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Wednesday, August 7, 2013 - 11:30
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Wednesday, August 7, 2013 - 11:30

This Company Is In The Sweet Spot Of 2 Huge Internet Trends

Wednesday, August 7, 2013 - 11:30am

A big part of my job as managing editor of StreetAuthority involves talking with our premium newsletter experts to get a sense of what they like in the market, where they think it's headed and how they plan to help their followers profit.

That means I get paid to hear from some of the top investing minds in the country on a regular basis. What could be better?

I want to share some of that wisdom. I'm featuring insights and top picks from each of our experts over the next couple of weeks as a way of saying thanks for being a reader.

Today's pick comes courtesy of Amber Hestla.

Amber Hestla

As a former U.S. military intelligence analyst, Amber Hestla learned how to analyze data to predict outcomes. These days she applies those skills to financial markets for, a StreetAuthority sister site. Amber's specialty is generating income using options strategies that minimize risk. In her advisory, Income Trader, Amber uses a step-by-step approach to guide readers through the options market in search of the best income plays each week.

So far, so good: Every trade that Amber has closed in Income Trader since the first issue in early February has been a winner -- that's one winning income trade a week since Feb. 6.

Here's more from Amber:

A Company Whose Coffers are Benefiting from Two Internet Megatrends
There are two undisputed Internet megatrends -- growing worldwide usage and the need for tighter security.

F5 Networks (Nasdaq: FFIV) benefits from both.

The company's flagship product, F5 BIG-IP 5000, is a high-performance "switch" -- a device that manages data for large networks. Customers include cell phone network operators such as AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). Major network software providers, including Microsoft (Nasdaq: MSFT), Oracle (NYSE: ORCL) and SAP (NYSE: SAP) also utilize F5's wares.

This equipment acts as a gateway between users and the data servers, while maintaining security.

As a way to visualize these services, think about connecting to Netflix (Nasdaq: NFLX). You request a movie, and the switch decides which of the Netflix's servers should deliver that movie to you. The switch is responsible for finding a server not being fully utilized to send your request so that it can be processed quickly.

It also defends against so-called distributed denial-of-service (DDoS) attacks, which try to overwhelm a company's servers and prevent legitimate users from accessing service. A recent survey found that more than a third of large companies experienced a disruptive attack in 2012. More than a quarter of the attacks led to costs between $50,000 and $100,000 an hour, with the average attack lasting more than 30 hours.

Given the expense of a single DDoS attack, the $32,000 price tag for a F5BIG-IP 5000 is a bargain.

Last week, F5 announced earnings for the most recent quarter that beat analysts' expectations. Revenue was up 5% from a year earlier, and, going forward, F5 said it expects earnings per share to increase as much as 7% in the current quarter compared with a year ago.

FFIV is also one of the best managed companies in its industry, as you can see from this chart:

F5 is performing significantly better than average in each of these measures and every other metric I checked. But instead of buying shares outright, I recommend readers sell a put and get paid to buy shares at a discount.

Specifically, I recommend selling FFIV Oct 70 Puts for around 65 cents. Selling these puts will generate immediate income of about $65 per contract. Assuming FFIV trades for $70 or more on Oct. 18, we keep the premium and make a profit of $65 on $1,400 (the "down payment" to initiate the trade). That's a 4.6% return in 77 days. If we can repeat a similar trade every 77 days, we'd earn a 22.8% return on our capital in 12 months.

If FFIV trades for less than $70 on Oct. 18, you'll keep the $65 per contract, but you'll have to buy FFIV at $70 per share. In this case, you'll own F5 at a cost basis of $69.35 (the $70 "strike" minus the 65-cent premium, which you keep), a 21.1% discount to recent prices.

At $69.15, we'd own shares at about 13.6 times estimated 2014 earnings, and we'd be able to sell covered calls on the position to generate additional income.

(Note: Options aren't for everyone. Please check with your broker about any special capital and paperwork requirements that you may need to fulfill.)

P.S. -- Amber has an eye for seeing what others miss -- and she's uncovered a glitch in the options world that could be worth thousands of dollars per year to traders. To see here report, and what she's uncovered, click here.

Bob Bogda does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The StreetAuthority Insider is a subscriber-only, complimentary publication, exclusively for our paid customers. As a paid subscriber in good standing, you'll now be getting more exclusive access to more investing gurus than ever before. I hope you'll find these periodic missives always informative, occasionally entertaining and consistently helpful to your bottom line.