This shorting strategy defied all odds and pretty much defined the year for the stock market.
I don't know anyone who truly thought Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) would both be trading under a buck as 2008 came to close.
The idea of these once-in-a-class-by-themselves quasi-government entities that touch more than 85% of all mortgages in the United States going into full receivership by the government was considered foolish, almost ludicrous discussion that only invited serious sarcasm from professional Fannie and Freddie watchers.
The ultimate collapse of both stocks was devastating, not only to investors that continued to believe all the false headlines spewing from the front offices of FNM and FRE that said they were more than amply capitalized, but the whole financial sector as well.
The notion that Freddie and Fannie were too big to fail was a given, sucking in long-side investors at every 10-point interval on the way down to zero.
If these two once-great names can't get their shares to trade back above $1 by the end of December, they stand to be de-listed from the NYSE. Now that would pretty much put the appropriate exclamation point on the stock market for 2008!
Back in January, Fannie Mae was trading at $40, and Freddie Mac was trading at $35. The traders that had the insight to make this a core short for the past 12 months have booked outrageous profits, especially if they own the puts.
What a home run!
Bryan Perry is a contributor to OptionsZone.com.
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