How confident are you about the market continuing to move higher? Wouldn’t it be nice to have some leeway on your outlook? That is the beautiful things about options. They give traders some room for a margin of error. Here is a trade idea that is a perfect example of having some room for error…just in case.
F5 Networks Inc. (NASDAQ:FFIV): Call Credit Spread
The trade: Sell the April 100/105 call credit spread (selling the April 100 call and buying the April 105 call) for 95 cents or better.
The strategy: The maximum potential profit for this trade is 95 cents if FFIV is trading below $100 at April expiration. Both call options would expire worthless. The maximum loss is $4.05 ($5 – 95 cents) if FFIV is trading above $105 at April expiration. Breakeven is $100.95 at expiration based on a credit of 95 cents.
The rationale: The company designs and sells application delivery controllers which are used in data centers. FFIV is generally well-regarded by many analysts and many have a price target for the stock much higher than where it is trading now. So why the bearish strategy? This trade idea is more non-bullish than bearish seeing as the stock can move higher and the trade can still profit.
Click to Enlarge This strategy is really based on FFIV’s chart. The stock dropped below the daily 200 simple moving average late last month and has struggled to recover. The stock has now formed a base and has struggled to close above $95 which has been resistance for FFIV. Not only that, the stock has two additional forms of resistance. The 200 SMA is right around $98 and has acted as support and resistance in the past for the stock. Of course this trade idea requires the 200 SMA to wear its resistance hat. Plus the stock has another area of resistance right around $100 (previous pivot highs and lows) which can possibly keep the stock in check too. FFIV may find its bullish swagger again, but over the next six or so weeks, it might run into multiple levels of resistance.
If you are interested in more of my trade ideas please visit: http://markettaker.com/group_coaching/
At the time of publication, I did not hold any of the aforementioned positions.