FFIV Situation

J

jkgraham

On 3/23/2011 I purchased FFIV Stock at $94.00 and sold the April 16-$95.00-CALL for $4.30. The earnings conference call is scheduled for this Wed April 20, after the market closes.

I am considering buying the April 21-$95.00-PUT as insurance in case the stock drops the day after earnings.

The current ASK of this PUT is $5.20 which is close to my break even if you add the $4.30 credit I got for the CALL last month and the $1.00 difference in the stock purchase price of $94.00 and the PUT strike price of $95.00. So if I had purchased the PUT today I would have at least broke even with unlimited gains if the stock moves up.

I am considering on waiting until April 20 to buy the PUT so that the time-decay will decrease the price of the PUT. Fidelity.com has an option tool that predicts the PUT will cost $1.47 on Wed April 20. So waiting would definitely improve my profits.

Does anyone agree that I should wait until Wed to buy the April 21 PUT?

Will the April 29 PUT be available on Wednesday this week?

Comments/Suggestions?
 
Fidelity's model is probably wrong. Earnings will keep that option bid. It will probably stay around $5 (assuming the stock price stays constant). The implied vol will go up a lot.
 
I agree that the number you are getting from Fidelity's program is probably wrong - if the stock price stays the same, I doubt it would go down THAT much (of course, being a weekly with only a few days to go, it could go down somewhat by Wed.). Earnings is certainly having a large effect on the price of that put. To test this out, you could see how much does the Fidelity program put for the current estimated value of the put?

I guess my question would be - why not wait until Wed though? Are you afraid it may fall quite a bit Wed during the day, or are you just worried about earnings? If you were just worried about earnings, then I would just wait. If you were concerned it could drop off quite a bit Wed as well, then you should probably buy it ASAP.

I guess the real question is why own stock and sell a covered call if you are going to be nervous enough about the stock every earnings season to buy a put on it?

I doubt Apr 29th weeklys will be available in time as they are usually created the Friday before I think - with a shortened week, will it be Thursday this time? Not sure, but that would still be after Wed.

JJacksET4
 
This is all part of the learning curve for me. I admit that I probably bought the stock prematurely solely based on good earnings and low debt. Now, however my feelings have changed and I think that the stock could be over-priced and therefore planning an exit strategy.

I see that my choices are:
1.Sell the stock tomorrow ASAP. Anywhere above $90 will be a gain.
2. Put in a Stop-Loss Order at $90(or higher) my current break-even.
3. Buy a $95-PUT which is also about my break-even.

I think I choose (3) over (1) and (2). That way I'll be protected if the stock gaps down after earnings and could come out ahead if the stock moves up.

I’m also trying to observe Theta and Vega in action. I think the Fidelity Tool is way off. But for the $95-PUT Theta = -.49 and Vega = .04, I plan to watch the tug-of-war between these two as FFIV earnings approach and the PUT approaches the final days before expiration.
 
Quote from jkgraham:

I am considering buying the April 21-$95.00-PUT as insurance in case the stock drops the day after earnings. The current ASK of this PUT is $5.20 which is close to my break even if you add the $4.30 credit I got for the CALL last month and the $1.00 difference in the stock purchase price of $94.00 and the PUT strike price of $95.00. So if I had purchased the PUT today I would have at least broke even with unlimited gains if the stock moves up.

The put's value is going to crash and burn after earnings due to massive IV contraction. It could be 3+ dollars lower if the stock goes nowhere. That's a reaming.

The previous call write is history. For the moment, ignore it. With a stock cost of $94 and a put cost of $5.20, BE is $99.20. I'd sooner cash out now with a profit (the ignored call premium) or collar the stock than to throw away money on hyper expensive 3 day long put protection. But it's not my position, money or outlook. If you feel comfortable with that, go for it. You'll regret not doing it if FFIV soars :)

A May 90p/100c collar might cost you a buck. Downside gives up call gain but upside is 100 - 94 - 1, give or take. It all dpends on how you want to roll the dice.
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Quote from jkgraham:

I am considering on waiting until April 20 to buy the PUT so that the time-decay will decrease the price of the PUT. Fidelity.com has an option tool that predicts the PUT will cost $1.47 on Wed April 20. So waiting would definitely improve my profits. Does anyone agree that I should wait until Wed to buy the April 21 PUT?
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It's likely that 5/21 95p will cost less on the 20th due to proximity to expiration due to 2 days of time decay but there's no guarantee since IV can expand pre EA.

FFIV closed at $93.53 today so that means that the 95p has $1.47 of intrinsic. The Fidelity prediction would make sense at expiration (the 21st) not the 20th as you wrote.
 
Quote from jkgraham:

I admit that I probably bought the stock prematurely solely based on good earnings and low debt. Now, however my feelings have changed and I think that the stock could be over-priced and therefore planning an exit strategy.
More...
If your outlook has changed, get out of the way. Sell the stock, book the profit. EA plays are for those with conviction or lack of good sense :)
 
Trying to apply what I've learned about The Greeks to the FFIV options, I hoped that Theta would lower the PUTS by $0.45 yesterday. It did for a little while in the morning but unfortunately after about 10am Delta and Vega worked against me so I didn't gain anything by waiting any longer. I should have pulled the trigger before 10am but I didn't and lost $0.40 per share and bought the $95 PUT at $5.20.

I sold half of my stock shares at $94 (breaking even on the stock but make $4.30 on the Covered Call that expired last week) and bought the April 21 $95 PUT for $5.20; $0.10 better than my break-even.

The deal is done, only thing to do now is waiting and see what happens.
 
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