LinkedIn, the Social media networking site made headlines last week for its spectacular run post its IPO on Friday May 20th. But just as the weather conditions have to be perfect to create a massive F5 tornado, like the one that tore the town of Joplin Missouri in half, so too do the conditions have to be perfect for investors to chase a $45 IPO up to $122 per share in the first hour of trade. Sadly, the resulting damage to investor's portfolios can be nearly as horrific as the human toll was in Joplin.
Let me examine how the mix was made in LinkedIn and what we might expect to see as options are listed on LNKD tomorrow, Friday , May 27th.
(And information on the listing date of these options has been as closely guarded as the missile launch codes for our national defense.)
There is no doubt that the small offering, at just 7.8 million shares and the pricing made this heavily oversubscribed issue even hotter. Bringing out a small number of shares has long been one of the tools the underwriters use to insure as best they can that the initial public offering remains in demand. The preliminary registration statement filed with the SEC that describes a new issue of stock is known as the red herring. This phrase comes from the training technique used to train young scent hounds.
Basically, a stinky fish (red herring) is dragged along a trail until the puppy leans to follow the scent. In much the same way the road show for the launch of an IPO is seeking to train investors to follow a particular issue such as LinkedIn. If they intend to only bring 7.8 million shares out on the IPO, and they get demand for say three times that amount, they've effectively primed the pump sufficiently to insure a robust rally if not feeding frenzy.
You couple a successful red herring with the success of SecondMarket and SharesPost, sites that seem to have found ways to skirt securities law in unique ways to let qualified investors get into hot issues prior to public offerings and you had indeed a situation ripe for explosive trading.
In storm chaser terms LinkedIn is a whole bunch of hot humid air trapped by a cold front, and when that hot air punches a hole through the enveloping cold air, a potential super cell storm is produced.
For those that were in pre-IPO and got the full benefit of that tremendous run, the felling is euphoric. For those that did not get in and instead were the unlucky chumps that chased LNKD up to $122 to get in, the feeling is like getting into the ring with a cage fighter that is also a pickpocket! Money that was made and lost last Friday had to run to over a billion dollars, and while that is likely to be the biggest day LinkedIn sees for many years, the opportunities to make and lose money will extend for quite a while.
It is nearly impossible to short a hot IPO. I ran into my friend John Tabacco, founder of Locatestock.com on the way to an event in New York City earlier this week. John said in order to secure a borrow for shares a client would like to short (sell with intent of buying back at lower price) the lenders were charging upwards of $0.40 a day, an implied negative rebate rate of nearly 100 percent! Thus if you wanted to short 1,000 shares of LinkedIn you would have to pay at least $.40/day or $400/day per 1,000 shares.
Given the fact that LNKD has stabilized around this $95 level I think it's obvious that few shorts are willing to pay such a significant premium to be short, but that will likely change dramatically when listed options begin trading on LNKD. Then, rather than paying that massive premium per day to be short shares, investors/traders will be able to, through puts, debit put spreads, credit call spreads and a host of other strategies they choose, establish defined risk short positions with higher potential payouts. That's what successful trading is all about, moving the odds into your favor.
On Wednesday of this week, when I plugged the brief three day trading history of LNKD as well as the excessively high premium to borrow shares into our pricing models we found that the implied volatility for LNKD would be 90 percent.
Estimated Options Prices with LNKD trading $95:
Plugging in that 90 percent volatility into Trademonster option calculator, I show the June 95 calls (24 days to expiry) would price at $8.80, the June 95 puts $8.65 or a straddle priced at $17.45, implying a move up or down of 18 percent for June expiry.
The one strike out-the-money June 100 calls would price at $6.75 & and the one strike out-the-money June 90 puts would price for $6.15.
* Jon Najarian is co-founder of optionMONSTER.com, a news and information site for options traders. Listen to Jon's radio show on FoxSportsRadio every Saturday 7 am - 9 am EDT in over 250 cities, or through XM 142 or via Stitcher.com. Follow Jon Najarian on Twitter as twitter.com/optionmonster
For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.
Got something to say? Send us an e-mail at firstname.lastname@example.org and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to email@example.com.