Name That Trade – Left Hanging on High $FFIV

by Dan April 6, 2015 2:08 pm • Commentary

Shares of F5 Networks (FFIV) are down 1.5% today for no apparent reason.  The stock is down 14% on the year. Most of the weakness has been a result of weak fiscal Q2 guidance in late January that resulted in a one day 10% gap.  At the time FFIV CEO John McAdam had the following to say about the results on the conference call:

 “In addition to the seasonal softness we normally experience in the first quarter of a new fiscal year, product sales during the quarter reflected a marked decrease in the number of deals greater than $1M. While this resulted in slower than expected revenue growth for the quarter, the number of large deals in the current pipeline is encouraging and indicates that we should see a resumption of the recent trend toward larger deals in the second quarter.”

Could the weak Q2 guidance set a low bar for the company? No doubt. But the price action in the stock since late January suggests that investors are less than sanguine about the quarter just ended.  Regular readers of RiskReversal will easily spot the Triangle of Death:

FFIV 1yr chart from Bloomberg
FFIV 1yr chart from Bloomberg

The company is scheduled to report fiscal Q2 results on April 22nd, after the close, the options market is implying a 7% move in the stock between now and then.

With the S&P 500 back in its “climb a wall of worry mode” the under-performance from a prior bull market leader like FFIV is worthy of taking note. Although, I would add that if in fact deal signings in the $1 million range were to pick back up (as the CEO suggested they could in January) the stock (trading at 17.5x expected fiscal 2015 earnings of 17% and sales growth of 12%) could suddenly be deemed cheap.

I don’t have a strong fundamental view on the company, and valuation is less than egregious, but the price action and the technical set up looks atrocious.

Hypothetical Bearish Trade: Buy the May 110/100/90 put fly for $2

Rationale – If the stock does indeed exit the TOD™ to the downside, 100 looks like the next level of support. This is probably the cheapest way premium wise to play for that move. The fly targets 100 with a max gain of 8 there while only having $2 in risk above $110.

Hypothetical Bullish Trade – Buy the April 17th / April 24th weekly $115 call calendar for $2.00

Rationale – If you think this stock holds the TOD™ and rallies on better than expected results and guidance, then this trade structure helps finance near the money calls by selling April 115 regulars that will not catch the April 22nd earnings announcement, but leaves you owning the April 24th weeklies that will catch the catalyst for $2, at that point you could consider spreading the April 24th weekly 115 calls by selling a higher strike call reducing your break-even.