The million-dollar bet against LinkedIn
Is LinkedIn setting up to make a big move? With the company's earnings release scheduled for Thursday after the bell, LinkedIn's stock options are implying something big one way or another. The implied volatility in the weekly options expiring on Friday points toward a 10 percent move in the stock.
The recent big moves in major tech stocks, particularly in Facebook, has added to the volatility in LinkedIn. But while Facebook may have popped 25 percent after its earnings last week, option activity in LinkedIn is telling a different story. There is more bearish sentiment on the Street, with a lot of call selling and put buying.
(Read more: Facebook profit shock led to big options bonanza)
There is no doubt that LinkedIn has been a successful stock, with its share price almost doubling in the past year, but the options are telling us that it may be time to play for a pullback. On the fundamental side, LinkedIn has seen revenue growth quarter over quarter. However, with an astronomical price-to-earnings ratio of about 600, an earnings miss could be a disaster for the shares.
The biggest trade in LinkedIn on Monday was the sale of 926 August 200-calls, which were sold for $16 each. This allows the investor to collect a net of $1,481,600 off the bat, and this will all be kept in the trader's pocket if the stock is below $200 by the time of expiration.
The breakeven of this trade is $216, and if the stock rallies significantly between now and August expiration, it will be a major problem for the trader. So while selling a call can be very risky, this trader is confident that the price of LinkedIn will not be above $216.
This is a bold move, because LinkedIn reports its earnings on Thursday. And while the trade is now benefiting from the overinflated pre-earnings prices of these options, this bet has the potential to be very dangerous if LinkedIn behaves like Facebook and rallies off of good news.
Other investors have been purchasing far-out-of-the-money calls for the week. These traders are making the opposite bet, as they are clearly anticipating that LinkedIn will join Facebook in rallying post-earnings. Also on Monday, someone purchased 359 Aug. 2 245-strike calls for 78 cents each, outlaying a total of $28,000.
This trade is far out of the money—more than 20 percent higher than the stock's current share price—but does not represent a significant cash investment for a large trading group, and has the possibility to make a great deal of money if LinkedIn soars off of very positive earnings.
Overall, there has been a lot of activity in the weekly LinkedIn out-of-the-money calls. But on the broader scale, the large trade placed Monday on the 200-strike calls represents not only three times as much size as out-of-the-money calls, but unlimited upside risk in the trade.
And this trader believes that in the month of August, LinkedIn will not rally as much as most options traders expect—meaning that there is an opportunity for this trader to profit off of the overpriced options.