F5 Networks (NASDAQ:FFIV) provides application traffic management products worldwide. The company develops, manufactures, and sells products and services to help companies manage their Internet traffic. The company's FirePass family of network server appliances provides secure user access to corporate networks and individual applications through any standard Web browser while its iControl architecture enables the products to communicate with one another in the network and ensure optimal throughput of traffic. F5 Networks sells its products and services to enterprise customers through various channels, including distributors, value added resellers, and systems integrators. Its customer base includes financial services, manufacturing, transportation, and mobile telecommunications.
Since the new position in ShuffleMaster (NASDAQ:SHFL) was not available near the suggested credit, we decided to look for a suitable replacement to supplement the bearish portion of the portfolio. FFIV emerged as a viable candidate today when the issue reversed course after announcing its Chief Financial Officer will step down due to personal considerations. The company was quick to reaffirm current third quarter estimates but the conference-call did little to assuage investors. Now the issue is trading below a short-term lateral range (near $50) and the recent bullish trend is unlikely to resume until the company reports quarterly earnings in late July. Considering the potential for a brief rebound, and the robust Open Interest in each option series, we believe a credit of $0.40 per contract can be achieved in the suggested spread. Traders who can accept a slightly smaller return-on-investment ($0.35 credit) might consider increasing the number of contracts to offset commission costs.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (conservative - bearish/credit spread):
BUY CALL JUL-60.00 FLK-GL OI=4626 ASK=$0.20
SELL CALL JUL-55.00 FLK-GK OI=1432 BID=$0.50
INITIAL "NET-CREDIT" TARGET = $0.40-$0.45
POTENTIAL PROFIT (X 5 contracts @ $0.40) = $200
MARGIN REQUIREMENT (X 5 contracts) = $2300
RETURN ON INVESTMENT (max) = 8.7%
COST BASIS = $55.40
INITIAL EXIT STRATEGY:
Once the spread is open, traders should place a (contingent) order to close the short ($55.00) call options if the stock price moves above $54.25 on an intraday basis. A "net-debit" order of $0.85-$0.90 to exit the entire spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.