The crash in LinkedIn Corp’s shares last week has many traders in the options market braced for an unusually violent reaction from Twitter Inc and Pandora Media Inc’s shares after the companies report results this week. LinkedIn shares dropped 44 percent on Friday, wiping out nearly $11 billion of market value, as investors balked at a disappointing revenue forecast. Traders in Twitter and Pandora options are pricing share moves that are more volatile than normal for the companies.
The companies report results on Wednesday and Thursday respectively. ”The release of LinkedIn earnings on Friday raised concerns about several social media companies,” said Scott Fullman, chief strategist at Revere Securities LLC. Fullman cited the correlation between these stocks, which has increased since November, as one reason why LinkedIn’s woes may have Twitter and Pandora investors worried.
The cost of a straddle in Twitter’s options, a strategy in which a trader buys an put option and a similar call option, implies a move of about 18 percent in either direction by Friday. Over the last eight quarters, the average move after reporting is 13 percent. The implied move for Pandora is 18 percent compared with an average move of 15 percent over the last eight quarters.
”The experience of LinkedIn means those long these names into earnings should be managing risk,” MKM Partners derivatives strategist Jim Strugger said in a note on Monday. The sense of caution is not restricted to these two names. Technology shares with lofty valuations have taken a beating over the last two sessions as volatility has picked up.
The S&P 500 Information Technology Index is down 4. 4 percent since Thursday. Traders in the options market have responded by loading up on protective put options on the tech heavy PowerShares QQQ Trust ETF Series 1, which represents the Nasdaq 100.
On Monday 1 million QQQ puts traded, about twice the average daily trading volume, according to options analytics trading firm Trade Alert. With options expensive due to the high expectations of a large move in the shares, Strugger suggested March options collars as a means to hedge long stock positions. A protective collar is an options strategy in which a trader sells a call option and buys a put option with the same expiration in a bid to protect a long position in the shares in a relatively inexpensive way.
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