Lehman Brothers Holdings (NYSE:LEH) is a global investment bank, serving institutional, corporate, government and high-net-worth individual clients and customers. Its business includes capital raising for clients through securities underwriting and direct placements, corporate finance and strategic advisory services, securities sales and trading, research, the trading of foreign exchange and derivative products and certain commodities, asset management for high-net-worth and institutional clients and private equity investments. The company acts as a market maker in all major equity and fixed-income products in both the United States and international markets.
We couldn't help but feel somewhat cheated by the recent activity in Legg Mason (NYSE:LM), which clipped our conservative "stop-loss" price in early May when financial issues retreated en masse. Now we want some revenge and it seems only natural to use one of the company's industry brethren to recover some of the losses from that position. Shares of LEH have been in a mild downtrend since hitting a multi-year high in late April and despite the near-term rebound, it appears the stock will be in a consolidation pattern for the next few weeks. In addition, Smith Barney recently trimmed its earnings estimates for the company, citing "across the board" revenue weakness for brokerages in the second quarter. The move came on the heels of a Merrill Lynch report in which second-quarter EPS for Lehman was lowered due to weaker equity markets and wider corporate credit spreads. The current technical indications reflect the mediocre fundamental outlook and we believe this position offers favorable risk versus reward for less conservative spread traders.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (less conservative - bearish/credit spread):
BUY CALL JUN-100.00 LEH-FT OI=1461 ASK=$0.15
SELL CALL JUN-95.00 LEH-FS OI=5157 BID=$0.70
INITIAL "NET-CREDIT" TARGET = $0.60-$0.65
POTENTIAL PROFIT (X 5 contracts @ $0.60) = $300
MARGIN REQUIREMENT (X 5 contracts) = $2200
RETURN ON INVESTMENT (max) = 13.6%
COST BASIS = $95.60
INITIAL EXIT STRATEGY:
Once the position is open, traders should place a (contingent) order to close the short ($95.00) call options if the stock moves above $95.50 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.