Long stock synthetic (split strikes) play on Legg Mason (NYSE: LM)


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Shares of Legg Mason (NYSE: LM ) are on the move higher this morning. The company announced before the open that they plan an accelerated stock purchase of roughly $300 million as part of the $1 billion plan approved earlier this month. That news could be what is pushing the shares up roughly 1% to $30.50. Options action from one investor suggests the upside could continue as they bought some calls and simultaneously sold some puts.

At approximately 11:18 a.m. EST, we see that the July 29 puts traded 10,000 for an average price of $1.775. At the same time, the July 34 calls traded an equal number, for $1.15. This means that the investor collected a credit of 62.5 cents on this spread. If shares of LM rally, the calls should appreciate, while the puts decline, which is why we say that this trade is bullish, and looks a lot like long stock. As recently as April 23, shares of LM were trading more than 11% higher, up around $34. If this investor is thinking that LM could quickly regain those levels, this options play is a fair way to express that bet.

Looking closely at time and sales of shares for LM, we do find that a large block of 650,000 shares of stock traded around 11:18 for $30.80. That amount of shares is the amount needed to make this trade delta neutral. So it is possible that this trade was initiated by someone betting more on volatility. The implied volatility of the calls they bought was near 48, while the implied volatility of the puts is near 55. The investor could be betting that that spread will decline.

However, a look at this position in a Profit & Loss graph from my virtual trading account shows that even with the short stock, the position makes money as the stock rallies. Also, it is quite possible that the investor traded the spread delta neutral, but already owned the stock, so is replacing a bullish stock position with the options for a different risk profile.

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

This article appears in: Investing , Options

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Jud Pyle

Jud Pyle

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