F5 Networks: Highest Returning Protected Covered Call

| About: F5 Networks, (FFIV)

F5 Networks (NASDAQ:FFIV) provides open architecture application delivery. Its customers include 8 of the Fortune 10, 44 of the Fortune 50 and 18 of the top 20 U.S. commercial banks. On the news front, the company recently unveiled a cloud-based service enabling companies to protect their infrastructure from malicious activity.

In the company's Q2 2012 earnings call, the company noted revenue of $339.6 million, representing a 5% sequential increase and a 22.4% year-over-year increase. The company reported strong Telco sales, as well as strength in software and security products. The company is very pleased with sales activity related to the acquisition of Traffix Systems. On a negative note, the company indicated it does not expect Telco sales to be as strong in Q3 as in Q2.

Competitors to F5 Networks include Cisco Systems (NASDAQ:CSCO), Citrix Systems (NASDAQ:CTXS) and Juniper Networks (NYSE:JNPR).

In a previous article related to F5 Networks posted on March 29, 2012, a protected covered call or collar was considered for the company, as the protected covered call had the highest potential return, which was most likely a result of the company about to report earnings. At options expiration in March of 2012, a long position in F5's stock entered at the time of the previous article, would have experienced a loss of -1.3%, however, the protected covered call would have experience a profit of +1.6%.

Once again F5 Networks has popped up as having the highest returning protected covered call as shown below:

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Following behind F5 Networks were pharmaceutical company Warner Chilcott (NASDAQ:WCRX), oil and gas company Plains Exploration and Production (NYSE:PXP), oil and gas company Stone Energy (NYSE:SGY) and digital storage company Western Digital (NYSE:WDC) discussed in this article and this article.

A protected covered call may be entered by selling a call option against a purchased or existing stock and using some of the proceeds from selling the call option to purchase a protective put option. The put option operates as "stock insurance", in case the price of the stock drops dramatically. The nice thing about the protected covered call, is the "stock insurance" is paid for via the sale of the call option. The F5 Networks protected covered call listed in the table above has a potential return of 3.5% (51% annualized) and a maximum potential loss of 7.4%, so even if F5's stock price goes to zero, the maximum loss realized is 7.4% (at expiration).

The highest returning positions as shown above were found by selecting to sort by the highest returning positions. Stock price for companies in an uptrend were found by selecting to include companies with a 100-day moving average greater than the 200-day moving average. The 8% maximum loss parameter was selected, as a loss of 8% or less can typically be recovered fairly quickly using income generating investment methods.

F5's stock price has peaked around $140 twice in the last two years followed by a pull-back as shown below:

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On the previous pull-back, the price of the stock dropped all the way to $70. With F5's earnings call on the horizon, an investor might consider entering the protected covered call listed in the table above. The protected covered call can be entered by selling the 2012 Jul 95 call option for $6.15 and purchasing the 2012 Jul 85 put option for $1.78. A profit/loss graph for one contract of the F5 protected covered call is shown below:

For a stock price below the $85 strike price of the put option, the value of the protected covered remains unchanged. If the price of the stock increases to around $105, the position can most likely be rolled in order to realize additional potential return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , , Application Software, Options
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