Options Trading News

January 3, 2013  Thu 10:10 AM CT

Legg Mason is at the top of its recent range, and now the trade is turning cautious.

optionMONSTER's Depth Charge monitoring program detected the purchase of about 2,000 May 25 puts for $1.30 and the sale of about 4,000 May 20 puts for $0.20. Volume was more than 25 times open interest

This vertical spread cost $0.90 to open and will earn a maximum profit of 456 percent if the mutual-fund company closes at or below $20 on expiration. It's also known as a ratio spread because twice as many contracts were sold as the number bought. (See our Education section)

That increases the investor's leverage because it lowers the cost basis but also leaves the trader on the hook to buy shares for $20 if they fall below that level. In this case he or she probably owns the stock and would be willing to own more at a lower price. (See our Education section for more on hedging strategies)

LM is down 0.42 percent to $26.31 and is stalling around the same $25.50 level where it peaked in mid-December. That could be leading some chart watchers to believe that it faces resistance and may decline.

Total option volume is quadruple the daily average in the name so far today, with puts outnumbering calls by more than 190 to 1.
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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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