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F5 Networks Option Traders Display Pre-Earnings Skepticism

FFIV's November 90-strike put was popular on Monday

by 10/16/2012 10:47 AM
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Option traders have expressed a taste for F5 Networks, Inc. (NASDAQ:FFIV - 100.65) puts of late, per data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The stock currently sports a 10-day put/call volume ratio of 1.31, compared to its 50-day put/call volume ratio of 0.68. In fact, the shorter-term ratio ranks higher than 86% of other such readings taken in the past year, indicating puts have been bought to open over calls at a faster-than-usual clip in recent weeks.

This growing trend is also evident in FFIV's Schaeffer's put/call open interest ratio (SOIR). Since Sept. 24, the stock's SOIR has jumped to 1.12 from 0.82, as near-term put open interest has risen 57%. The current ratio ranks in the 85th percentile of its annual range, suggesting short-term speculators are more put-skewed than usual toward the equity.

Yesterday's activity in the options pits was no exception, with put volume nearly doubling call volume. Of the 9,761 put contracts traded on Monday, 45% crossed the tape at the out-of-the-money November 90-strike put, the majority of which traded at the ask price. With open interest adding 4,214 contracts overnight, it's safe to assume new bearish positions were initiated.

By buying these puts to open, traders will begin to profit with each step south of $86.11 (the strike minus the volume-weighted average price of $3.89) the equity takes through November expiration. This represents a steep 16.9% slide from FFIV's current level.

For a stock that has shed a modest 5.4% in 2012, but has added 15% on a year-over-year basis, this seems like a bold bet. Plus, although the stock has lagged the broader S&P 500 Index (SPX) by more than eight percentage points over the past month, FFIV hasn't experienced a daily close beneath the aforementioned breakeven level since Oct. 7, 2011. Against this backdrop, it's possible the aforementioned put buyers were attempting to insure a long stock position.

What's more, FFIV is scheduled to take its turn in the earnings confessional on Wednesday, Oct. 24. The tech company has bested bottom-line expectations in each of the last four quarters, and has enjoyed positive price action following the respective announcements. Should FFIV continue with its solid quarterly showings, the November 90 put buyers may be surrendering the premium they paid, which is the maximum risk associated with the play.

Wall Street is calling for a profit of $1.18 per share for FFIV's fiscal fourth quarter.


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