One market theme that gained strong investor momentum in 2014 (and continues to find a following today) is cybersecurity.
Cybersecurity stocks may not be household names (yet), but the companies that tackle these potentially crippling socioeconomic and financial threats are positioned to see continued growth as they integrate themselves behind the scenes of companies and governments’ digital lives.
One name I find particularly attractive in this progressively important group is FireEye Inc (NASDAQ:FEYE). FEYE stock has a compelling technical and fundamental picture … and for the traders out there, best-in-breed options liquidity should you want to hedge your positions.
FEYE Bullish Factors
Regarding FireEye’s technical and fundamental picture, shares of FEYE and the company’s prospects both appear in much stronger position following February’s earnings report.
While not yet a profitable concern, FireEye did trump earnings estimates with a narrower-than-expected loss and impressive-looking sales growth of about 150% year-over-year. Combined with the company “nearing cash-flow break-even” — a significant milestone for many analysts on Wall Street per Barron’s — the immediate reaction in FEYE was impressive technically. And this trader views the move in FireEye stock as a trend-changer, with FEYE clearing major overhead resistance on equally important record volume.
Additionally, I like the fact the notorious James Cramer of CNBC recently gave his version of a seal of approval to FireEye stock by labeling it one of his “four horsemen” in cybersecurity and a designation reserved for top names within a particular market niche. The other three amigos are Palo Alto Networks Inc (NYSE:PANW), CyberArk Software Ltd. (NASDAQ:CYBR) and Fortinet Inc (NASDAQ:FTNT).
Saving the best for last, FireEye is the best in breed because of its listed calls and puts. What makes FEYE options attractive are listed markets with sufficiently tight bid/ask spreads, weeklies, half-point strike prices and enough investor activity to establish a hedge and take it off or roll out over time without getting “hacked!”
FireEye Bullish Option Strategies
With FEYE’s underlying volatility matching participants’ implied pricing of the actual call and put contracts, there’s no overt trading edge. However, with volatility levels also testing historic lows in the low to mid-40s, a long premium strategy with predetermined, limited risk and open-ended reward potential is made more compelling.
For bullish investors, both a long call purchase and married put strategy — a synthetic equivalent using long stock and equal ratio of long puts — have these attractive characteristics.
With FEYE near $41.40, the slightly in-the-money April 17 $40 calls fetch about $2.65, while the married put would trade for roughly $42.60. Using either strategy, a trader bullish on FireEye stock has limited their maximum risk exposure to about 6% through the April expiration cycle and possibly even less risk if managed successfully prior to the contract expiring.
Priced conservatively at expiration without time premium, FEYE shares need only rally about 3% to break even, while currently maintaining intrinsic value of $1.40 and more than 50% of the contract’s total price.
At the same time, an investor can quickly turn a profit of roughly 50% if FireEye stock simply takes out last Thursday’s pivot high of $43.92. If a larger rally develops prior to expiration, an investor can anticipate bigger gains aided by time premium still priced in the options.
Finally, if this particular horseman can gallop to its post-earnings high of $46.44, the associated position gains in excess of 140% would certainly be a ‘House of Pleasure.’
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, and the use of it is the responsibility of the individual. As of this writing, he did not hold a position in FEYE in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
