* Calls favored over puts in run-up to earnings-Schaeffer's
* F5 option volume above daily average, earnings out
* Goldman Sachs recommends July $90 puts for downside risk
By Doris Frankel
July 18 F5 Networks is a volatile,
momentum-driven stock with a good track record beating market
expectations, but trading after its post-close earnings report
may be less dizzying than usual.
Options market activity suggests bullish sentiment among
investors after the stock has been hit recently, in tandem with
peers in the tech industry.
The options market is positioning for a smaller swing than
normal when compared to past moves. F5 options imply a share
price move of about 9 to 9.5 percent based on the July options
expiring this Friday.
For many stocks, that would be quite a jump - or fall. For
F5, it's a little quieter than usual.
"The expectations in the options market is that options are
underpricing an earnings move compared to historical data," said
Steve Place, a founder of options analytics firm
investingwithoptions.com in Mobile, Alabama.
Shares of the network gear maker have tended to rise or fall
by an average of 12.05 percent over the past eight quarters,
according to Birinyi Associates. It has beaten earnings
forecasts in 13 of the last 14 reports, they said.
There has been a lot of call buying heading into earnings.
During the 10-day period starting at July 3, option players on
three U.S. exchanges have purchased nearly three times as many
calls than puts as new positions, said Joe Bell, senior equity
analyst at Schaeffer's Investment Research.
"This ratio was higher than 98 percent of the readings taken
during the past year, indicating quite a bit of optimism from
option speculators ahead of earnings, Bell said.
But the action in F5 call options, contracts that grant
investors the right to buy shares at a fixed price by a certain
date, may not only suggest optimism. The calls could also be
used as insurance by investors with short positions.
Schaeffer's put-to-call open interest ratio for F5 Networks
for options set to expire in the front three months is lower
than 100 percent of the readings taken during the past 12
months. This ratio of 0.67 indicates calls outnumber puts,
suggesting that option traders are positioned bullishly for the
three nearest option expiration months, Bell said.
Analysts expect F5 to beat or post an in-line third-quarter
but expect a muted forecast following a rash of outlook cuts
from peers in the industry like Adtran and Acme Packet
, who cut estimates as telecom providers held back
Network gear makers have been facing slowing demand for
their products as telecom carriers reduce spending amid a
sluggish U.S. economy and weakness in Europe.
F5 is not a highly shorted stock and its short interest
stands at 4.7 percent of its outstanding shares traded. But that
figure has increased 45 percent during the past month, according
to Schaeffer's Investment Research data.
The stock is down 29 percent from its 52-week high on April
3. It reported earnings on April 18 above market expectations.
Analysts on average expect the company to post adjusted
third-quarter earnings of $1.14 per share on revenue of $352.9
mln, according to Thomson Reuters I/B/E/S.
Overall option volume on F5 was 3.1 times the average daily
levels with 21,000 calls and 11,000 puts traded by early
Wednesday afternoon, according to options analytics firm Trade
Alert. The most active options were the July $100 strike call
and the July $90 strike put. Front-month July options expire on
Friday after the close.
According to Thomson Reuters StarMine, the stock's intrinsic
value is about $80.79 a share, making its current $91.36 price
somewhat overvalued. StarMine calculates a stock's intrinsic
value - what it should be worth based on expected growth rates
over the next decade - by using analyst estimates and its own
models of projected growth.
"While FFIV shares are down 14 percent year to date, and
have traded down 11 percent in the past month, we still
recommend that investors hedge earnings risk with puts," wrote
derivative strategists at Goldman Sachs Group in a report prior
to Wednesday's open.
F5 shares rose 7.5 percent to $98.61 a share on Wednesday.
Goldman Sachs derivative strategists advised clients to buy
F5 July $90 puts to hedge downside risk. Put buyers risk the
premium paid if shares close above the strike at expiration this
Friday. Goldman tech analysts expect F5 to report an in-line
quarter but sees risks to next quarter's guidance.