We posted our detailed thoughts on LNKD in our earnings preview yesterday. LNKD stock is up more than 100% in 2013, one of the momentum leaders of the past year.
The implied move is around 10%, and the stock has moved more than 11% on average on earnings over the last 8 quarters. As we noted in the Technicals section of the preview, the $213.50 level is the price to watch on the downside, and the recent all-time high at $257.56 is the upside level to watch. We are not doing any trades ourselves, but for longs who are not selling into the print, the idea of an overlay to add potential yield and leverage looks attractive.
Options Overlay against 100 shares of LNKD at $246 – Buy Dec 260 / 285 1×2 Call Spread for even $
- Buy 1 Dec 260 Call for 14.20
- Sell 2 Dec 285 Calls at 7.10 each or a total of 14.20
Break-Even on Dec Expiration:
Profits: Gains of the stock btwn 246 and 285, make up to 29. Stock is called away at 285 for a 29 profit PLUS the distance of the call spread, so an added 25, or 10%, so you have effectively sold your stock at $310, up 26% from current levels.
Losses: Below 246 you have the losses of the stock, but you have not added any additional premium as the overly was put on for no additional cost.
Trade Rationale: This structure takes advantage of elevated vol into the earnings event to potentially add yield to a long position. What’s interesting about the structure is that it is actually short about 10 deltas and short vol. Meaning if the stock goes down or is flat the trade is likely to be up a small amount of money tomorrow. If the stock does a large gap to the upside it will actually be down a little money but it is then set-up perfectly into year end as any follow through in the stock up towards 285 would mean you’ve effectively been called away at $310.