The turmoils at FNM and FRE created great anxieties and opportunities for both equities and debt TRADERS. The newly passed housing rescued packages by the Congress and signed the President essentially changed the "implied" to "explicit" US government backings on both quasi agency's outstanding debts. Their spreads to US treasuries have tightened in last few weeks. However, the most liquid 15 yr and 30 yr fixed MBS from Freddie and Fannie were under great pressures in last few days. Using 10 yr swap rate as benchmark, FNCI (15 yr Fannie MBS TBA) was priced to 5.50% with spread of 78 bps, that was 4 times of historical 10 year average (see the first chart). FNCI was traded at the cheapest level since 1998. The 78 bp spread to the swap was about four sigmas of the mean. FNCL (30 yr Fannie MBS TBA) was also trade at the lowest level that we have not seen in the last decade (second chart). Comparing to other investment alternatives, current fixed MBS provided the most attractive risk-reward profiles for long term investors.
In late March, we saw significant bullish bets on AAPL in option markets. In my post " Will AAPL be $125-150 by July ?", we noticed a huge call spread position (10,000 contract) hit the tape on March 25. AAPL was closed at 106 and change, and has rallied more than 35%, which certainly make the owner of this long bull spread position smile proudly. So how much profit we are looking at right now if the investor exits the position today? At this moment, AAPL July 125 call is traded at about $19.50 and July 150 call around $4.20. Ignoring the transaction cost, each contract is worth about $1,530, so the total position is $15,300,000. Remembering that the initial investment was only about $3,950,000, and so net profit would be $11,350,000. The trade almost triples the initial investment just over two months! Not a small feast considering the limited risk profile.