Dubious Activity
There’s a great deal of debate surrounding some suspicious options activity in LinkedIn (LNKD) options prior to the Microsoft (MSFT) acquisition. The activity was first highlighted by Fortune in a breakdown that cited suspicious activity in the August $160 and $175 calls. According to Fortune:
- 600 options to buy LinkedIn shares at $160 were bought in two trades on Friday afternoon for a total of $135,100. Those same options are now worth just over $2 million, for a less than one trading day profit of nearly $1.9 million.
- Also on Friday, 300 options to buy LinkedIn shares at $175 were bought in four trades. Those options cost $25,000. They are now worth $569,100, a gain of 2176% in less than one trading day. Another red flag: All of the $175 call options were bought in the last five minutes of trading on Friday.
However, a subsequent article by Bloomberg added a new wrinkle to the trade: was it potentially part of an Iron Condor? If so, the trade actually lost a substantial amount of money. The Bloomberg article followed a tremendous amount of debate on Twitter surrounding the exact nature of these trades. So let’s analyze these trades a little further to determine exactly what happened (data courtesy of Trade Alert):
At 1:40pm on Friday (6/10) a customer executed the following trades in LNKD:
- 600 LNKD Aug 125 Puts for $7.15 (The trade was executed close to the bid indicating a probable sale)
- 600 LNKD Aug 115 Puts for $4.05 (The trade lifted the offer indicating a probable purchase)
This activity was not noted in the original Fortune article. Selling the Aug 125/115 put spread for $3.10 is a bullish strategy. This spread is effectively worthless as of press time, so this trade clearly worked in the customer’s favor. However, at the same time the customer also executed the following call trades:
- 500 LNKD Aug 160 Calls for $2.26 (The trade was executed close to the bid indicating a probable sale)
- 500 LNKD Aug 185 Calls for $.49 (The trade was executed close to the offer indicating a probable purchase)
Contrary to the original article, the call activity was most likely a sale of the Aug $160/$185 call spread for $1.77. That spread is currently trading much higher, indicating a loss of nearly $1.2M on that position. Taken together, the sale of a $25 vertical call spread and a $10 vertical put spread in the same month is actually a “funky” ratio short Iron Condor. The short Iron Condor is hardly the ideal strategy to speculate on a corporate takeover. If this customer had early information regarding the LNKD/MSFT deal, he or she certainly executed the wrong options strategy to profit from the transaction.
To recap:
- The customer will pocket the lion’s share of the $3.10 profit from the short put spread (approx. $186,000).
- However, that profit was dwarfed by the losses on the short call spread (nearly $1.2M, depending on execution).
Note: The intent behind the Aug $175 call activity noted by Fortune is not quite as transparent. 300 contracts traded in the final five minutes of the session at prices ranging from $.82-$.84. These may have been purchases, although the vacillations of the stock at the end of the day make the exact nature of these trades inconclusive. One print of 100 contracts for $.82 was actually executed near the bid, indicating a potential sale. These calls closed around $18.50 today, indicating a potential profit/loss of approximately $530,000. As of press time there are still 470 contracts open on the strike.?