Trading an Earnings Surprise with Credit Spreads

07/23/2010 12:01 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Shares of F5 Networks Inc. (FFIV) jumped more than 12% in Thursday morning trading with investors responding to better-than-expected third quarter earnings. Specifically, FFIV posted adjusted earnings of 60 cents per share, compared to the consensus estimate for 59 cents per share. Revenue for the quarter came in at $230.5 million, versus expectations for $218.4 million by Wall Street analysts.

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Options traders are jockeying for position following the surprise, and most of them were caught flat footed given the FFIV's Schaeffer's put/call open interest ratio (SOIR) of 1.56 in the 76 percentile. Puts are still popular today, but most of the activity appears to be focused on short vertical put spreads, or credit spreads. For instance, at about 9:37 am ET on the International Securities Exchange (ISE), a block of 1,482 FFIV August 75 puts traded for the bid price of $1.16, or $116 per contract.

At the same time, a block of 1,482 August 65 puts crossed the tape for the ask price of $0.26, or $26 per contract. The result is a credit of $0.90, or $90 per contract, which the trader keeps as long as FFIV holds above $75 per share through August expiration. The chart below is a representation of this particular trade's profit/loss scenario at expiration.

By Joseph Hargett, contributor, Schaeffer’s Trading Floor Blog

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