I purchased 12 put contracts on Freddie Mac (FRE), with a strike price of $1 and expiration of July, for $0.16 each.

The thesis was brought to my attention by John Hussman in his November 16 weekly column where he quotes Freddie Mac’s quarterly report:

“In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting standards for transfers of financial assets (SFAS 166) and an amendment to the accounting standards on consolidation of variable interest entities (SFAS 167). Both amendments are effective and will be applied prospectively by the company on January 1, 2010 … Under these accounting standards, the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of September 30, 2009… While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth.”

Fundamentally, I still believe that this economy has problems ahead.  Moreover, even if the economy was in decent shape, the market is still overvalued.  With a probable second round of foreclosures upcoming, the FASB amendment could be a nice catalyst for a larger trend, at least for FRE.  As for the execution, I’m well willing to risk $200 on this.