Earnings Preview Linkedin LNKD

by OptionPundit on August 2, 2012

Linkedin Corporation (LNKD) is set to report its highly anticipated results today i.e. Aug 02 after the market close. In the social media/network landscape, Facebook (FB) and Zynga (ZNGA) announced poor results while Yelp (YELP) delivered beyond analysts’ expectations. Linkedin will therefore be watched with great interest. It competes with Monster (MWW) in the recruitment services market, as well as social networking portals like Facebook and Twitter.

WHAT TO EXPECT:
Analysts, on average, are expecting earnings of 16 cents per share on revenue of $215.2 million, according to a poll by FactSet. After dismal performance from Facebook (FB), Groupon (GRPN), Linked-in expected to show good results to keep faith in social media (at least short term). Since IPO Linked-in always beat the earnings during the past 4 quarter. So naturally the expectation is to beat again.

OPTIONS’ TAKE:

This quarter IV rise prior to earnings is in line with previous quarters. Currently index mean IV stands around 80% and post earnings, it might drop by at least 15-20 points.

Linkedin IV Skew

The IV skew between Aug weekly options (expires this week) and Aug Monthly options is about 90%. Based on ATM implied volatility, options are pricing a $10+/- move and based on Aug 1 closing prices, a $95 (nearest ATM) weeklies’ straddle can be sold for $11.30 credit. Based on the past 4 quarters, LNKD has moved a maximum of ~20% (upside) during Feb’12 and -12% (downside) during Nov’11. So a +/-10-15% is a reasonable expectation. However, as we have seen recently, any big miss will trigger a sell-off as stock is currently priced almost at P/E= 600.

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TECHNICAL TAKE

Yesterday LNKD dropped below 50dma but found support at the lower trendline (pls see attached chart). Currently 20dma is 103.6, 50dm is 101.56 and 200 days moving support is 89.29. All time high for LNKD was $122.7 and low was $55.98. Based on the S&R lines that I have marked in the charts it seems 88-110 is the likely scenario. In the extreme highly unlikely scenario (remember CMG), the stock may move to $80 as well (on missing out expectations).

HOW TO TRADE:
There are various ways to play earnings via numerous Option Trading Strategies. One of the easiest trade is via option straddle or strangle. If you are a buyer, you risk is if stock doesn’t move big (uncertain) and Implied Volatility crash (Certain). If you are a straddle/strangle seller your biggest risk is stock move (uncertain) beyond your breakeven point (recall CMG). If you are fine with the probable range, an Iron Condor strategy could also provide a good solution. If you are an option trader, here are several ways on how you can trade google earnings with a good risk/reward ratio. If your outlook is that stock won’t move, you can also trade earnings via calendars spreads. However if you think stock will sure move, Reverse Iron Condor and/or selling Butterfly could result in nice gains too. Every strategy has its own pros-n-cons choose what you like based on your risk/reward preference.

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WHY DOES IT MATTER:
If traded well, earnings can provide nice boost to the portfolios with limited risk. Checkout OPN Extra! how earnings can add momentum to your portfolios. CMG recently demonstrated the exceptional gains possiblity that are associated with earning events.

WATCH-OUT:
Keep in mind that earnings are always a 50/50 probability event and stocks can move in a much wider range than implied by either option market or forecast by charts.

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Trade carefully, Trade profitably, OP

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