A year ago, there was speculation that Trump would win the election, with many believing Kamala Harris was a flawed candidate. Despite betting odds being close, Trump was seen as having a chance at a Republican sweep, especially in the House, which seemed unlikely at the time.
Several ‘Trump trades’ failed to deliver. Jim Cramer’s suggestion of New Fortress Energy saw swings with Trump’s improving odds but suffered due to significant debt, currently down 86%. Cramer’s other picks included short positions on Nike and Starbucks, which saw declines of 2.81% and 8.94% respectively, while Albertsons rose by 5.65%, Amazon by 28.3%, Apple by 3.52%, and Johnson & Johnson by 8.42%. Overall, these trades underperformed compared to the S&P 500’s 15.9% gain.
The Defining Political Trade
Bill Ackman identified Fannie Mae and Freddie Mac as the successful Trump trade, potential beneficiaries of removal from conservatorship. Initially trading at $2.65, Fannie Mae surged to $14.40, reflecting a 12x return. Ackman’s decade-long investment saw payoff with US Commerce Secretary signalling a possible IPO for Fannie and Freddie, potentially the largest in history.
Looking back, the 12x gain on Fannie Mae since last September was the defining political trade, but that opportunity has passed. With the stock now at $14.40, the game has shifted from speculative upside to event-driven volatility. We’ve seen implied volatility on near-term options spike above 150%, a level reminiscent of the meme-stock craze of the early 2020s.
The trade is no longer about the simple thesis of a Trump administration freeing the GSEs; that is now the market’s base case. The focus for the next few weeks is on execution risk and timing, especially following Commerce Secretary Lutnick’s comments about a fast-tracked IPO. Any perceived delay or roadblock could trigger a significant correction, making unprotected long positions riskier than at any point in the past year.
Market Strategies
Given the extremely high implied volatility, buying options outright is now an expensive proposition. Instead, we are seeing traders pivot to strategies that collect premium, such as selling covered calls against existing stock positions or using credit spreads. A recent analysis shows that the premium for a 30-day, 20% out-of-the-money call option is yielding over 8% of the underlying stock price, highlighting the market’s expectation of sharp price swings.
The key catalyst to watch for is a concrete timeline or structure for the public offering Lutnick mentioned. Looking at the spinoff of PayPal from eBay in 2015, we saw that specific details about dates and terms caused major price adjustments in the final months. Until we get an official filing, we should expect the stock to be highly sensitive to rumors, making defined-risk option structures a more prudent approach.
