Following an absolute bloodbath on Friday, with a post-earnings drop of 44% due to weak guidance, shares of LinkedIn Corp (LNKD) found some support on Monday. LNKD stock posted a 1.5% gain to close at $109.97 on an overall bad market day.
I look for LNKD stock to consolidate near these levels over the next few weeks, with further downside damage being tempered after the recent carnage.
Several analysts came out in defense of the shares following Friday’s large drop, with Stifel Nicholaus and Credit Suisse both reaffirming their “buy” ratings, albeit while lowering the price target prices.
While guidance was definitely shy of expectations, earnings and revenues for the quarter actually beat handily.
Click to Enlarge The company now sees full-year earnings per share (EPS) in the range of $3.05 to $3.20, putting the forward price-to-earnings ratio at a much more reasonable 36 times earnings.
Technically, LNKD is now trading at levels last seen in January 2013. Long-term term support is at $95, with the stock being deeply oversold on a nine-week RSI basis at 15.34.
Monday’s price action, with LinkedIn closing higher on the day after opening lower, was also encouraging from a technical perspective.
More importantly, option implied volatility (IV) is at lofty levels of 67.24% even post earnings, trading in the 90th percentile. This heightened regime of IV is normally a reliable contrary buy indicator and makes option-selling strategies much more viable.
Short-term implied volatility is even more pronounced, with February monthly options that expire a week from Friday trading with a mid-80% IV. This sets up a put credit spread strategy to position bullishly in LNKD at a 13.6% discount to the current closing $109.97 level of LNKD stock .
The Trade for LNKD Stock
Specifically, I would look to sell the LNKD Feb $95 puts and buy the LNKD Feb $90 puts for a 71-cent net credit. The short strike price of $95 is right at long-term support, and also provides a 13.6% cushion.
Click to Enlarge The maximum gain on the trade is $71 per spread, with the maximum risk being $440. Return on risk is 16.1%. I would close out the spread on a meaningful break of the $95 support level, while letting the spread expire and retaining the initial credit of $71 per spread if LNKD remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
