Earlier today we previewed LinkedIn’s (LNKD) Q4 results due out after the close (here). At the risk of over-doing it today, there was an interesting pre-earnings options trade in the name that I thought was worth highlighting for educational purposes.
When the stock was $190 at 2pm, it appears that a trader collared 300,000 shares of stock:
- Selling to open 3,000 Feb 240 calls at 91 cents,
- Buying to open 3,000 Feb 180 puts for $8, and
- Selling to open 3,000 Feb 150 puts at $1.39
Options traders would call this a put spread collar. The trade cost $5.70, or $1.71 million in premium.
This is how this stock overlay affects the supposed long stock position on February expiration:
Profits: of the stock of up to $44.30 between $190 and $234.30 (the different between the current stock price, short call strike and less the $5.70 in premium spent for the structure). At $240 or higher the long stock position would be called away, but the trader always has the ability to buy to cover the short call position and leave their long stock position intact.
Losses: between $190 and $174.30 have losses of the stock position, have protection between $174.50 and $150 of up to $24.50, or about 13% of the stock price. Losses again below $150, but will have mitigated $24.50 of losses.
What’s interesting about this trade is that it allows the trader to participate on the upside, but also provides some fairly near the money protection in the stock in the event that the stock declines somewhere near or above the implied move of 12%.