Legg Mason (LM) trade bets on limited downside


Shares of 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. 20).

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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Options

Referenced Stocks: LM

Karla Yeh

Karla Yeh

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