Is it Time to Short LinkedIn?

I feel sorry for the person who bought the shares of LinkedIn (NYSE:LNKD) at $122.70.� Now less than a week later, they are selling at under $89.� Ouch!� It shows that the IPO market is not for the faint of heart.

In fact, major media publications � like the Wall Street Journal, Financial Times and Barron�s � are now writing stories about shorting LinkedIn — making money on the stock�s fall.

So how is this done?� Here�s an example:� Suppose you think LinkedIn�s stock price will fall to $80 from $88.� To capitalize on this, you borrow 100 shares and then immediately sell them, giving you a total of $8,800.� This is done by using a margin account with your brokerage firm.

When the stock falls to $80, you then buy the 100 shares back.� The difference of $800 is your profit.�

However, there are some hitches.� For example, you will likely have a difficult time borrowing the shares.� After all, LinkedIn only offered about 8 million total shares.� Hedge funds and other big-time investors will likely get most of the supply.� Keep in mind that they will pay a hefty fee for the shares.

Next, shorting an IPO can be highly risky.� Perhaps the biggest problem is what is called a short squeeze. This hapens when the stock price spikes, making the short-sellers antsy.� As a result, they start to unwind their positions because they need to put up more cash in their margin accounts.� But of course, this means they have to buy more shares, which puts further upward pressure on the stock price.� It�s brutal.

Another approach to short LinkedIn is to buy put options.� This involves paying a fraction of the overall cost of a transaction, which provides lots of leverage.� Unfortunately, put options are also quite volatile.� In most cases, they expire worthless.� Not really good odds, huh?

Ultimately, playing IPOs � whether to go long or short � is extremely tough.� You are playing against the pros, who have the time and experience to make the right moves.� Instead, for individual investors, the best approach is to have some patience before jumping in.� It can save you a bundle.

Tom Taulli�s latest book is �All About Short Selling� and he has an upcoming book called �All About Commodities.�� You can find him at Twitter account @ttaulli.� He does not own a position in any of the stocks named here.