Dabum,
As an alternative (capital attractive) play on your FNM, a stock in a strong and likely to continue downtrend, consider the Jun 60/55 put spread.
Let's assume you want to take a position on 1,000 shares, in your scenario looking for a potential (target) profit of $3,830. (Now, I know with trailing stops, if the position continues to run it could profit beyond this, but if a stop is hit on a volatile day it could reach this point but then lose some ground as well, so let's just take $3,830 as THE profit target.
I forget exactly how much capital gets tied up in a a short position, but let's use the normal prudent capital charge of 100%, as conservative speculators. Cost = $53,830. [We will ignore commissions, etc.]
In order to get this profit, FNM will have to drop to $50 within a reasonable timeframe. If it rises, you will lose $1 for each dollar of rise, until you are stopped out with a $2 ($2,000) loss. Iff it stays flat, you will stay flat, and you will only make money on one direction in FNM: down.
Now, with the put spread, you will will need to do 20 contracts on each side to get a profit target of about $3,800. The Jun puts will cost you $6.50 per share covered on the long side (the Jun 60s) and you will receive $3.40 per share on the short side (the Jun 55s), or $3.10 per share in cost. Your total capital utilized for this operation is $6,200. At expiration, if FNM is lower than $55, you will receive $10,000, or $3,800 in profit.
In order to receive this $3,800 in profits, FNM doesn't need to drop any further, it just needs to avoid rising. It can flatline, continue a minor degrading from here or plunge and you will make the maximum profit on the $6,200 invested, or a 61% return.
If FNM rises to $55.50 and stays there, the put spread will at expiry still show a 45% profit, whereas the short position will have stopped out.
There are many different valuations this spread can take between now and expiry, depending on where the volatility goes, but in general, if you are looking for a good reward:risk play on FNM's downside that makes good use of capital, look into the put spreads.
Kb |
