Is the CME the real MF Global causualty?

Posted by atg on Thu, 11/10/2011 - 7:15pm

Is the CME the real MF Global casualty?

The collapse of MF Global might blunt the storied career of Jon Corzine, but I think the real casualty lately has been the price of the Merc’s stock. The market volatility of the last quarter has been pretty good for the CME’s hedging products; the CME has always been a leader in technology and product innovation. The key words of frozen funds, bankruptcy, and liquidation certainly scare the bejesus out of everyone. This fear has certainly excalated given the financial instability of the last 3 years or even the last 3 months, in particular (yes it has been that long!). Whatever the solid fundamental outlook, lately, it is easy to hit the sell button on just about anything with a decent excuse. Missing MF Global funds is a good excuse since the CME runs the clearing business for its member firms and the products on its exchange, and it derives a good piece of revenue from it. The exchange could be on the hook and the big number that has been bandied around is $600 million or so. I am quite sure the CME will clarify soon. From what I can see (http://www.cmegroup.com/clearing/mfglobal.html), I don’t see how it will be that big, and the $25 in lost share price is about $1.7 billion in market cap which does seem steep.

I think CME is setting up for a bounce between now and December expiration, but the question is, how to position it? Take a look at the volatility chart below.

50% volatility is on the very high side (two solid $10+ swings lately) for CME, and the current December downside is about a 50% IV at the 230 strike. For the risk takers out there, selling the CME DEC 2011 230/210 put spread for $2+ might be a nice play since the name has not sniffed the $230 number since the president was sworn in. Another way also to play a sly bet on a volatility coming in would be buying the CME Dec 2011 260/270/280 for $2 or so. If the bad news starts to decline and CME firms up, we should get a nice rally up to $270 where we could take it off for a nice little winner. As befitting a name synonymous with giving investors choices, two ways to play and almost a pick 'em.

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