Big Printin’ – $LNKD: Who Knew?

by Dan June 13, 2016 3:12 pm • Commentary

We often detail “unusual options activity” not because we think there is necessarily specific knowledge to be gained as to the direction of the underlying, but because it often reveals investor sentiment/fears into an event. Of course what’s often more fun after the fact with an acquisition like this morning’s $26.2 billion bid from Microsoft (MSFT) for LinkedIn (LNKD) is when traders and journalists immediately look to see who knew what and when by looking at prior days’ options activity.

At first glance there was nothing particularly dramatic in LNKD, call volume was 11k, vs 10k 20 day average, and calls out-numbering puts 11k to 8k vs the 20 day average of 10k vs 5k.  To be very honest, there is little to be gleaned from that data of major players knowing about this deal in advance.  And you need to be really careful with what you take-away from options activity without intimate knowledge of any specific trade.

For instance, in a Fortune article today; Was Someone Tipped Off To The LinkedIn Sale? by Dan Primack & Stephen Gandel, they point to some funky stuff going on in August expiration 160 calls on Friday afternoon:

Fortune has examined options contract records for LinkedIn, and discovered unusually high trading volume last Friday.

One of the LinkedIn options is a call with a strike price of $160 per share, which is the price at which an option starts to make money, that matures on August 19. They first began trading on Feb. 5, which also represented the day with the most contracts sold, at 121 (the only day of triple-digit action). Well, until last Friday when a whopping 621 contracts were traded.

Before this article was forwarded to me I was also examining LNKD activity and arrived at a very different conclusion.  First let’s look at the largest block options trades from Friday:

from Bloomberg
from Bloomberg

What its looks like is the Aug 160 calls were part of a 4 legged traded. The blue quantity indicates opening, and the grey quantity indicates closing. Adding to that, the options that appeared to be closing were less than the existing open interest, while the options that appear opening were in greater quantity than the existing open interest. This makes some sense, if it were a roll down in put strikes and a roll down in call strikes.

So I hit up my floor broker on the Philadelphia Options Exchange (PHLX) where this trade was printed, and asked for the report as it was advertised on Friday afternoon:

sld 600  aug 115 – 125  put spreads
sld 500  aug 160 – 185 call spreads
collected $274500 crossed all

So what’s that mean? It kind of confirms my initial thoughts, that the trader sold to open 500 Aug 160 calls and bought to close 500 Aug 185 calls and sold to close 600 Aug 125 puts and bought to open 600 115 puts.

A caveat though. Just because this is the way the position was reported, that the spreads were each sold, it does not have to be what happened. Sometimes the reports are just mistaken, and sometimes the report is confusingly relayed by the brokers to throw onlookers off. Some would say, “but these options traded on the offer, and these options traded on the bid, so it had to be this way or that way”. But that’s not always the case either. With a trade like this that was “crossed” (as the report states), the stock has already shifted slightly before the market maker printed the trade. Therefore all 4 legs printed may be off from the bid ask.

You get the point, who really knows unless you have intimate knowledge of the trade. But one thing I am fairly certain of, 500 of the Aug 160 calls were not bought on an outright basis as was suggested by the Fortune piece above.

When I first looked at this trade shortly before noon, this is what I came up with, prior to getting color from the PHLX:

a roll though of risk reversal in Aug exp. tough to tell whether it was rolling a collar, or a bullish risk reversal, at 1:40 pm a trader closed 600 of the Aug 125 puts vs 500 of the Aug 185 calls and opened 500 of the Aug 160 calls vs 600 of the 115 puts

if it was rolling a collar vs long stock it was very bad timing, if it was rolling a bullish risk reversal then it was very good timing.

I’ll make one last point. Calls were clearly bought and sold in LNKD on what was a kind of active Friday afternoon in the market, and maybe some of the short dated calls were bought on material non-public info, but I doubt anyone who knew something they should not have would have done so in a 4 way options trade that would easily stick out like a sore thumb.

Your guess is as good as mine. But it’s not likely as clear cut as Fortune sees.