Connecting with LinkedIn Options

LinkedIn [LNKD:NYSE] has seen some massive volatility since its IPO date, and as a result, its options, which started trading on May 30, have seen its premiums priced accordingly. At the start of June, options trading $15 out of the money were holding more than $1 in time value. Even today, $4 out of the money puts are holding nearly $1 in value. If you are an options writer, you may want to consider opening up some positions.

On Monday, I opened up bullish position on LinkedIn. Although I firmly believe the stock is well over valued at current levels, I believe that the shares are ready for a dead cat bounce. I sold to open put options at 72.50 for June, gathering $1.40. The share have climbed a few dollars since, but the put option is still bidding 80 cents at the close of Tuesday. The 75 puts look more attractive, bidding $1.55 at today's close, but also provide less downside protection.

Writing the 72.50 puts and earning a conservative 80 cents would provide you with 6.07 per cent protection, for the remaining three days of the week. You would also earn 1.05 per cent over the next three days by completing this trade. That's better than a GIC over a year! The margin requirement is also very limited, and required less than $2,000 margin per contract.

If you are less bearish (that is, more bullish or neutral), a 75 put may be more for your liking. At close, the June 75 puts were valued at $1.55, returning 2.03 per cent over the next three days. However, you would only be protected 3.78 per cent.

Considering the stock's volatility, expect the value of the options to hold significant risk value until the final hour of the week. Being patient on LinkedIn may reap benefits.

Those who are more neutral should consider writing the 77.50 or 80 call options. This would require no additional margin, because it would be a short combination trade, something I will most likely be attempting later this week. The 77.50 call was bidding $1.35 while the 80 call was 60 cents.

One final consideration would be an immediate short straddle at 75. The premiums on the call and puts at bid were netting $4.10. You would profit if the stock traded between $70.90 and $79.10 on Friday. This trade gives you substantial up and downside protection, more protection than the 72.50 put and the 77.50 call alone. However, your total profits will be limited depending on when you close the in-the-money option.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. As already mentioned, I currently have option positions and have plans on making more trades on the above mentioned stock in the next 72 hours.