Twitter shares fell more than 6 percent Wednesday following the company's weak revenue guidance for the current quarter. The move put pressure on other social media stocks — LinkedIn and Facebook — and some traders are betting on even more volatility in one of those names after reporting earnings later this week.
LinkedIn reports earnings on Thursday after the bell, and the options market is implying that the stock could move as much as 10 percent in either direction by Friday. "The average move for LinkedIn [after earnings] is 13 percent, so it moves a lot," Dan Nathan told CNBC's "Fast Money " on Tuesday.
To calculate the implied move, options traders look to the front-week at-the-money put and call strike prices — known in the options market as a straddle. The cost of the straddle usually captures how much traders think a stock will move
In one trade that caught Nathan's eye, someone purchased 900 of the Oct. 30 weekly 220/230 call spreads for $3, making it a $270,000 bet. Buying a call spread is a bullish strategy where a trader will buy a call and then sell a higher strike call to offset the cost. The goal is for the stock to rise to the call you are short. This specific trade sees profits if LinkedIn rises as high as $230, or 10 percent, by Friday.
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"When you look at a one-year chart you can see these [earnings] gaps from the last three quarters," Nathan said. LinkedIn shares are up 4 percent in the last year. Longer-term, Nathan noted, LinkedIn has been trading in a very "volatile" range from around $135 to $160.
"Targeting $230 seems like a very logical level," said the founder of RiskReversal.com. "Using options to define your risk into a potentially volatile event seems like a good way to play it, especially given the move we saw in Twitter."
LinkedIn releases its fiscal 2015 third quarter earnings report on Thursday after the closing bell. Analysts polled by FactSet are expecting the company to earn 45 cents on $756 million in revenue.
Correction: This article has been modified to reflect the proper strike prices of the trade.