LNKD broke down from the $200 pivot level where the stock was trading when we initiated the put spread position on Friday. Since then, the stock has been very volatile, selling off all the way down to near $180 yesterday, and then bouncing back to $190 today. This morning, the stock’s strength has take back above the mid-February low. With the quick gain in the position, and the volatile nature of LNKD stock, we’ll take the put spread off for a gain here rather than risk a move back to the $200 pivot level in LNKD.
ACTION – LNKD ($188.60) Sell to Close the May 200/170 Put Spread at $14.10 for a $3.60 Gain
Original Post: New Trade – $LNKD: LinkedIn’s Breakdown is Awaiting Your Response, March 21, 2014
While social media stocks have gotten a ton of investor intention in the latest leg of the bull market, I think it is safe to say that the price action for most of the stocks has gotten a bit irrational, save one, LNKD. While many social and web services stocks (FB, P, YELP & Z) are partying like it’s 1999, LNKD is now down 7% on the year and 22% from the all time high made back in September.
The one year chart below shows the downtrend that has been in place since the highs, making a very methodical set of lower highs and lower lows, while also below key momentum indicator, its 50 day moving average most of the way down. The stock is now testing the $200 support level, and a break below would clearly make the Feb low in play with a possible test of $180:
Add to the poor technicals two consecutive earnings disappointments, earnings growth that has come to halt, with 2014 expected to be its first year of negative growth, sales that have decelerated from north of 50%, heading to the low 30s over the next few years, and you have a stock that continues to be priced for perfection. Even taking into account the recent slide, LNKD is trading at forward multiples of 125x earnings and 12x sales. Any trader worth a damn knows that shorting a stock like this solely on valuation is a fool’s errand, but with weakening financial performance, weakening momentum, a horrible technical set up coupled with the valuation, well, then there may be a trade!
The company is expected to report Q1 earnings the first week of May, it is my belief that if the company disappoints for the third consecutive quarter in the stock would likely test the 52 week lows.
TRADE: LNKD ($200) Bought May 200/170 Put Spread for $10.50
-Bought 1 May 200 Put for 14.20
-Sold 1 May 170 Put at 3.70
Break-Even on May Expiration:
Profits: btwn 189.50 and 170 make up to 19.50, max gain of 19.50 below 170
Loses: lose up to 10.50 btwn 189.50 and 200 with max loss of 10.50 above 200
Rationale: This is a structure that looks for a technical breakdown based on the stock’s recent action of lower highs and lower lows. There’s a chance that LNKD holds this 200 level and bounces changing the recent momentum. If so we’re likely to keep a fairly tight stop to the upside. But if it does break here it could quickly flush towards 180 at which point we’d likely look to exit the trade.