Business software applications and network equipment outfit F5 Networks (FFIV) is set for a breakout supported by a strong FFIV stock chart, solid fundamentals and a ride upon the wave in cybersecurity.
The broader market still is caught in its tight and often technically damaging trading range for momentum players. So, one way for FFIV stock bulls to improve their odds in an otherwise strong situation would be way to up the odds in an otherwise strong situation is with a bullish vertical spread, which we will outline below.
FFIV Stock Setup
Since F5 reported earnings late last month, shares of FFIV stock rallied into a very favorable position on its price chart.
FFIV stock has gained about 13% compared to the Nasdaq Composite’s decline of around 1.5% after releasing strong all-around results that saw growing earnings and revenues top Street forecasts and the company affirming its above-view guidance.
What’s more, FFIV stock offers overall attractive fundamentals. The company has plenty of free cash flow, has been profitable for a long while, sports a forward price-to-earnings ratio of 18.29 and is expected to to show earnings growth of around 15.5% for the next five years and continuing its trend of about 16% for the past five years.
Another good sign, analyst estimates for FFIV stock have increased since the earnings report for FFIV stock.
Finally, while not known as a cybersecurity play, F5 has captured marquee clients. The company can count Facebook (FB) and Alibaba (BABA), as well as the U.S. government as customers, in one of the market’s hottest growth areas.
In our view, that’s some extra ammo that might not be fully priced into the FFIV stock chart.
FFIV Stock Chart
Following two swift corrective moves in the fall of 2014 and early 2015, FFIV stock is now situated just below its year-to-date highs, less than a handful of percentage points from its 2012 high and slightly above its all-time highs from 2011.
With the prior corrective activity and uptrend in place, FFIV stock now looks to be putting the finishing touches for higher prices by consolidating in quiet and tight trade. This action should lead to a breakout and upside follow-through in the days (weeks?) ahead.
One big caveat for FFIV stock’s eventual price path is the broader market. Range-bound conditions, as well as an environment where valuations have come under fire for being stretched historically, could always prove “trouble before a double.”
FFIV Stock Bullish Vertical Strategy
Because the majority of stocks do move with the broader market, and because the market’s condition is tenuous at best right now, a vertical spread in FFIV stock looks very appealing. This should help maintain a limited risk profile while cutting down on volatility, time decay and directional risk.
Being able to manipulate how much risk and reward is in a bullish F5 position is tied to the vertical’s versatility and a result of where it’s placed in relation to shares of FFIV, and how wide or tight the trader wishes the maximum risk of the spread to be.
In reviewing FFIV’s option board, one spread that looks attractive is the FFIV Sep $130/$140 bull call vertical spread for up to $5 and contingent on shares trading above $134.57 which denotes the July closing high within the consolidation of the last couple weeks.
With the spread priced conservatively at $4.70 to $4.75 and the current directional risk / reward of the vertical at approximately 33 cents for a $1 move in FFIV stock; the contingent 79 cents of required strength from shares of F5 would put the spread’s fair market value at around $5.00.
In our view, by requiring a bit of technical wherewithal from FFIV stock and not waiting for a full-fledged breakout, the spread can be entered with more confidence that it’s on course to move higher and also allow for a stronger opportunity to get filled on the vertical for a reasonable price.
Overall, this type of defined contingency order should help keep traders out of trouble.
The $5 paid for the FFIV vertical could lead to a double in the spread’s value to $10 with FFIV stock at or above $140 at expiration. It’s nice to get paid 100% while only requiring 4.5% from FFIV’s underlying shares.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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