Trade Update LNKD – Taking Off For a Small Loss, Hate the Binary Event

by Enis August 2, 2012 2:43 pm • Commentary

Trade Update August 2nd, 2012 at 2:40 pm:

LNKD stock is finally starting to catch up to its social media brethren on the downside.  The stock is down almost 15% in the last 2 days, heading into its earnings report after the close tonight.  With FB now trading at $20, I would have expected LNKD to be trading closer to 50 than 100, but there are clearly still people with endless faith willing to dump money into this stock.

When I first posted this trade in June, I had no intention of having to hold it until the August earnings report.  I did anticipate that if the trade was still on ahead of earnings, the increase in implied volatility would help to hold up the value of my options.  That is what has happened, and I can now sell the position for a small loss even though the stock is only a few percent lower than it was almost 2 months ago at my initiation (so the options structure did not decay much).

I have no view on earnings.  My Aug 80 long put strike is still more than 10% out of the money, so the probability of this trade being a winner is still quite low, significantly lower than 50%.  In reality, I think there is a good chance LNKD trades 25-50% lower over the next 6 months, but that doesn’t necessarily mean it happens in the next 2 weeks.  I am going to preserve this premium for a better time.

Action: Sold to close LNKD ($92.50) Aug 80 / 60 1×2 put spread at 2.15 for a 0.60 loss.  Still long the Aug 40 put since I didn’t want to sell it for nothing.

(Similar logic applies for those who did the Aug 80 / 70 put spread.)  I still don’t like the LNKD story.  If LNKD is flat or up, or even down small after earnings, I will likely re-enter a bearish biased structure.  But the probabilities are just not working in my favor here, and my original trade was not designed to end up as a binary bet on earnings.




Original Post June 8th, 2012:

Here’s a preview of what I’ll be discussing on Options Action at 5pm EST today on CNBC:

If you told me on May 17th, the day before the Facebook IPO, that Facebook would decline 30% in 3 weeks after its groundbreaking IPO, and then asked me, how much lower will LinkedIn be trading as a result?  I would have guessed between 20 and 40% lower.  Instead, LinkedIn is trading down about 10% from its closing level on May 17th, and that truly amazes me.  Here’s the chart of LinkedIn since the Facebook IPO:

I’ve circled in red the day of the Facebook IPO, and you can notice that the volume has been elevated ever since.

Even more incredible, here is the performance comparison since the May 18th close:

What makes LinkedIn so much more attractive than Facebook?

A few comparisons:

  • LinkedIn has 1 year revenue growth of 115%, impressive for sure, but Facebook’s figure was 88% growth
  • LinkedIn has 1 year EPS growth of 87.5%, no chump change, but Facebook also grew EPS at a blistering 53% pace.
  • LinkedIn has a forward P/E of 138.  Facebook’s is 54.  Based on the revenue and EPS growth rates, that P/E difference seems ridiculous.  The only explanation is that investors view LinkedIn’s business model as offering substantially better long run prospects than Facebook, no matter the current growth rates.

Setting aside the long-term valuation arguments though, the reason LNKD first popped up on my radar this week is because of their recent data breach.  Hackers apparently accessed millions of customer passwords on the site, and LinkedIn is still investigating the extent of the breach.  That further exposes the vulnerability of social media sites to security and resulting regulatory and privacy risk going forward.

Facebook’s IPO also demonstrated the potential weakness in the digital advertising space, as investors are concerned about the ability to monetize all those users.  More evidence of that weakness was outlined in this article from Reuters yesterday, as digital advertising growth for newspapers declined for the 5th straight quarter.  Now in LinkedIn’s defense, its primary bullish case is that it’s a network that often connects employers to job-seekers, while advertising is a secondary revenue stream.  But I think the overall trend online will affect LinkedIn as well, where it becomes harder and harder to monetize members without excessively intruding their privacy.

Long story short, I think LinkedIn’s stock has some catching up to do on the downside, particularly in a negative market backdrop overall.  The 200 day moving average sits at 85, and I’m going to target a breakdown below there for a move to the support level of 60.  The first trade structure is a put butterfly, and below that I will lay out the put spread I will detail on the show, as a simpler alternative.

TRADE: LNKD ($95.00) Buy Aug 80/60/40 put butterfly for $2.75
  • Buy 1 Aug 80 put for 4.85
  • Sell 2 Aug 60 puts at 1.20 each, for a total of 2.40
  • Buy 1 Aug 40 put for 0.30
Profits between 77.25 and 42.75 with max gain of $17.25 with the stock at 60, losses of up to 2.75 between 80 and 77.25 and between 42.75 and 40.00, max loss of 2.75 above 80 or below 40.


LinkedIn implied volatility is near 70 in August, as August expiry captures the next earnings report.  As a result, it’s hard to find a great risk/reward bet given the high premiums, so this put fly is about the best we could find.  The advantage of this structure is that it won’t decay much for the next month, which will allow us to stay in the game if the trade doesn’t go in our favor immediately.  And it’s still decent risk/reward, better than 6 to 1.  Please Note:  Liquidity is not great in LNKD options, so be sure to use limit orders if you trade the name.


TRADE 2: LNKD ($95.00) Buy Aug 80/70 put spread for $2.40
  • Buy 1 Aug 80 put for 4.95
  • Sell 1 Aug 70 puts at 2.55
Profits between 77.60 and 70.00 with max gain of $7.60, losses of up to 2.40 between 80 and 77.60, max loss of 2.40 above 80.


This structure’s risk/reward is lower, but it’s a simpler structure and should act quite similar to the put fly over the next month.