Trade of the Day: FireEye (FEYE)

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FireEye Inc (FEYE) is a cybersecurity/application software company that I am recommending today for an option-writing trade. The stock sold off sharply in early 2014 but has been stabilizing since last May. It has been building a nice trading channel and recently broke out above that channel, and also above its 200-day moving average. This breakout gives FEYE support at $35, with its 200-day average. Additional support also exists at $33, with its 50-day moving average.

The best FEYE trade now is a put credit spread. Those who follow me will know that this is one of my favorite profit strategies, but here’s a quick primer for those who are new to this approach.

A credit spread involves writing (selling to open) an option and purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.

In a credit spread trade, you collect more money on the leg you write than you spend on the leg you buy, so you are getting paid to enter the trade! For maximum profits, you want both options involved in the spread to expire out-of-the-money. But regardless of what happens to the options, the money you receive for opening the position is yours to keep.

Here is the information you need to know to open the FireEye put credit spread:

  • Underlying stock — FireEye (FEYE)
  • Current stock price — $35.70
  • Trade Type — Put credit spread
  • This position generates a 10% return on margin for a two-week holding period. Your maximum risk is $270 per contract.

Use a spread order to sell to open the FEYE Feb 32 Put (FEYE150221P00032000) and buy to open the FEYE Feb 29 Put (FEYE150221P00029000) for a spread credit of 30 cents or higher.

Use an auto-stop order to close this position if FEYE trades below $31.50 prior to February options expiration and you do not want to buy the stock. If you do not close the position and the FEYE Feb 32 Put expires in-the-money, you will be obligated to buy 100 shares of the stock at $32 per share for each credit spread contract you open.

But, as I mentioned before, I expect the $33 level and/or the $35 level to act as support. If so, you’ll keep 100% of the option premium you collected upfront and have no further obligation — making for some nice income on a week-and-a-half hold.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/trade-day-fireeye-feye/.

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