My analysis showed a 1:4 reward/risk ratio if I stayed in the position in the hope of a more profitable exit. My preference is to have a 1:1 reward/risk ratio or better; otherwise, I'm outta there.
I closed the position in the last half hour of trading for a loss. Shares fell 4.8% over the 17 days I held the position, or 102.2% annualized.
The options position produced a -50% yield on risk, or 1,073.5% annualized.
In my entry analysis, below, I wrote that there is no limit to how high a fifth wave can travel. I added, "The only rule is that the third wave cannot be the shortest of three up waves, and that requirement has already been met." That being the case, there is also no rule governing how high a fifth wave must go. Clearly, in the case of LNKD, not very far at all.
LinkedIn Corp. (LNKD) went public in May 2011 and, as is common after an initial public offering, began to swing wildly within a range.
It was only in November of that year, after the six-month lockup that prevents insiders from selling their shares, that LNKD began an uptrend that carried it from $55.98 to a high so far today of $252.62.
LNKD broke above its 20-day price channel on Thursday and confirmed the bull signal today by trading still higher.
It is the sixth bull signal since the uptrend began. Four of the five completed signals earned a profit, on average yielding 30.1% over 59 days. The one failure lost 6.3% over 20 days.
The most recent wave up in the trend began on June 5 from $160.20. There has been one previous upside breakout during that wave. It yielded 20.6% over 31 days.
|LNKD 3 years 2-day bars
So LNKD has a history of success. Good odds, and I like that. But as always, a trader must look to the future.
Using Elliott wave analysis, I count four completed waves in the uptrend. The rise that began June 5 is the fifth wave, which is presently underway.
There is no limit to how far a fifth wave can travel. This one has covered a goodly distance already, at $92.42.
The only rule is that the third wave cannot be the shortest of three up waves, and that requirement has already been met. Wave 1 is the shortest, at $64.65, and wave 3 came in at $108.16.
This analysis has been done on a fairly large-scale chart, covering three years. So waves can take a long time to complete, and the fact that we're three months into wave 5 doesn't rule out getting paid over the next month or so.
LNKD was one of 11 symbols that survived my initial screening last night, all having broken out to the upside. (See "Friday's Prospects".)
Three fell back within their 20-day price channels and so failed confirmation: DECK, POWI and IX.
Two had bearish assessments from Zacks, contrary to the bull signal, and so I scratched them from the list: LNG and SNE. A conforming Zacks rating isn't a hard requirement, but when I have a choice, I prefer to see conformity between Zacks and the chart.
Four symbols have options that are more illiquid than I prefer: GNTX, IRWD, BDC and STRZA.
That left me a choice between BSX and LNKD. BSX has had no other bull signals during its current trend, and over the longer term trend had only even odds of a successful bull trade. Also, the open interest on its options is concentrated in just one or two strike prices, making it marginally more difficult to construct a vertical options spread.
LNKD is the lone symbol standing.
LinkedIn, headquartered in Mountain View, California, is a household name in the world of social media. I can best describe it as a Facebook for the business and work side of life. People use it to make business connections and to search for job tips. I've never seen photos of cute cats.
The service reports having more than 90 million member in more than 200 countries and territories
Analysts on balance are positive about LinkedIn's prospects. They collectively come down with an 18% enthusiasm index.
That's certainly not a result of the company's financials. Return on equity is a pedestrian 5%, a level mitigated by the fact that LinkedIn has no long-term debt.
Nearly half of its market capitalization can be attributed to income from recruitment services and job postings, and a bit less than a third from ads and marketing.
The company has reported earnings for nine quarters since its IPO, all of them profitable. Earnings rose steadily from the 3rd quarter of 2011 util the 1st quarter of 2013, and then declined the the most recent quarter, the 2nd. Each quarter has produced an upside earnings surprise.
Institutions own 86% of shares, and the price has been bid up to bubble levels. It takes $22.38 in shares to control a dollar in sales.
LNKD on average trades 2.2 million shares a day and supports a wide selection of options strike prices, with open interest running to three figures. The frront-month at-the-money bid/ask spread on calls is quite narrow, at 1.4%.
Implied volatility stands at 38%, slightly below the middle of the six-month range. It has been meandering sideways since mid-August.
Options are pricing in confidence that 68.2% of trades will fall between $223.72 and $278.20 over the next month, for a potential gain or loss of 10.9%, and between $237.87 and $264.05 over the next week.
Trading in options is extremely active today, with both calls and puts running at more than four times their five-day average volume. Calls have a slight edge.
The fair-price zone on today's 30-minute chart runs from $247.06 and $251.46, encompassing 68.2% of transactions surrounding the most-traded price, $250.55. LNKD opened at the zone floor this morning and has since risen to the ceiling.
LinkedIn next publishes earnings on Nov. 4.
Decision for my account: I've opened a bull position in LNKD, structuring it as a short vertical options spread sold for credit and expiring in October, short the $250 put and long the $245 put.
The position is only slightly leveraged, at 2:1. The hedge provides only a 1.6% cushion of profitability at expiration below my entry price. I could have increased both by allowing more than a $5 spread between the long and short option strike prices, but that would have increased my risk in comparison to the reward. I chose the prudent course.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.