No Likes for LNKD
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No Likes for LNKD

Henry Gambell - February 5, 2016

Good evening everyone. This is Henry Gambell with, and in today's free video, I want to spend some time reviewing the trade that we put on with LinkedIn (LNKD) ahead of earnings.

So, as we're heading into the end of the day, we knew that LNKD was said to report after the cash close, and this is some of the analysis that we went through. So when I come back to the monthly chart, I don't know that this one tells me a whole lot of anything. LinkedIn hasn't been public for all that long, and while it is starting to develop a monthly squeeze, those signals can take a long time to play out. I'd give it more credibility if they had fired, but since they were in a consolidation mode, it doesn't really speak to me in any way.

When I look at the weekly chart, I know being below the 10 and 34 tells me that that is one reason to look at it to the sell side. And when you come in and look at the daily, also a point where we're below the fire line. which is a major area of resistance. We're also below all of our key moving averages, and I thought it was a good opportunity to play it to the short side.

I also felt like, to some degree, you might have a little bit of sentiment where people were looking for LNKD to perform well, since Facebook did. That's obviously not terribly technical, but it's a thought process, and I think you see a lot of that in the way LNKD is trading after hours. Before the report, we were still looking at this with a confluence, saying we're trading here at 192, and the expected move is at 170, with the idea that this would come down into something--or basically, if you think the expected range is going to be at 170, then you would say that it wouldn't go below that. Not to say that it will go directly to 170, or directly up to 210, but that in theory, it should not exceed those ranges.

So with that idea in mind, we positioned ourselves with a butterfly, doing this with the short puts at 175, then buying strikes at the 185 and 165. That trade ran us about $1, but the way that I've been working to configure these trades more--because what happens with those plays is that it stays inside that expected range and falls, well then, you'll do really well. But if it just keeps getting crushed, then your butterfly will not work in that situation.

So what we've done--and another thing that I like modifying with these--is adding on another unbalanced butterfly. I felt like it gave us a really good risk:reward heading into this report. So the first trade, and the one that I feel is a little bit more straightforward, was this bearish butterfly, but we would need to see it stay a bit range-bound.

I also came in here and looked at an unbalanced fly on the call side. So what this does is just gives us a better place, where if we were to open flat, we would do well in that situation, though this particular play wouldn't really work out. We're basically saying that we take in the credit on this one, to help finance this idea, and then give ourselves a situation where we have no downside risk. So taking in a $3.75 credit, then paying $1.30 for this other butterfly.

Obviously, if we come back and take a look at the chart--down into an intraday--you can see where LinkedIn is just getting absolutely crushed. So it's a good spot. You know, the one butterfly where I won't really have any reason to modify until we get into the end of the day. If it gets some kind of miracle snap back, we can look to manage it there, but the main idea is having positions where--when you come over to your analyze tab and look at them here--if it exploded to the upside, of course, you have to know what your risk is. If it stayed sideways, if it dropped to the expected move, that's where we do the best. And if the stock completely rolls over, we still make money. So. I think with earnings trades, giving yourself that opportunity where if it does move drastically in one direction, not having any risk there is very helpful, as opposed to trying to pin it to a specific strike. It should be very straightforward to manage tomorrow morning.

One other thing I want to let you guys know about is: Getting Started with Options, a class that John and myself will be teaching. Free webinar portion of it on February 8. I believe this is going to be next Monday. We're going to cover why options offer greater profit potential than stocks with lowest risk, some concepts around beginning with these, buying vs. selling, strategies you can focus on, and how to avoid some of the most common mistakes. If this is something you think you might be interested in, this webinar is completely free. February 8 from 7 to 8. Sign up here, and I hope to see you guys at the class.

Getting Started With Options Free Webinar