by John Kmiecik | October 14, 2013 8:26 am
It should be an interesting week ahead. With America’s debt ceiling deadline set for Oct. 17, anything can happen, and investors are prepared for the best and worst cases. Of course, trading is awfully similar in some respects — you devise a plan to profit from a scenario that you like, but prepare yourself in case it doesn’t happen. The following trade idea for LinkedIn (LNKD) is a good way to ready yourself for a less-than-ideal scenario.
The trade: Sell the Oct 25 240/245 Call Credit Spread (selling the Oct 25 240 call and buying the Oct 25 245 call) for 80 cents or better.
The strategy: The maximum potential profit for this trade is 80 cents if LNKD is trading below $240 at Oct 25 expiration. Both call options would expire worthless. The maximum loss is $4.20 ($5 – $0.80) if LNKD is trading above $245 at October expiration. Breakeven is $240.80 at expiration based on a credit of 80 cents.
The rationale: Since this trade idea is a credit spread that is expiring in two weeks, the general fundamentals of LinkedIn stock probably are not as vital as if this was a long-term trade.
The return on equity for LNKD has been disappointing over the last several earnings announcements, even though it improved slightly in this last quarter as compared to last year. LinkedIn also reported flat earnings per share in that same quarter.
That being said, LinkedIn stock has had a terrific run higher, especially in the past three months up until this latest market slide. So, could LNKD shares be just a bit overvalued?
Click to Enlarge During this recent selloff, the stock dropped from about $250 to below $220 in the past several sessions. LNKD rallied some in the latter part of the week, but does it have enough to make it back to $240 in a couple of weeks? It certainly is not out of the question, but with this unsettled debt ceiling crisis still looming, it might not help LinkedIn stock rebound unless things are completely settled.
The $240 level is a strong area of possible resistance that has acted as both support and resistance in the past. The implied volatility still is considerably higher than the historical volatility, which gives selling premium like in this trade idea a slight advantage from an options perspective.
LNKD is expected to announce earnings after this trade’s expiration, so now might be a good time to connect to this trade idea.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
Source URL: http://investorplace.com/2013/10/oct-credit-spread-linkedin-stock-lnkd/
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