Wednesday, June 2, 2010

Legg Mason (LM) - Another Huge Bet for News in July

*********** CORRECTION **********

8:24 AM PST
The trade today was a risk reversal (sell puts/ buy calls) for even (i.e. no cost). It was not a strangle.

*********** CORRECTION **********

LM is trading 30.23, up 2.8% with IV30™ down 4.8%. The LIVEVOL™ Pro Summary is below.

On May 24th I posted:
Legg Mason (LM) - Delta Buyer on Vol Sale into Summer and Stock Repurchase (click to read). Today is the second large options trade in July in the last week (ish) - CORRECTED TEXT this is the same type of trade one on May 24th; buy calls/sell puts.

The company has traded over 40,000 options in the first hour on total daily average option volume of just 3,391. The largest trade accounts for essentially all of the volume - it was a purchase of a Jul 27/32 strangle for $2.30 20,000x (i.e. 40,000 options). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that both the calls and the puts are opening (trade size >> open interest).

I have also highlighted the lines from the 5-24-2010 trade. Buying the Jul 34 calls and selling the Jul 29 puts. Note how large the 10,000 OI is and how large the 20,000 OI will be relative to the other lines. The next largest position is just 1,548 in the front two months.

5-24-2010: 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

6-2-2010 (today): Trade Specifics
20,000 Jul 27 puts @ $1.15
Buy 20,000 Jul 32 calls for $1.15
Debit = $0

The Skew Tab snap (click to enlarge) illustrates the vols traded in the order today (the 27 and 32 strikes are highlighted).

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.

We can see the stock has stayed range bound for a while now. We estimate that earnings will fall outside of the July cycle (i.e. after July 16th).

This could be a short stock holder protecting the upside - i.e. just a hedge.

Alternatively, these two trades are betting on stock moving worthy news that isn't an earnings release. Of course, if earnings are in the July cycle, then perhaps the bet is on a stock moving worthy earnings release. Either way, something is "supposed to happen" before July expo according to these bets.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. i hate to talk about other stocks other then the underlying symbol but maybe you can open a link to page with questions and answers
    well i was wondering if you can comment about all the Put activity on GNW over 60,000 Contracts changed hands already!!!

  2. It looks like they are selling Sep 10 puts to fund a purchase of Jun 15 puts. So, a put spread across months.