The endless one-week wait is almost over … we get options in LinkedIn (NASDAQ: LNKD) tomorrow! We think. Nothing is ever etched in stone in the options listing – or options trading — business.
After those first day fireworks, LNKD has settled into a more human range. By human, I mean the ranges have hovered in the 7% — 10% area per day. That should taper too. If the market makers think 5% ranges look realistic, they’ll price volatility at about 70-80. That sounds high of course in a world where the CBOE Volatility Index (CBOE: VIX) basically lives in the high teens, but it’s realistic for a small float name that the world has on its radar for now. At least until the next band of IPO’s hits.
If I trade this option at all, I’d probably go with Iron Condors. That is, I’d sell out-of-the-money (OTM) put spreads versus OTM call spreads. I’m not a fundie. My definition of “value” is “price of stock on the board”. LNKD may be four gazillion times earnings, and may “correct” some day. It may also grow earnings at four gazillion percent. I truly don’t know or care. What I do know is that I don’t believe it breaks either end of that first day range so fast. I also know that I don’t want to bet the ranch on that “bold” call, hence playing LNKD with spreads. And I also know that implied volatility will (rightly) open on the high side.
Iron Condors have relatively muted risk/reward characteristics. You can only earn the net credit you take in, and you can only lose the maximum width between strikes you sell minus that same credit. So pending actual prices, and pending whether I actually want to get involved in LNKD,that’s how I plan to proceed.
Follow Adam Warner on Twitter @agwarner.