Friday, August 22, 2014

* LinkedIn (LNKD) - Risk Collapses Again as Stock Rips 60%. Proof that Market Volatility Has Lost Its Mind?

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LNKD is trading $226.08, up 3.1% with IV30™ up 0.4%. The Symbol Summary is included below.

Provided by Livevol

This is a stock price and volatility note on a social media stock that is fast becoming a "must have" in all sales departments (unlike other social media which is a marketing department function).

The risk in the stock price as reflected by the option market is near all-time lows and continues to drop as the stock has made a 60% rise in a matter of months.

Prior posts:
LNKD - How Option Market Blew Earnings & Why LNKD is Different than Every Other SOCL

This is simply a follow up to the story above with an update on an even higher stock price and even lower implied risk by the option market.

I just posted a story yesterday on TWTR:
TWTR - Unprecedented: Risk Breaks All-time Lows; Stock Moves in Huge Cycles.

That stock has hit all-time lows in risk and is also in an up cycle of 50%+.

These examples are everywhere, and it continues to be the case that the risk pricing in these stocks has become absurd.

Let's start with the all-time stock chart for LNKD.

Provided by Charles Schwab optionsXpress

Since IPO LNKD has moved up 202%; so basically a triple.  But, as the chart above illustrates, the price has really fallen into one of three-cycles, each of which was fairly prolonged.

  • Cycle #1: Stock +300% in about a 20 months (ending 9-1-2013).
  • Cycle #2: Stock  -45% in about eight months (ending 5-7-2014).
  • Cycle #3: Stock +58% in about three months (as of today: 8-22-2014).

As these prolonged periods of momentum have persisted, the risk in LNKD as reflected by the option market has also cycled.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  We can see where risk is right now (far right), and how that level looks relative to both the annual low and two-year low. The blue "E" icons represent earnings dates.  Risk always rises into those dates because that's a single event with a lot of unknowns (aka risk).

From my last LNKD post:

Last Earnings
  • The stock closed at $180.64.
  • The next day the stock closed at $201.78.
  • Original Post: As of right now, the stock is trading $212.78.
  • Updated on 8-14-2014:  The stock was trading at $218.48.

In a pre-earnings note, I demonstrated that the option market reflected a price range of [$162, $198] by the end of trading on Aug 15th.  A quick snapshot of the Options Tab on the close of 7-31-2014 is included below.

Provided by Livevol

That straddle costed ~$18.  Today it's worth ~$33 in parity.  So, to say it mildly, the option market vastly under-priced risk in earnings (so that dip in the red chart above was in fact an "incorrect" assessment of reduced risk.

Leaving FB out of the mix, which is now much more than "that app where  like my friends pictures" (Story: FB - Transformation: This Isn't Social Media, this is a Giant of Technology), this social media company is really... different.

The firm is also innovating (and acquiring) with a panned $1B business out of its "marketing solutions product" in conjunction with the planned acquisition of Bizo.

LNKD has turned into a sales tool.
  • This is where sales mangers and sales people find contact information for prospects.
  • This is where job seekers find job providers.
  • This is where job providers find job seekers.
We need to recognize that upward moves in stock price can be as large and abrupt as downward moves.  These stocks (this stock) is absolutely ripping and that stock price movement is not reflected in the option market at all.  We also need to recognize that as stocks make these huge moves up, the downside risk may also be rising (although the option market prices it lower).

Finally, the Options Tab is included below.

Provided by Livevol

In the prior LNKD post we saw that the option market reflects a price range of [$195, $235] by the end of trading on Sep 20th.

Well, we're at $227 today.

Now, moving forward, the at-the-money (ATM) straddle in the Sep monthly options we can see a price range of [$209.50, $240.50] by the end of trading on Sep 20th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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