With LNKD trading @ 184 premarket, the probability is extremely high that the May1 165/240 Short Strangle will expire worthless. With that in mind, it’s time to put on our finest Kentucky Oaks apparel and hit the track to continue this win streak!
We filled two Strangles @ 0.78, and two more @ 0.96 for an average credit of 0.87. Couldn’t resist that second round when we saw the pop in price for this Strangle. Assuming this does in fact expire worthless and we realize max profit we will make $87 per spread, totaling $348. Not bad for an overnight trade.
It’s Friday so no trade as usual. Have a great weekend, and be sure to tune in for the Kentucky Oaks today @ 5:45pm EST and Kentucky Derby tomorrow @ 6:24pm EST!
This may as well be a carbon copy of last month’s chart. Support at the bottom of the regression channel and the 200-day simple moving average lead us to see no end in sight for this slow march upward. Implied volatility is near an all-time low in LinkedIn at 35%, which means traders aren’t betting on a quick drop in prices. It could be that, a year after a crazy IPO, the market has learned to properly value LNKD’s revenue model.
From a trading standpoint, this is exactly the kind of chart we like to use for naked puts, but the price of the stock is much too high. The margin requirement on any naked trade would be too high to properly reward the trader for the risk taken. Without that option, we turn to credit put spreads, possibly around the 100/105 area. The next earnings report is after January expiration, so it could be that a short term premium-sale could be profitable for the patient trader.
If we elect to enter a trade in LNKD our Options Strategy Alert members will be the first to know about it. Sign up here to make sure you’re in the know!
We’re past the halfway point of 20 on 20 today! Nice job, us! They say that self-congratulation is the highest form of flattery… or something like that.
Ahem, what we mean to say is, “take a look at this chart of LinkedIn!” LNKD, originally a dud in the IPO scene, has turned into quite the investment for those people who got in after the original sell-off. Now we’re trying to figure out if it’s a good bullish pick around $105, the price it’s bouncing around now.
There are two good arguments for getting in around this level. First, the 200-day simple moving average (a relatively new measurement, given the recency of the stock’s public release) is just below the current price, giving us a nice support level. Second, any regression channel we put on the chart (including the one we decided to use) shows that the current price is near the bottom of the 1-standard deviation regression line (math!).
With that in mind, we see bull put spreads underneath $105 as decent trades for December. Always be sure to analyze your own risk tolerances - we’re just giving you a starting point for finding a trade. If you like it and want more, sign up for our Options Strategy Alerts!
Here’s the trade we sent to Earnings Trade Alerts members at 3:20pm EST today. The trade filled @ 0.85. Hopefully strategy prevails and we have another winner. The heart always pounds extra hard when selling Strangles into tech earnings!
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Another tough call today. With liquid names like SBUX & LVS and not so liquid names like LNKD & PCLN, there are quite a few options. We initially decided to stick with the super liquid LVS, but ultimately couldn’t resist the lure of trading LNKD into earnings.
Earnings Trade Candidate: LNKD
Easy to Borrow (ETB): yes
Liquid Options: plenty of OI & volume, did/ask spread of 10-20 cents
Max Potential Gain: $80 per spread if LNKD expires between 90 & 125
Max Potential Loss: theoretically unlimited, but max probable loss is $900
Break Even: 89.20 lower b/e, 125.80 upper b/e
Explanation: A Short Strangle into earnings on a stock like LNKD is not for beginners. This trade requires that one have plenty of capital in your account, and that one is willing to stomach a potentially large loss. We like it because the upper break even resides at recent highs resistance and there is support at the lower break even which may hold the stock in the event the report is poor.
The break even to break even range of this Short Strangle puts us approx 1.9x outside the expected move range, which we may need every bit of in a stock like LNKD. Anything can happen here.
A solid defined risk alternative to this trade is the LNKD Nov1 90/95/115/120 Iron Condor @ 1.80 Day Limit (credit). This puts the break evens just outside 1x the expected move range, but still requires one to be willing to stomach a max potential loss of $320 per spread if LNKD moves outside the expected move range.
Here’s a chart of LNKD noting the expected move range (black lines) and profit zone of this spread (purple lines & green oval):
NOTE: Trading Options into earnings includes financial risks and may result in loss of capital. Do not consider an earnings based Options strategy unless you understand and accept the capital risks associated with the trade.
As noted on twitter this morning here and here, we took profits on our LNKD earnings trade shortly after the opening bell. LNKD came out of the gates running, and we did not want to take any risks. Turns out this was a good decision considering LNKD is now trading at 89.15 and the spread is trading at a loss.
As mentioned yesterday in this article, we sold to open the LNKD Feb2 weekly 65/70/85/90 Iron Condor @ 1.85 credit. This morning, we covered the 85/90 call spread @ 0.50 with the intention of letting the 65/70 put spread expire worthless in order to minimize transactional costs. The result was a gain of $135/spread, or +42.86% return on risk overnight! Excellent.
We tend to exit earnings trades shortly after the opening bell. After all, these trades are about the vol crush. If the stock is even remotely close to either end of the expected move range, there’s no reason to take any chances. On the other hand, if the stock is in the middle of the range with 7 or less days left and there’s still a decent amount of profit to be made, we’ll often let it ride (see OPEN earnings trade).
We have shared our member earnings trades in AAPL, SBUX, AMZN, WYNN, and OPEN with you here on this blog once the closing bell rings. All five have been profitable trades, something we are very happy about. We do not go huge on these earnings trades, but our 100% win ratio has made a difference nonetheless.
Today we kept with our outside the expected move strategy with the trade we did in LNKD. We shared our trade with members before the bell, and are sharing the email we sent to members with you now for educational purposes.
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LNKD expected earnings move is 7.60, giving it an expected move range of 69.10 - 84.30 based on current price. Feb2 weeklys implied volatility (IV) is 190%, Feb IV 104%, and historical is around 60%. They have only reported earnings twice now, resulting in a big downside move from 100 on the first report and a muted reaction to the most recent report.
This is a tough one since there is little history to look at, and historical volatility is not very accurate due to lack of data. That makes this much more of a high risk earnings trade, so we want to stick with something simple with defined risk.
We just filled the LNKD Feb2 weekly 65/70/85/90 Iron Condor @ 1.85 credit. Risking $315 to make $185 per spread with expiration taking place tomorrow in these weekly options. 63.15 & 86.85 are the break evens, keeping both outside the expected move with a little more cushion to the downside.
We went very small on this given the lack of historical volatility data and the fact this is only the third report for LNKD. That said, we couldn’t resist placing a trade since LNKD is liquid and has extremely high IV levels on the weekly options going into the earnings report.
The trade idea was the Aug 75/80/115/120 Iron Condor, which would have easily filled @ 1.90 during the final hour had we worked the trade.
How does the trade look now that earnings have been announced?
Here’s a LNKD 1 day 1 minute chart…
The initial reaction to earnings was positive. The upside move quickly retraced during this morning’s melt down, but is settling in well now @ 94.00.
We would be exiting this trade right here had we entered. To cover the spread, the current “Mid” is 0.75 and the “Nat” is 1.35. This isn’t the most liquid spread in the world, but money would have been made even at the worst case scenario “Nat” fill.
We could get filled pretty quick if we worked the exit at 1.10, which would result in a gain of $80 per spread…a return on risk of 25.81%. Another win for the earnings trade idea posts!
As mentioned yesterday, we did not trade this spread since this was LNKD’s first report. Now that we have a better feel, we may trade it next time. If you read our earnings analysis and entered the Iron Condor, congratulations!
LNKD reports after the bell today. There are still opportunities to trade earnings regardless of the heavy selling pressure we have seen in broad markets as of late. In determining what the best LNKD earnings based trade might be, let’s start by taking a look at LNKD vs. QQQ 60 day charts.
LNKD 60 day:
QQQ 60 day:
As you can see, LNKD has been showing relative strength in comparison to its relative indice, the Nasdaq (represented by QQQ). LNKD has been range bound between 97.00 & 110 as of late, while QQQ has dropped sharply from 59.50 to 55.10. Considering the way LNKD has held up amidst this downside move, it may be safe to say there is more risk to the downside than the upside in response to earnings. We’ll keep that in mind.
Let’s calculate the expected move using our usual strategy…
current price of LNKD is 97.00, meaning it’s closest front month strike is the Aug 97.50.
Aug 97.50 Straddle is currently @ 18.25 ask
Aug 95/100 Strangle is currently @ 15.75 ask
(18.25+15.75)/2 = 17, so the expected move is 17 at the moment.
97.00+17 = 114.00 max upside expected move
97.00-17 = 80 max downside expected move
Now that we have that data, let’s see if there is a trade worth making. Given the recent volatility increase in the market we are not comfortable with any naked Options positions, so we will focus on trades with defined risk.
Aug 115/120 Bear Call Spread @ 0.80 is no good because the credit does not amount to at least one third the width of the spread in the strikes (5x0.33=1.65).
Aug 77.50/80 Bull Put Spread @ 055 is no good for the same reason (2.50x0.33=0.825)
What if we combine a Bull Put Spread and Bear Call Spread to make an Iron Condor?
Aug 75/80/115/120 Iron Condor @ 1.90 works! The credit obtained for selling the spread exceed one third the width of the 5 point strike spread. The max profit range on the spread stays at or outside the expected move, and the break even to break even range is outside the expected move. Let’s take a look at the Risk Plot Profile of this spread…
The spread may or may not work, but that goes for any trade you make. The fact is, the probability of success is high given the wide range obtained by selling this spread. The probability of LNKD staying between the max potential gain price points of 80 and 115 into expiration is 58%. The probaility of it staying between the two break even price points of 78.10 and 116.90 is 64%. Not excellent, but at least you put the odds in your favor.
We are staying away from this trade for the simple fact we aren’t comfortable enough trading LNKD yet. Regardless, this information is valuable and if you are cozy trading LNKD into earnings this is a nice weapon for you to take into battle.
