $2.59) are having a tough week as concerns about the two needing a government bailout have come to a head. The outlook is so bleak for both companies that Capitol Hill is meeting today to discuss contingency plans should they be unable to raise funds.

Both companies are government-sponsored enterprises but they are expected to need billions of dollars in capital to support their balance sheets. And it’s not going to come in the open market. While Fannie and Freddie had some luck in raising $20 billion last year, the instability in their stock prices will cause investors to run for the hills this time around.

There is simply no support in the financials right now and the other shoe is falling as we speak. Fannie started the week off at $18.76 and is down from a 52-week high of $70. The July 13 puts (NJWSO, $1.90, up $1.25) are up 190% today as bears take positions looking for a drop below $10. The August 10 puts (NJWTJ, $2.00, up $1.15) are up 135% and are the most active in the August put chain.

Freddie started the week off at $14.53 and has been hit the hardest of the two. Its 52-week high is $67. The July 10 puts (FRESB, $2.75, up $1.50) are up 140% and are the most active of the July puts as 16,000 contracts have traded so far. The August 5 puts (FRETA, $1.00, up $0.45) are up 82% as open interest continues to climb.

Rick Rouse
Rick@OptionsMentoring.com