With the market mostly moving sideways today I thought it would be more interesting to look at the activity in MCP.? McGraw-Hill is the parent of Standard and Poor?s and has just been unfriended by the Justice Dept.? Four years later someone is getting around to blaming the one of the ratings agencies for their calls on the mortgage securities under their watch.? Why the other ones are not in the suit is interesting but MCO?s stock is in the basement too.? The market seems to think it is coming.? Let?s go with the news we have and interpret the reaction.
MCP has been taken to woodshed with the $5 billion suit.? It is not a company killer but still is very serious dent in the future cash flow of the company.? My guess is that at some point they will settle for some part of that and move on.? As far as the ratings went they were just ratings of course and in hindsight they were a mistake.? So far the downgrade on the USA has not played out either but they are not being sued for that, yet. ?That might be part of their defense, as in ?look how we screwed that one up.? ?Let?s see how the market reacted by examining the volatility market at the close today.
Paper took down the IV by at least 10% in February and all through the term structure.? That is a pretty serious decline in the perception of movement short term.? The move to get MHP to 44.5 was severe and the news totally unsettling but movement ?came in? today. Short term MHP is most likely dead money. ? It is important to balance what could happen in the short term with what might happen in the long term from a trade standpoint.
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The spikes show heavy volume and the color is change in implied volatility.? Note the heavy activity in the August calls too.
The reality is that market perception has decreased since yesterday ?by looking at today?s IV change.? Earnings are out next week but the IV is far and above the normal earnings cycle for MHP.? As the market digests this news I think this an admission that movement could be truncated in the short term because another announcement needs to come out.? That will be some kind of settlement and that should take a while, something like 4-6 weeks at least.? I don?t see MCP going in front of a jury on this one and try to explain how they rated bonds in 2008.? Short term the name should just sit around until there is more clarity on the suit.? Today?s decrease in IV reflects that.
The trade
The MCP Feb 41.5/44.5/47.5 would work on a smaller size basis or an Iron Condor or OTM short vertical spreads of similar nature.? The idea is to sell some short term juice while the lawyers hash it out.? The time frame here is of a limited nature since the trade should be closed before any whiff of settlement starts to surface.
This is a trade with some serious risk (keep to contract neutral) so it would take a lighter allocation.? Check out the OTM time spreads in MCO (Moody?s) for a similar set up.