Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)

Occasionally, there are trades that present themselves that may require a little adjusting based on what was initially planned. This is especially true when using the 'reverse iron condor' spread. Many of the changes are because the strike prices originally planned will not work out in realistic terms. Along with the 'reverse iron condor' spread, I will also be purchasing a 'strangle' with F5 Networks (NASDAQ:FFIV) just in case the stock really pops or falls precipitously.

F5 Networks, Inc. provides application delivery networking technology that optimizes the delivery of network-based applications, and the security, performance, and availability of servers, data storage devices, and other network resources in the Americas, EMEA, Japan, and the Asia Pacific.

One key to the success when using the 'reverse iron condor' is keeping the strike prices as close together as possible. While the cost of the trade may be greater, it really does ensure the chance of success is a greater, too.

With higher-priced stocks like International Business Machines (NYSE:IBM), Google (NASDAQ:GOOG), CF Industries (NYSE:CF), and (NASDAQ:AAPL), the strike prices are usually in $5.00 increments, i.e. $140.00, $145.00, $150.00, etc., this can present several problems. This is where an adjustment is made before placing the trade. This is exactly the situation with F5 Networks , which I will be trading next week as an earnings trade using a 'reverse iron condor' spread.

Normally, the 'reverse iron condor' spread is placed using the following format:

Reverse Iron Condor Construction

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

Currently, F5 Networks is trading at $110.72/share. The 52-week range is $69.01 - $145.73. The company is scheduled to report earnings on Wednesday, January 18, 2011, after the markets close.

52wk high: 145.76
52wk low: 69.011
EPS: 2.96
PE: 37.00
Div Rate: N/A
Yield: N/A
Market Cap: 8.81 B
Volume: 1.36 M

While F5 Networks does see large price moves after reporting earnings, I am a little bit uncomfortable using a 'reverse iron condor' spread that is requiring a $10.00 price move, up or down, to profit.

Here is a closer look at F5's previous price movement after reporting earnings:

On October 25, 2011, F5 Networks reported fourth-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Oct 27, 2011 103.03 107.00 100.79 105.72 3,394,853
Oct 26, 2011 97.25 103.00 96.56 101.26 8,089,327
Oct 25, 2011 92.77 92.92 88.40 88.76 3,370,392
Oct 24, 2011 89.13 93.99 89.13 93.42 1,921,157

On July 20, 2011, F5 Networks reported their third-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Jul 22, 2011 99.76 102.45 99.57 101.20 4,089,714
Jul 21, 2011 102.81 104.00 98.10 98.87 7,328,352
Jul 20, 2011 116.00 116.00 110.45 111.44 6,381,945
Jul 19, 2011 113.33 118.69 113.00 118.65 2,683,822

On April 20, 2011, F5 Networks reported second-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Apr 21, 2011 106.87 106.87 106.87 106.87 9,923,800
Apr 20, 2011 95.73 99.80 94.41 99.74 6,343,591
Apr 19, 2011 93.30 94.37 92.33 92.92 2,509,879

On January 19, 2011, F5 Networks reported first-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Jan 21, 2011 111.73 113.82 109.66 109.97 9,443,620
Jan 20, 2011 112.82 114.75 106.10 109.15 23,329,466
Jan 19, 2011 141.89 143.60 135.60 138.78 7,365,082

As you can see, F5 Networks rarely fails to deliver a large price move after earnings. I really think the two trades I will be placing have a very good chance at profiting.

The first trade, as mentioned above, will be the 'reverse iron condor' spread with a slight variation. This trade has an excellent probability rate. Here is how I will place this trade:

  • Buy (10) FFIV January 2012 $110.00 strike put options
  • Sell (10) FFIV January 2012 $105.00 strike put options
  • Buy (10) FFIV January 2012 $110.00 strike call options
  • Sell (10) FFIV January 2012 $115.00 strike call options.

The second $110.00 buy call option is not a typo. As I mentioned earlier, the trade becomes more difficult to achieve a profit if I choose to use the standard $115.00 strike call options, followed by the selling of the $120.00 call options. While the ROI is not great with this trade, the chance at success is, as this profit/loss chart shows. Every once in a while, we need to play a more conservative route with trades, and this is what I will be doing with this F5 Networks earnings trade. Yes, it is only a 16% ROI, but in my view it is a lock.


Cost/Proceeds $4,310.00
Option Requirement $0.00
Total Requirements $4,310.00
Estimated Commission $50.00

The current bid/ask spread is $4.00 -$4.62. A limit order of $4.31 should get your order filled.

Current Price: $110.81

Price Profit / Loss
78.75 $690.00
91.22 $690.00
104.36 $690.00
105.00 $690.00
105.69 $0.00
110.00 ($4,310.00)
114.31 $0.00
115.00 $690.00
117.49 $690.00
130.62 $690.00
143.75 $690.00

However, it is necessary to show you how the trade looks if you were to use the 110//105/115/120 strikes mentioned earlier and the profit/loss chart:


Cost/Proceeds $4,000.00
Option Requirement $0.00
Total Requirements $4,000.00
Estimated Commission $50.00

Current Price: $110.81

Price Profit / Loss
78.75 $1,000.00
92.42 $1,000.00
105.00 $1,000.00
106.00 $0.00
106.82 ($818.00)
110.00 ($4,000.00)
115.00 ($4,000.00)
119.00 $0.00
120.00 $1,000.00
121.21 $1,000.00
150.00 $1,000.00

Yes, there is higher ROI. However, this is an extremely risky trade with such little time left until expiration. Ultimately, it is the choice of the trader.

There is a good chance that this trade will profit early. From there, you can either sell or hold through earnings. I would place this trade by Friday or early next week (markets are closed on Monday).

Now that I got the very conservative trade out of the way (that I see as a virtual lock to work out), I will also outline the placing of a 'strangle' option strategy on F5 Networks to benefit if there is a massive price move, which is entirely possible.

With a 'strangle' strategy, one key aspect is to always have plenty of time value left on your trade. This is because the implied volatility drops exponentially after earnings are announced. This is a market makers dream scenario, especially when options expiration is so close.

The 'strangle' strategy is when the buyer purchases an out-of-the-money call option(s) and an out-of-the-money put option(s).

Long Strangle Construction

  • Buy 1 OTM Call
  • Buy 1 OTM Put

Instead of purchasing the January 2012 options, we want to purchase February 2012 strike prices. This will mitigate the time-value decay that the January strikes will have. Either way, this trade can be put on relatively cheap, and with the 52-week range that F5 Networks has, this trade should do great. This is an extremely volatile stock. The February 2012 options will give you a month of time-value.

It should be noted that I am not expecting F5 Networks to reach one of these two strike prices after reporting earnings (all the better if it does), but that the price of one side of the option (calls or puts) will rise more than what was paid to place the trade.

Here is the 'strangle' trade I will placing:

  • Buy (10) FFIV February 2012 $130.00 strike call options
  • Buy (10) FFIV February 2012 $90.00 strike put options.

The current bid/ask spread is $3.07 -$3.23. By using a limit order of $3.15, you should get your order filled. The price of F5 Networks could change by the time this article is published, but all you will need to do is to adjust the strike prices (but using parameters).


I am long AAPL, GOOG. I will be placing these two FFIV trades on Friday.