Monday, May 24, 2010

Legg Mason (LM) - Delta Buyer on Vol Sale into Summer and Stock Repurchase

LML is trading 30.35 with IV30™ down 6.9%. The LIVEVOL™ Pro Summary is below.

The company has traded over 20,500 options in the first hour on total daily average option volume of just 3,208. The largest trade accounts for 20,000 options. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the trade - a Jul 29/33 risk reversal, sell puts/buy calls @ $0.625 total credit. Since today is the first day of July options for LM, they are all opening.

Trade Specifics
Sell 10,000 Jul 29 puts @ $1.775
Buy 10,000 Jul 34 calls for $1.15
Credit = 10,000 * 100 * ($1.775 - $1.15) = $625,000

The PnL chart at expiration is included (click to enlarge).

The trade makes money if LM stays put or goes higher. It loses money below $28.375 at a rate of $1,000,000 per $1 in stock.

The Skew Tab snap (click to enlarge) illustrates the vols bought and sold.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

You can see the range the stock has been in recently. It certainly has dipped below the breakeven price with the 52 wk. low of $17.73 range.

This could be a long shareholder hedging, though I don't see this trade happening in prior months after expo (or anytime really). The company released news of an accelerated stock re-purchase plan. This could be a bet that the plan holds the stock steady or pushes it up. In other words, a bet that the stock has a steady floor for at least the short term.

This is trade analysis, not a recommendation.

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