Option Investor

New Portfolio Position: LM "Bull-Put" Spread Projected Gain = $325

Printer friendly version
LM - Legg Mason $80.49

Legg Mason (NYSE:LM) is engaged in providing financial services such as asset management, securities brokerage, investment banking to individuals, institutions, corporations, governments and government agencies. The company operates through three business segments: Asset Management segment provides investment advisory services to institutional and individual clients and company-sponsored investment funds; Private Client segment distributes a wide range of financial products through its branch distribution network, including equity and fixed income securities, and non-affiliated mutual funds and annuities, and Capital Markets segment consists equity and fixed income institutional sales and trading; investment banking; syndicate; structured products, and research. The Corporate Business segment consists of unallocated corporate revenues and expenses.

We did not originally plan to publish any new plays this week as the portfolio is near the (target) margin/collateral limit and the time-frame for June options is somewhat lengthy. However, Legg Mason offers a compelling case for a bullish position given the recent upside activity in its stock price and the company's (favorable) fundamental outlook. Shares of LM rose more than 12% Wednesday after the financial services firm posted first-quarter earnings of $117 million, or $0.98 a share, compared to $91 million, or $0.80 a share in the same period a year ago. The numbers surpassed consensus estimates as revenue climbed 19% to $665 million amid a sizable increase in investment advisory fees, and analysts noted the results were particularly impressive in light of the negative returns in both the equity and fixed income markets during the quarter.

Apparently, investors were also happy with the announcement as they boosted the stock back into a previous trading range near $80 and the renewed technical strength in the underlying issue suggests this position has a high probability of a profitable outcome. Considering the relatively large bid/ask spreads, traders should target a higher net-credit (initially) to improve the potential profit in the position. We suggest a minimum credit of no less than $0.60 per contract to open the spread.

Fundamentals Chart Earnings Dates Analyst Ratings

PLAY (less conservative - bullish/credit spread):

BUY PUT JUN-70.00 LM-RN OI=71 ASK=$0.50
SELL PUT JUN-75.00 LM-RO OI=118 BID=$1.00

POTENTIAL PROFIT (X 5 contracts @ $0.65) = $325
MARGIN REQUIREMENT (X 5 contracts) = $2175
COST BASIS = $74.35


Once the position is open, traders should place a (contingent) order to close the short ($75.00) put options if the stock moves below $77.75 on an intraday basis. A "net-debit" order of $1.25-$1.30 to exit the entire spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.

Monthly Cash Machine Newsletter Archives