Legg Mason has tried to bounce, but one trader apparently thinks that it's going back down.
optionMONSTER's Depth Charge monitoring program detected the purchase of 3,000 November 27 puts for about $2.30 and the sale of an equal number of January 20 puts for $1. Volume was more than 6 times open interest in both strikes.
Known as a diagonal put spread, the trade exploits the greater time value in the long-term puts to reduce cost and to increase leverage. The investor paid about $1.30 and stands to make 438 percent if LM closes at $20 on November expiration and then holds that level.
He or she may own shares in the mutual-fund company and wishes to protect against a drop--especially with earnings looming in the next month. (LM's last profit report was on July 28 and it hasn't yet announced the next release date.)
The diagonal spread will protect them to the downside if shares fall, while obligating them to buy shares at a much lower price--something they may be willing to do if they like the stock over the longer term.
LM is down 4.7 percent to $26.93 in early afternoon trading. It's up about 14 percent in the last week but is still down by more than one-quarter of its value in the last six months.
The stock is also back to its falling 50-day moving average. Those patterns could make chart watchers expect another push to the downside.
Overall option volume is 7 times greater than average in LM today, with puts outnumbering calls by 46 to 1, according to the Depth Charge.
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