Condor Options

Two directional trades we’re looking at today that are both consistent with the story that this week’s positive action is just a brief pause in a longer bear market.

Gold

Thesis: Gold has been almost unbuyable for months as it kept hitting new highs - if you weren’t in already, it was pretty tough to get in so late in the game. This week may be your opportunity, as the Fed decision caused the biggest single-day plunge in gold since June 2006:

Gold futures for April delivery fell $58.30, or 5.8 percent, to $946 an ounce at 12:49 p.m. on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest percentage drop for a most-active contract since June 13, 2006. The metal climbed in the previous six sessions, gaining 3.3 percent.
[...] “There is some measurable support for gold in the low $900s,” Hanlon said. “There isn’t heavy support until $800. It may sound like a dramatic decline, but it’s a correction in a bull market.” Before today, gold climbed 20 percent in 2008 after gaining for seven straight years. [Bloomberg]

We’re seeing pretty strong follow-through on yesterday’s decline, so this looks like a nice opportunity for a contrarian play.

Trade: GLD, the ETF loved by so many, hasn’t listed options yet, so we have to get a little more creative to make this play. Two mining companies stand out:

• Barrick Gold (ABX) has pretty great volume in both the options and the stock, so we like the short 40/35 April put vertical for a $0.50 credit (selling the April 40 puts and buying the April 35 puts), or if you’re not into credit spreads, the April 50 calls are currently about $1.30.
• Compania de Minas Buenaventura (BVN) is another way to play this sector. The liquidity in these options isn’t as strong as in ABX, so you would want to trade small, but the stock has behaved better of late and tracks GLD more closely than does ABX. A nice credit spread here would be the short 65/60 April put vertical for $1.20 (short the 65 puts, long the 60 puts), or you could buy the April 80 calls for $2.00. BVN traded above $85/share as recently as last week.

A word of caution: the volume in these names has been strong, and there’s no guarantee that gold will bounce back promptly, especially since so many investors may have profits to take out first. So it’s worth the trouble to ease into any positions here, and you may need to be prepared to roll these positions forward if the reversal takes longer than expected.

Fannie Mae

Thesis: This story is even simpler: federal regulators provided $200bn to the mortgage-backed securities market by easing capital requirements on Fannie Mae and Freddie Mac.

Regulators for the two companies cut their surplus capital requirement to 20 percent from 30 percent to help expand their combined $1.5 trillion in mortgage investments and revive the home-loan market. The change is expected to provide $200 billion in funds to the mortgage-backed securities market, the Office of Federal Housing Enterprise Oversight said in a news release. [Bloomberg]

The thesis here is just that eased restrictions don’t mean Fannie Mae is out of the woods. Effectively, regulators are just allowing them to increase their leverage, and injecting more capital into the mortgage market won’t help FNM if foreclosures continue to pile up. This seems like just another cash infusion by short-sighted regulators who are more interested in immediate stability than they are in long-term financial solvency.

Trade: The implied volatility in the April options has spiked up to 114% (historically, the IV in FNM options is usually closer to 60), so you’ll have to pay if you just want long puts: the FNM April 29 puts are about $2.25. Alternatively, you could sell the April 35/40 call spread for $1.05 (short the 35 calls, long the 40 calls).

As always, these bonus trades are provided purely for educational and entertainment purposes; though if you find random options trades entertaining, you should probably get out more.

[tags] GLD, ABX, BVN, FNM, gold, Fannie Mae, Freddie Mac, Compania de Minas Buenaventura, Barrick Gold, options, trading, vertical spread [/tags]