LinkedIn Lovers Could Opt For Upside Call Spreads

LinkedIn Lovers Could Opt For Upside Call Spreads

LinkedIn Corp (NYSE:LNKD) currently has a Positive rating and a 12 month price target of $280 from SIG analyst Brian Nowak. The shares of the professional networking site are down 18% this year and 13% in the last two weeks.  In a report on March 26, Nowak maintained his bullish approach on the stock despite the recent downward movement, which he primarily believes was the outcome of weak EBITDA guidance for 2014, lower desktop engagement, and rising negative sentiment around enterprise client adds.

Short term volatility for LinkedIn alarming

Nowak believes that the near term concerns are overhyped, and the consensus estimates are too low. Revenues are expected to grow, which along with others are “all reasons why LNKD remains one of our top ideas in the sector right now.”

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However, a report from SIG Derivative Strategist Christopher Jacobson on April 4th 2014 noted that though many investors are bullish on LinkedIn Corp (NYSE:LNKD), some may not be willing to acquire the stock at this point owing to recent weakness and volatility. Short-term implied volatility for the social media company has increased significantly, which makes it expensive for the investors to make a position “through long calls outright.” For the company, 30-Day implied volatility is around 52%, which ranks the stock at the 73rd percentile when compared to the previous two years.

Spread your cost and risk

Therefore, investors who plan for a more levered exposure to lower their cost and risk (volatility) could benefit by acquiring an upside call spread on LinkedIn Corp (NYSE:LNKD), says Jacobson. Giving an example, the derivative strategist suggests a May 200/210 call spread with regular expiration. On the basis of the $176.97 stock price on April 3rd, the option could be purchased for $1.95, giving expiration breakeven at $201.95 and a chance to earn profit up to $8.05 (minus the cost of the spread).

Risks on such spread are limited to the price paid. Another way to view the situation is:  risking $1.95 to win $8.05. So, if the LinkedIn Corp (NYSE:LNKD) stock ends the May expiration below the $200 mark, then the spread will not be triggered, and if the stock ends over $210, the spread in this case will be $10. It also implies like “buying a ~20% probability of the stock being above $210,” says Jacobson.

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