Trading in Fannie Mae options is signaling that investors expect the largest U.S. mortgage lender to be bailed out by the government, market participants said.
The put/call ratio which represents the number of puts, or options contracts protecting against a stock price decline, vs. the number of calls, or options contracts betting on a rally rocketed to 6.42 on Tuesday. The Options Clearing Corp. makes put/call ratio data available with a one-day lag.
Fannie Maes put/call ratio on Tuesday was 4.5 times its recent average of 1.5. There were about 568,000 Fannie Mae put contracts that traded on Tuesday and only 88,400 calls.
This seems to be a case where people who had large exposure to Fannie Mae stock bought puts for downside protection some time ago, when the stock price was higher. Yesterday, people were getting out of their long put positions because they are either out of the stock, so there is no need for protection, or because they are willing to assume the downside risk on their stock position now that the price is only $4, said Bud Haslett, director of options analytics at Miller Tabak + Co.
This was consistent with a 15% drop in the spreads on credit default swaps or insurance on Fannie Maes debt, as investors felt the debt will be backed by the government.
Fannie Mae shares closed down 25.79% today at $4.40. The stock has lost 93% from its record high of $70.57 on Aug. 22, 2007.
Todays slide occurred amid talk that the U.S. Treasury will bail out the mortgage lender, which has $120 billion of debt maturing on Sept. 30, and may need a rescue if it cannot roll it over.