LM - Another Huge Bet On Stock Move in July

Discussion in 'Options' started by livevol_ophir, Jun 2, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    *********** CORRECTION **********

    8:24 AM PST
    The trade today was a risk reversal (sell puts/ buy calls) for even (i.e. no cost). It was not a strangle.

    *********** CORRECTION **********

    LM is trading 30.23, up 2.8% with IV30&#8482 down 4.8%.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TAZsGTtT2mI/AAAAAAAACsw/RKKtFInmBbE/s1600/lm_summary_2.gif">

    On May 24th I posted:
    <b><a href="http://livevol.blogspot.com/2010/05/lm.html">Legg Mason (LM) - Delta Buyer on Vol Sale into Summer and Stock Repurchase (click to read)</a></b>. Today is the second large options trade in July in the last week (ish) - CORRECTED TEXT this is the same type of trade one on May 24th; buy calls/sell puts.

    Today is the second large options trade in July in the last week (ish).

    The company has traded over 40,000 options in the first hour on total daily average option volume of just 3,391. The largest trade accounts for essentially all of the volume - it was a purchase of a Jul 27/32 strangle for $2.30 20,000x (i.e. 40,000 options). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/06/lm.html">in the article</a>).

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TAZsHC2KQUI/AAAAAAAACtA/PXvY1cCKP_U/s1600/lm_stats_2.gif">

    The Options Tab (<a href="http://livevol.blogspot.com/2010/06/lm.html">in the article</a>) illustrates that both the calls and the puts are opening (trade size >> open interest).

    I have also highlighted the lines from the 5-24-2010 trade. Buying the Jul 34 calls and selling the Jul 29 puts. Note how large the 10,000 OI is and how large the 20,000 OI will be relative to the other lines. The next largest position is just 1,548 in the front two months.

    <b>5-24-2010: Trade Specifics</b>
    Sell 10,000 Jul 29 puts @ $1.775
    Buy 10,000 Jul 34 calls for $1.15
    Credit = 10,000 * 100 * ($1.775 - $1.15) = $625,000

    <b>6-2-2010 (today): Trade Specifics</b>
    Buy 20,000 Jul 27 puts for $1.15
    Buy 20,000 Jul 32 calls for $1.15
    Debit = 20,000 * 100 * ($2.30) = $4,600,000

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/06/lm.html">in the article</a>) illustrates the vols traded in the order today (the 27 and 32 strikes are highlighted).

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/06/lm.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    We can see the stock has stayed range bound for a while now. We estimate that earnings will fall outside of the July cycle (i.e. after July 16th).

    <b><CORRECTED TEXT></b>
    We can see the stock has stayed range bound for a while now. We estimate that earnings will fall outside of the July cycle (i.e. after July 16th).

    This could a short stock holder protecting the upside - i.e. just a hedge.

    Alternatively, these two trades are betting on stock moving worthy news that isn't an earnings release. Of course, if earnings are in the July cycle, then perhaps the bet is on a stock moving worthy earnings release. Either way, something is "supposed to happen" before July expo according to these bets.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
    http://livevol.blogspot.com/2010/06/lm.html
     
  2. 1) The stock is slightly higher since May 24th.
    2) Is it running on stong or weak "legs"?
    3) Do you "coattail" these big trades or do you wait for news to "happen" before doing something? :confused:
     
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Usually I just try to remember them. Stocks where someone has info tend to have patterns in their large option trades. So I try to remember the ones that repeat, then I may coattail.

    This feels like a hedge - if anything, I might short this stock. But ultimately I won't do anything on this one I suspect.