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F5 Networks and the Trapped Option Shorts

Ackbar sold vol. Bad Ackbar.

Ackbar sold vol. Bad Ackbar.

Things are about to get interesting for F5 Networks (FFIV).

Earnings were "off" and they are currently trading at 110/sh. That doesn't seem that bad, except they were trading at the close at 138.75-- so the market is down a little over 20% right now. Quite a drubbing.

Is this a point to "buy the dip?" I'm not a fundie, I focus on market structure, but I want to show you a particular source of supply today: the option shorts.

Introducing: The Vol Players

When a company reports earnings, some option traders will bet on the volatility of the name, not necessarily the direction-- I often do that, and if you are selling volatility, you run the risk of a blowout one way or the other.

At the close Wednesday, FFIV options were pricing in about a 9% move in either direction-- a pretty high premium, but not so much in hindsight. The stock is now lower more than twice the expected movement, which means we will see an option short squeeze.

The Mechanics of the Squeeze

There are traders that shorted vol, and they will be at a loss... what can they do?

  1. Sell stock to delta hedge. This will put more supply out on the market.
  2. Buy puts to delta/gamma hedge. The market makers will then take the other side and short stock to cover.
  3. Close out the put side entirely. The market makers again will take the other side and short stock to cover positions.

Pretty much in all these cases, it's not going to end well. Could we see a huge gap fade and rally? Sure, I can't predict the future. But what remains here is that implied volatility will stay elevated.

The Trade

So if you want to play it, I'd be a net option buyer in the Feb options. Furthermore, if you do want to buy the dip, consider stock with put overbuys, and peel puts or add stock if it does dip.

Another idea is to trade proximity plays like APKT, RVBD, CRM, VMW, and others.

by Steven Place

Steven Place is the founder and head trader at