Options Trading News

February 1, 2013  Fri 3:16 AM CT

One investor expects a rally from Legg Mason, even if today's earnings report disappoints.

optionMONSTER's Heat Seeker monitoring program detected the purchase of about 2,000 May 31 calls for $0.50. Volume was almost 14 times the open interest in the strike at the beginning of the day, so this is clearly fresh buying.

These long calls lock in a $31 entry price on the mutual-fund operator for the next 3-1/2 months, no matter how high the stock might go. That could result in some nice leverage in the event of a rally, but the contracts will expire worthless if the shares don't move.

LM fell 0.32 percent to $27.65 yesterday. It barely moved for years after the 2008 market crash but has started working its way higher in the last two months. Like many companies in the financial sector, it trades at a steep discount to book value.

By choosing May contracts rather than the near-term February options, the investor is expressing a belief that the stock might not rally immediately after this morning's quarterly report. But he or she does apparently believe that it will continue climbing in the longer term, regardless of the news. (See our Education section for more on how options can be used to manage trades.)

Calls outnumbered puts by a bullish 6-to-1 ratio in yesterday's session, according to the Heat Seeker.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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