Freddie Mac (FRE) drops on construction data

Filed under: Major movement, Bad news, Industry, Options, Technical Analysis, Economic data, Housing

Freddie Mac (NYSE: FRE) shares are falling after the Commerce Department reported that private residential housing construction dropped by 2.3% in April, the 26th consecutive month of declines. The news from the U.K. this morning was not too keen either, as B&B warned that the mortgage market across the pond is also weak. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on FRE.

After hitting a one-year high of $67.68 last June, the stock hit a one-year low of $16.59 in March. This morning, FRE opened at $25.29. So far today the stock has hit a low of $24.31 and a high of $25.57. As of 1:00, FRE is trading at $24.44, down $1.00 (-3.9%). The chart for FRE looks bullish but deteriorating slightly, while S&P gives the stock a neutral 3 Stars (out of 5) hold rating.

For a bearish hedged play on this stock, I would think about a July bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the buy and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. This particular trade will make a 7.5% return in seven weeks as long as FRE is below $30 at July expiration. FRE would have to rise by more than 22% before we would begin to lose money.

FRE hasn’t been above $30 since March and has shown resistance around $28 recently. This trade could be risky if the housing situation suddenly ameliorates, but even if that happens, this position could be protected by resistance FRE might find around $28, where it has topped out quite a few times over the past two months.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in FRE.

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This entry was posted on Saturday, June 7th, 2008 at 7:26 pm and is filed under Real Estate and Housing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.