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Strategy bets on Moody's volatility

Chris McKhann (chris.mckhann@optionmonster.com)

Moody's fell sharply yesterday, and one trader is betting that the credit-ratings agency will make a sharp move higher or lower in the next six weeks.   

A trader bought 3,200 March 55 puts for the ask price of $1.93 yesterday, according to optionMONSTER's Depth Charge system. This is clearly a new position, as open interest in the strike was just 81 contracts before the day's trading began.

At the exact same time, two of the largest MCO stock prints traded in blocks of 9,874 and 51,520 bought for $54.80. The combination of the stock and options creates a so-called delta-neutral strategy that is designed to profit if the stock continues its wild volatility in either direction.

Our systems detected another big option trade in MCO just before the close. This trader bought 2,679 March 55 puts for $5.94 and sold the same number of March 50 puts for $2.99. The volume at the lower strike was higher that than the previous open interest, so this is a bearish vertical spread . (See our Education section)

Moody's shares fell 10.66 percent to $49.45 yesterday after rival Standard & Poor's said it would be sued by the Justice Department over ratings of mortgage debts at the center of the 2008 financial crisis. The news led to speculation that Moody's and Fitch would also be targeted for such action.  

Yesterday's close was the MCO's lowest since mid-December. The stock, which had been trending higher from below $34 in late June, on Friday traded above $55 to its highest level since  October 2007.

More than 20,000 MCO options changed hands yesterday, compared with a daily average of just 400. Puts outpaced calls by more than 7 to 1.

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