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Minyan Mailbag: Time Preferences

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Dear Mr. Succo,

I own Fannie Mae (FNM) puts that expire in Jan '06 and I'm thinking of rolling them to Jan '07. However, I feel that, "everything that is going to be known about Fannie Mae through this investigation will be known," by January and I might be wasting my money buying the extra year. I'm not looking for advice (I know you guys don't do that) but was curious about your thoughts from a stylistic standpoint.

Thanks,
Minyan Tsachy
position in fnm

Tsachy,

If congress is foolish enough to not curtail GSE portfolios--and they may be--then these stocks can continue to go up (as investors pile back in). If that happens, the probability increases that the GSEs will eventually blow up the whole system.

In fact, if this scenario unfolds, I will be a better buyer of financial stock volatility down the road.

But I don't think it is worth it to roll to '07 as it will cost too much: our '06 paper may not work, but right now there is not yet enough gamma in '07 options to do any good. I think the best strategy for us (and not advice to you) is to keep '06 paper and, if it doesn't work, re-evalute and roll later. Whenever you buy long-term options, you are paying a very large premium to lock in a specific scenario and, by definition, the farther out in time the less certain that scenario will unfold.

Regards,
Prof. Succo

position in fnm

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