The following is the OptionBT sighting of "Leg N Master".
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Title   :   "Leg N Master"
Position Description  :
     Position taken   :     September 18 and 19 ,2007
     Position held 36 trading days,
     Vertical Bear Call Spread for Credit,
     Long the 08 Jun 1150 Calls (5000 cnt) on September 18,2007
     and Short the 08 Jun 1075 Calls (5000 cnt) on September 19,2007
     Margin required,
     Long Calls in the money by 369 points on Close (Sep 18,2007 / 1519.78).
     Short Calls in the money by 354 points on Close (Sep 19,2007 / 1529.03).
     Expiration/Settlement     : N/A

Count   :                           5000 pairs

Credit or (Debit)   :            ($50,100,000)

Margin   :                          $37,500,000.
Results   :                          Spread sold for profit of $15,900,000 prior to expiration.


Comments   :   "Leg N Master"

  "Leg N Master" is truly a master and not in name but in deed.

On the 18th of September 2007 "LM" lays out a sizable $189M for 5000 deep in the money 08Jun1150 Calls . This on a huge up day of +44.3 points on the SPX. We know he got in early because his price was considerably less than the Ask at the close of business.

"LM" then has the will to sit and wait until near the end of the next day (the 19th of September 2007 , also an up day) to sell the short leg (the 08Jun1075 Calls) at a Bid very near the COB numbers.

"LM" is now in possession of a large deep in the money bear spread ( a rare comodity) which has a lot of money stored in it and a $37.5M margin requirement.

By selling the 08Jun1075 and buying the 08Jun1150 at these good prices he now has $50.1 million in his pocket and technically speaking at expiration will only have to give back $37.5M .

"LM" apparently likes untrodden ground. The OpenInterest for both the 08Jun1150 Call and the 08Jun1075 Call before he got there on the 18th and 19th of September were zero. The 08Jun1075 Call had been available to trade since December 20,2006 while the 08Jun1150 Call showed up in the list on March 13,2007. The Oi indicates that no trades in these options occurred before "LM" took his position.

If "LM" were to have sat on this position until expiration in June of 2008 he would have received $12,600,000 when he settled for cash.
But this is where the fun begins:

"LM" comes up to the 7th of December 2007 and sees a big down day (-44 points) and he decides to scramble.

It's early in the day (we know this because it was a down day and his transaction's prices for these calls are much higher than the bid and ask at the close of business). "LM" spends $34,200,000 to close both legs of his position. We know these were closing transactions because the Oi (which is reported next day) declines the same 5000 count on each leg as the volumes on the 7th.

The result of this hasty retreat was a net +$15,900,000 for "LM". More than he would have made had he held until expiration.

Moreover, let's ask the question of why anyone would "buy" "LM" out for a credit of $34.2M when the spread if held to expiration at the new prices would loose money. One answer is that the spread still had some money in it based on time only premiums. As of the 15th of November 2007 (about a week later) the new owner could close the spread at the COB bid and ask for +$500K. This is pretty good , provided you can find a third someone to close you out in the short run. Remember these are expensive deep in the money calls and a 5000 count is not that easy to move.

"LM" took only 50 calendar days to work his magic.

"LM's" praise should not be withheld, while his methods not necessarily emulated.
There is that part about the $189M twisting in the wind overnight.

By rule, the BFHof normally does not allow hasty exits. In this case "Leg N Master" would have turned a nice profit had he stuck it out.

As it was "LM's" thoughts were probably that $15.9M now was better than $12.6M at expiration and he had an urge to free up his $37.5M margin in time for Thanksgiving.

Or ... it could be that the guy who took over "LM's" position was the guy who originally had the other side of the position and wanted to take the $15.9M loss this year rather than hold it until next year.
Ouch!


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