* Fannie Mae, Freddie Mac shares rise early, then settle
* Day traders 'playing until the game stops'
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NEW YORK, Aug 25 (Reuters) - Day traders helped drive up the price and volume of Fannie Maeand Freddie Mac shares for a second consecutive day on Tuesday, looking to turn a quick profit and spurred by the prospect of collecting rebates on the low-priced household names.
The shares of the U.S. government-controlled mortgage lenders jumped early and closed only moderately higher for a fourth straight day, despite no material news. Two-day trading volume in Fannie and Freddie was the highest in several months.
The pattern was more pronounced on Monday, suggesting day traders were piling in after each other to seize on a trend that may not last long, traders and observers said.
"A lot of guys are playing until the game stops. The shares have been opening up every morning and there's kind of a pattern to that," said Scott Dreyer, managing partner at boutique broker-dealer Compass Point Research & Trading, which specializes in financial stocks.
Fannie rose as much as 24 percent, while Freddie gained as much as 14 percent in morning trading. They closed up 9.4 percent at $1.86 and up 0.5 percent at $2.06, respectively.
"They're gapping open every morning just on the overnight news that the world is getting better," Dreyer said. "For the day traders, this goes back to the way they used to trade the tech stocks -- buying them in the evenings and selling them after they gap open."
The "gap" is the difference between a stock's closing and opening price.
Day traders and other firms, including high-frequency traders, will also post standing orders in active stocks, hoping to collect the rebate when that bid or offer is filled.
Exchanges and other trading venues rebate those who add liquidity and charge those who take liquidity under the "maker-taker" pricing scheme, first introduced more than a decade ago. [ID:nN24319128].
CHEAP, ATTRACTIVE STOCKS
The U.S. government seized Fannie and Freddie last September after they reported huge losses caused by plummeting U.S. house prices.
Although both hard-hit companies were essentially nationalized to prevent them from going under, Fannie shares have more than doubled since starting the year at 76 cents. Freddie has almost tripled in value from 73 cents.
"You can get these massive spikes in these low-dollar companies that are structurally in a lot of trouble," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.
Cheaper stocks require a far smaller capital commitment from active traders than expensive shares such as Google Inc, trading at more than $400 on the Nasdaq.
This month, Citigroup Inc, Fannie and Freddie were three of the four most active stocks on the New York Stock Exchange. Each were less than $5 a share on Tuesday. [ID:nN25213947]
The shares of other financial companies, such as Citigroup and insurers American International Group Incand Hartford Financial Services Group Inc also have risen dramatically in recent weeks.
For better or for worse, then, some investors see the mortgage lenders following the rebound of the banking sector.
"If the recession has actually ended and the economy is bouncing back, these investors would hope and believe that Freddie Mac and Fannie Mae will make a similar move as these others," said William Lefkowitz, option strategist at brokerage firm vFinance Investments.
Joe Kinahan, chief derivatives strategist at Thinkorswim Group, a division of TD Ameritrade Holding Corp, said some investors may see an improving outlook for the mortgage giants thanks to an economic rebound and government intervention.
"The only rumor I have heard is that the government may extend or increase the time frame for the government's first- time home buyer tax credit, which is supposed to expire this fall. If that happens, that would be great for Fannie and Freddie," he said.
Options markets were also very active on Tuesday. During the first 45 minutes of trading, about 61,000 call options changed hands in Fannie -- more than three times its average daily volume and nearly five times the number of puts, according to option analytics firm Trade Alert.
Heavy call demand shows that investors expect Fannie and Freddie stock to rise. (Reporting by Elinor Comlay and Jonathan Spicer; additional reporting by David Gaffen, Doris Frankel and Joe Giannone; editing by Ted Kerr, Matthew Lewis and Andre Grenon)
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