Markets

Diagonal play follows Legg Mason rally

Legg Mason has bounced back to a potential resistance level, and the bears are stepping in.

optionMONSTER's Depth Charge monitoring program detected the purchase of 5,000 January 26 puts for $1.33 and the sale of an equal number of February 22 puts for $0.73. Volume was more than 6 times open interest in both strikes.

The trade resulted in a cost of $0.60 and will profit from a quick drop but limited drop in the operator of mutual funds. Its maximum gain will occur if LM pushes down to $22 by Jan. 20. Below that level, he or she stands to lose money on the short position in the February puts.

Known as a diagonal spread, the strategy uses the additional premium from selling longer-dated contracts to reduce the cost of buying puts that are closer to the money . It could be the work of an investor who wants to hedge a long position in the shares and wouldn't mind being required to buy more if it goes all the way to $22. (See our Education section)

LM rose 2.36 percent to $26.89 in late morning trading and is up 15 percent in the last week. Shares have been stalling at their 100-day moving average, which could make some chart watchers think they're due for a push lower.

Overall option volume is 17 times greater than average in the name so far today, with puts outnumbering calls by more than 280 to 1.

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

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


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

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