CHICAGO/NEW YORK (Reuters) - Investors who believe LinkedIn Corp is overvalued after its explosive market debut last week may get their first crack at proving that Friday, when options in the stock start trading on U.S. exchanges.
The share price of the professional social networking company more than doubled in its first day of trading on May 19 after its initial public offering price at $45 a share.
The massive gain in LinkedIn early has some investors suggesting the stock will not be able to maintain that level if not for limited supply, due to LinkedIn's very small float, which is supporting the share price.
"If it is hard to short, then the demand for options will be high since it's an easy way to have leverage for less capital," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.
LinkedIn is valued at about $9 billion, based on its share price on Thursday at $93.83, or more than motorcycle maker Harley-Davidson. LinkedIn's original IPO range valued it at about $3 billion.
LinkedIn's small float -- just 7.84 million shares were sold in the initial public offering out of 94.5 million shares total -- means that the limited number of shares available for trade makes it difficult to borrow the shares to sell short.
That makes a long-term short position a riskier strategy,
"I made a quick trade and then got out," said Doug Kass, president of Seabreeze Partners in Palm Beach, Florida, who said prime brokers that lend to investors are charging a high price to borrow the stock to sell short. "It's a very dangerous short and a very dangerous ballgame."
Underwriters, who have a large inventory of shares, are restricted from lending shares for 30 days, which also skews the expected supply-and-demand relationship.
"It comes down to a basic issue of supply and demand, and the supply of shares isn't enough for LinkedIn to be a safe long-term short," said Michael Quigley, technology analyst at Wedgewood Partners in St Louis.
That's not unusual for an IPO, but the sharp rise in LinkedIn shares may have whetted the appetite for bearish bets. It makes options more appealing for investors to speculate on price direction or hedge their risk in the shares.
"There will be a lot of put activity with speculators buying these contracts on the view that the IPO price was overblown," said Patrick Mortimer, director of options trading at stock and options block execution firm Pipeline Trading Systems.
Mark Sebastian, chief operating officer at OptionPit.com, an option education firm in Chicago, said the difficulty in borrowing shares could result in "huge amounts of conversion trading during the first few days of option activity."
Conversion strategies allow investors to create a "synthetic" short position against a real long position.
An investor would buy the underlying stock and offset this by buying a put and selling a call with the same maturity and strike price. The trader is then able to sell the real long position in the open market.
Not everyone sees a massive interest in put options. "I don't think that investors will necessarily be purchasing puts," said Joe Kinahan, TD Ameritrade chief derivatives strategist. "If the stock is hard to borrow, that will be priced in already because every time a market maker has to buy calls or sell puts he is going to sell stock as a hedge."
Premiums -- the price paid for options -- are likely to be high because of the anticipated volatility in shares. LinkedIn's share price hit an intraday high of $121.97 in its first day of trading.
"I suspect that when the options open they will be ridiculously high priced," Kass said. "You'll have a huge decay in premium if you buy long. There's a lot of risk in it, but in conclusion I don't think it's a good idea to invest in it at this price."
The Chicago Board Options Exchange, owned by CBOE Holdings Inc said it would list options in LinkedIn on Friday. Other exchanges are expected to follow suit.
Reporting by Doris Frankel in Chicago and Ryan Vlastelica in New York; additional reporting by Angela Moon; Editing by Leslie Adler