Someone just lost a ton of money on LinkedIn, and the SEC probably has questions (LNKD, MSFT)

Maybe he’s just tired … or maybe he lost $1 million.REUTERS/Brendan McDermid

When something is obvious, then there’s probably more there.

On Monday, Microsoft agreed to buy LinkedIn for $26.2 billion.

Following the news, Dan Primack at Fortune sniffed out some seemingly suspicious options activity in shares of LinkedIn that had taken place on Friday.

Primack noted that someone bought over 600 call options – or a contract to buy 600,000 shares of LinkedIn for $160 by August. Meanwhile, Microsoft had just said that it would pay $196 for each of those shares.

Given that LinkedIn shares were trading near $130 per share on Friday, these options were cheap. Looking at this as a binary, directional bet on LinkedIn shares going higher, our anonymous options trader appears to have paid about $135,000 for options that are now worth about $2 million.

Nice trade!

But as Bloomberg reports, it is probably more complicated than that.

These options, according to Bloomberg’s Oliver Renick, appear to be bought as part of a larger strategy called an “iron condor” trade.

I am not an options trader and will try not to botch the explanation here, but this trade most simply involves using calls at two price points – in this case, $160 and $185 – and puts at two price points, in this case, $125 and $115.

All of these options were out of the money. The important thing to note here is that an iron condor is effectively a bet that a stock won’t do much of anything between now and August.

Bloomberg’s Matt Levine estimates that the losses look something like this:

Primack noted that in the past people have gotten in trouble for this sort of thing, highlighting that weird options action ahead of the HP-3Com deal eventually led to charges.

And look, people are dumb, but if you knew that this merger was going to be announced on Monday, then buying a bunch of options on Friday ahead of the announcement would be very, very dumb. This would be, and I say this with no exaggeration, the most obvious thing you could ever do to get in trouble with the SEC.

Recall that Phil Mickelson, for example, got in trouble for give or take this exact same thing recently. Mickelson didn’t use options, but he bought some stock ahead of an event that he shouldn’t have known about – despite not really trading much – and then sold it.

So the real takeaway here is, as we’ve written before, when something on Wall Street looks too bad to be true, then it probably is.