You’ve probably heard the saying that just because a company has solid fundamentals doesn’t mean it’s reflected in the share price, and vice-versa. Even the staunchest proponents would have to somewhat agree with that.
On the flip side, the same can be said about technical analysis. Sometimes a perfect setup on the chart doesn’t seem to pan out. That’s trading.
But here’s a potential trade idea that looks like it has a decent chance of profiting if it’s triggered.
F5 Networks (NASDAQ:FFIV – $100.27): Long Puts
The trade: Buy the October 100 puts for $5.90 or less.
The strategy: The long put is a basic option strategy that can be used for a bearish outlook on a stock. The trade can profit if the stock falls and the put premium increases as the option moves farther and farther in-the-money (ITM). Maximum profit is almost unlimited because the stock can only fall to $0 (which is highly unlikely). Maximum loss is $5.90 if FFIV finishes at or above $100 at October expiration. Breakeven is $94.10 at expiration based on a cost of $5.90.
The rationale: FFIV provides application delivery networking technology primarily in the U.S. and the Asia Pacific. The company has decent fundamentals based on several analysts’ comments, but that hasn’t been reflected in the share price, at least this year. Shares of FFIV are trading right about where they started 2012.
Fortunately, this trade isn’t about the company’s fundamentals or the stock’s past performance. It’s about what’s currently happening to the stock. For the last three months, it has been range-bound between about $90 and the low $100s. Since the end of August, the stock has formed a downtrend setting a lower pivot high and a lower pivot low.
Due to a rally late last week, FFIV moved higher but failed to make a new pivot high. A bearish sign for the stock would be if it can trade below $100, which can sometimes act as a support area. This may not be a huge move down, but a drop to $94 (previous pivot low) isn’t out of the question.
Traders should take caution if the stock moves above $102, which was the last pivot high.
As of this writing, John Kmiecik had no positions in any security mentioned here.