Legg Mason Inc. (NYSE: LM )
are in the red on Friday morning, but at least one investor appears
to be convinced the stock will not drop much farther during the
near term. The August 28 puts were active out of the gate thanks to
a put seller.
The LM near-the-money August 28 puts crossed the tape more than
27,500 times thanks to an investor who traded all of the contracts
in one block for $1.20 per contract. A look at time and sales shows
the investor most likely collected the credit to open short put
positions. The August 28 puts are home to current open interest of
4,874 contracts. These put sellers are betting that LM shares will
be trading higher than $26.80 at August options expiration (Aug.
If the stock does not drop more than 6% during the next month,
the investor could make a maximum profit of $1.20 per contract
($3.3 million for the entire lot). In the event that LM shares are
trading below the breakeven price at expiration, the investor
suffers significant losses that are limited to $26.80 per contract
if the stock drops all the way to zero. If LM shares are trading
between the strike and the breakeven price, the investor gives back
some of the premium collected. LM shares declined more than 2%, or
69 cents, to $28.61 during morning trading. The stock is trading
roughly 15% lower than its 52-week high of $34 reached in May. The
asset management company did not announce any notable news on
Friday, but Susquehanna initiated the company with a "neutral"
rating on July 15. LM is due to announce earnings figures on July
26 after the market closes and analysts estimate earnings of 31
cents a share.
Short put positions such as this express moderate bullishness
because the stock has some room to drop before investors lose money
on the trade. You can build a profit/loss graph to assess and risk
and reward of this short put trade by opening a free
virtual trading account .