What to Expect From LinkedIn's Options This Week
Since LinkedIn'sspectacular initial public offering last Friday, concerns have been raised about potential short-sellers waiting in the wings. This week may provide a good gauge of any significant bearish sentiment when options become available on the social-media company.
It has been nearly impossible to short LinkedIn , as is the case with any hot IPO. To borrow shares that a client would like to short—sell with intent of buying back at lower price—traders would have had to pay upwards of $0.40 a day, the going rate among lenders, said John Tabacco, founder of securities-lending portal Locatestock.com.
So if you wanted to short 1,000 shares of LinkedIn, you would have had to pay at least $0.40 a day, or $400 per 1,000 shares. That's an implied negative rebate rate of nearly 100 percent.
Given that the stock seems to have stabilized around the mid-$90s, few traders would have been willing to pay such a significant premium to be short. But that will may change dramatically when listed options begin trading on the name this week.
Rather than paying massive daily premiums, traders will be able to establish defined-risk short positions with higher potential payouts by using puts, debit put spreads, credit call spreads, and a host of other strategies.
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There is no doubt that the small offering of just 7.8 million shares made this heavily oversubscribed stock even hotter. Bringing out relatively few shares has long been one of the tools that underwriters use to stoke demand for an IPO and ensure a robust rally, if not an outright feeding frenzy.
Factor in the success of SecondMarket and SharesPost, sites that let qualified investors get into hot issues before public offerings, and you indeed have the type of explosive trading that leads investors to chase a $45 IPO up to $122, as they did on LinkedIn's maiden session on Friday.
Although that will likely be the biggest day LinkedIn sees for many years, the opportunities to make money will extend for quite some time. And starting today, that will include making profits on the downside as well.
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Jon 'DRJ' Najarian is a professional investor, CNBC contributor, and cofounder of OptionMonster.com.
Najarian has no positions in LNKD.