Trade Update Nov 2nd, 2012, 12:45 PM EDT: LNKD reported last night, and the stock was initially up 9%, but has now settled up 1.5%. I put on a trade structure yesterday that was designed to benefit from LNKD implied volatility moving lower on a smaller than expected move today, and that’s what we’re getting.
I could wait for the position to decay, and hope the stock stays around $105, but LNKD has shown that it can move $10 quite quickly in either direction, so I am going to close out the position and take my profits.
Action: Sold to close LNKD ($108.40). Bought the Nov 105 straddle at $8.25 to close, and sold the Nov 90 / 120 strangle at $0.75.
Closed structure for net debit of $7.50, for a gain of $2.00
-Bought the Nov 105 call at 5.80
-Bought the Nov 105 put at 2.45
-Sold the Nov 90 put at 0.20
-Sold the Nov 120 call at 0.55
Original Post Nov 1st, 2012:
Dan laid out a strong two-way bull / bear debate on LNKD in the preview earlier today. From a growth perspective, LNKD is the creme de la creme of the internet companies, and one of the few stocks in the social media space with numerous potential revenue streams. On the flip side, its valuation is in the stratosphere, and it’s hard to value given its unique business model and nascent market.
With this sort of backdrop, the technicals start to matter a bit more. Here is the chart of LNKD since inception:
In the last 6 months, the stock has basically been bounded between the range of 90 to 120, with the stock pushing to breakout post-QE3, but ultimately failing to stay above 120. The stock is now almost right in the middle of that range, at 105, which provides a nice setup to play for the stock to stay within that large $30 range, with risk/reward on our side.
TRADE: LNKD ($105.90) Sold Nov regular 105 straddle and bought Nov regular 90 / 120 strangle, collected $9.50
-Sold 1 Nov 105 call at 6.70
-Sold 1 Nov 105 put at 5.70
-Bought 1 Nov 90 put at 1.40
-Bought 1 Nov 120 call at 1.50
Break-Even On Nov Expiration:
-Profits if stock between 95.50 and 114.50 on Nov expiry, with max profit of $9.50 with stock at 105
-Losses of up to $5.50 between 90 and 95.50, and 114.50 and 120, with max loss of $5.50 if stock below 90 or above 120 on Nov expiry
Trade Rationale: This is very similar to the NFLX trade we put on and took off for a profit last month. It sets up well in situations where you feel that there is a defined range for the stock, and implied volatility is high into an event. That seems to define the current situation quite well, so we pulled the trigger on a trade where we are close to risking 1 to make 2. We chose November regular expiry to protect ourselves in the case that LNKD makes a run for 90 or 120 tomorrow, but then pulls back into the range after the event. In this way, we have 2 weeks for the stock to react, as opposed to being forced to take the trade off tomorrow.