In last week’s edition of Trading Tools, we examined The Coca-Cola Company (KO), after the Zacks Unusually High Option Volume screener revealed the blue chip was the target of a ratio vertical put spread. Utilizing the same filter for today’s column, Baltimore-based asset management firm Legg Mason, Inc. (LM) piqued my curiosity, as it was the apple of both call speculators’ and put traders’ eyes on Thursday, Jun 25.
Before we begin, let’s explain the contrarian stance that makes Schaeffer’s so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
However, keep in mind that some optimism and pessimism is genuinely warranted and isn’t always a contrarian indicator – like an outperforming stock with many “buy” ratings or an underperforming stock with a plethora of “sell” ratings.
According to the Zacks screener, LM saw roughly 19,600 calls and 9,200 puts change hands Thursday, Jun 25, more than 6 times its average daily volume of about 2,900 and 1,500 contracts, respectively. What’s more, the 25 strike was most popular among both the bulls and bears. The stock’s Jul 25 call saw single-session volume of 4,131 contracts, while the July 25 put saw nearly 1,800 contracts cross the tape.
The at-the-money 25 strike is now home to peak put open interest in the front-month series, with about 1,200 contracts in residence. However, the in-the-money 24 strike is still king of July-dated calls, harboring open interest of nearly 3,000 contracts.
Thursday’s inclination for more calls than puts echoes the recent trend on the International Securities Exchange (ISE). During the past couple of weeks, speculators on the ISE have bought to open more than twice as many bullish than bearish bets on LM. Furthermore, the equity’s 10-day call/put volume ratio of 2.46 ranks in the 82nd percentile when compared to similar readings taken during the past year, suggesting that traders on the ISE have rarely been more optimistically aligned toward LM.
Further evidence of the bullish presence in the options pits is the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.57, which implies that calls nearly double their bearish rivals among the front three months of options. In fact, the security’s current SOIR stands only one percentage point shy of an annual optimistic acme.
Getting back to Thursday’s surge in option activity, it seems investors may have been placing their bets after the Wall Street Journal squashed a recent rumor. More specifically, the WSJ reported that, contrary to popular belief, activist investor Nelson Peltz hasn’t accumulated a bigger stake in Legg Mason. During Wednesday, Jun 24’s session, the shares of LM had skyrocketed about 10% on whispers that Peltz was preparing to challenge management.
Now that the grapevine’s been torn to pieces, where does that leave the stock?
Shares of LM have been a bright spot on the Street lately, outshining the broader S&P 500 Index (SPX) by 32% during the past 60 trading sessions. In fact, since skimming the $11 level in early March, the equity has more than doubled, and is poised to close the month atop its 10-month moving average for the first time in two years.
However, despite the stock’s impressive run higher lately, not everyone’s impressed. According to Zacks, only 2 of the 10 ranking analysts deem LM worthy of a “buy” or better rating.
Also on the bearish bandwagon are short sellers. Short interest on LM ramped higher by 24.3% during the past month, and now accounts for 20.1 million shares, or 14.5% of the stock’s total available float. At the equity’s average daily trading volume, it would take about a week for all of these pessimistic positions to unwind.
Nevertheless, the skepticism among analysts and short sellers could be a potential boon for LM in the short term. Should the shares continue their upward trajectory, the bears could get spooked. A fresh round of upgrades and/or price-target boosts, or a short-covering rally, could help fuel the stock’s voyage into the black.
