Use LNKD to Play the Social Media Stock Breakout

Social media stocks have yet to join the the bullish bonanza transpiring on Wall Street. But if the charts are any indication, the time is soon at hand.

Use LNKD to Play the Social Media Stock BreakoutThe social media focused Global X Funds (NASDAQ:SOCL) has a breakout brewing that may well spur the next advance in leaders of the social media complex like LinkedIn Corp (NYSE:LNKD).

While the SOCL ETF has much to be desired in the liquidity department — the average daily volume hovers near 100k — its price action acts as an effective proxy for the social media sector. In addition to the aforemtionted LNKD, it counts Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOGL, NASDAQ:GOOGL) and Twitter Inc (NYSE:TWTR) among its membership.

Since booming in the back half of 2013, SOCL has been consolidating in a symmetrical triangle formation. While the broader U.S. equities market has been marching to unseen heights, SOCL remains well off its peak.

With the apex of the triangle looming a breakout should be coming sooner than later.

Source: MachTrader

A closer inspection of the daily chart reveals SOCL’s recent trend reversal and return to bullish behavior. Over the past few weeks we’ve seen a nice tight base form just beneath resistance at $18.75.

Source: MachTrader

As the largest holding in the SOCL ETF, LinkedIn stock has been one of the best performers in the space. The last three earnings announcements have resulted in large up-gaps in LNKD, propelling its uptrend to new heights quarter after quarter.

Since it’s latest earnings jump LNKD stock has been treading water just under its all-time high at $274. The digestion has been healthy allowing the stock to build a based for its next advance.

Source: MachTrader

The coming breakout in SOCL may well be the spark needed to kick off LNKD’s next up-leg.

Link-Up with LNKD Call Spreads

With a $267 price tag, even call options in LNKD are more expensive than most traders may want to pay. One of the simplest ways to reduce the cost is to use call spreads instead. We can sell a call option of a different strike price to partially finance the one we’re purchasing.

Buy the Apr $270/$280 call spread for $3.90. The risk is limited to the initial $3.90 debit and will be lost if LNKD sits below $270 at expiration.

The max reward is limited to the distance between strikes minus the net debit, or $6.10, and will be captured if LNKD rises above $280.

You may consider waiting for LNKD to break above resistance in the $274 zone before pulling the trigger.

At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.

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