Cyber-security play FireEye Stock (FEYE) has been on a tear this year. But following a recent analyst cut and broader market weakness, traders have a more secure technical pullback to enter from using a limited risk options strategy to ensure the position doesn’t get hacked.
FireEye stock has been in one of the market’s investment sweet spots during the first half of the year. Compared to the flat S&P 500, shares of FEYE are up a more than 40%, but that same relative strength wherewithal did catch the concerned attention of an analyst late last month.
The recent analyst action from Barclays cut FireEye stock to equal weight from overweight but maintained a price target of $56 on shares. Far from dire, according to Barclay’s the reduction to equal weight simply reflects the expectation FEYE will perform “in line” with industry returns over the coming 12 months.
The weekly chart provided for FireEye stock is certainly pleasant to look at and certainly lends itself to a classic bottom within a nicely established uptrend. Currently, shares of FEYE have corrected 16% and are currently holding prior channel highs set back in February and 50-day simple moving average.
Less perfect but nonetheless technical eye candy, FireEye stock is wrestling with the 23% Fibonacci retracement level and trying to notch a higher low candle pivot modestly above our hand-drawn up-channel line.
But, what if FireEye stock heads even lower? For bullish investors the technical picture of an uptrend could theoretically remain intact all the way down to the March pivot low near $37.50. But the next logical stop and area of support that we see is around $44 a share.
If FireEye stock were to drop to the $44 area, the price action would produce a correction of 21%. That’s well within the 30% figure many traders willing to position in growth names use as a max threshold for labeling a correction as being healthy or par for the course in a more volatile name.
A move to the $44 area in FireEye stock would also represent a test of the 38% level, which is more widely-used as support by traders than the lesser 23% currently in play.
Of course, at the same time our hand-drawn channel line would be broken. But, rather than an ominous event for FireEye stock, the breach might be viewed more optimistically. The reason being, markets rarely allow for perfection. Besides, were a low near $44 to develop on the weekly chart, wouldn’t that still look like an uptrend if we removed our drawn channel line?
FireEye Stock Collar
One way to be positioned long for a low at current levels, but be protected from shares dropping too far south of $44 is to collar FireEye stock by purchasing an out-of-money put combined with the sale of an out-of-money call to finance the purchase.
Option and FireEye stock volatility is actually near historic lows right now, but given the possibility for entering “early” within the corrective pullback and the discussed mixed analyst call, the collar as a neutral premium spread makes sense.
Reviewing the board, one combination that’s available is the August $43 put / $55 call for a debit of 25 cents. With shares of FireEye stock near $48 the protective put is $5 out of the money, so the trader has guaranteed protection the position’s losses are contained to 11% when accounting for the modest debit.
Were an upswing in FireEye stock to occur, the 7 points to reach the sold $55 strike means there’s about 13.5% of profit potential before the capping of gains at what amounts to as technical resistance as the strike is aligned with last month’s highs.
That said, the cap in FireEye stock’s collar doesn’t need to be permanent. If resistance is overcome, these traders have the option (no pun intended) to roll the collar up and establish a position whose profits can trend higher alongside a continued increase in stock price.
It should be realized gains in an adjusted collar won’t be as robust as simply being long FireEye stock. However, the increased protection and possibly a lock on profits are attractive features to consider when dealing with a volatile stock like FEYE. Don’t you agree?
On the downside, if the FireEye stock collar position appears to give away too much with an effective stop of $42.75 (strike-debit), consider if shares continued to slide down to the fore-described March low near $37.50? That would constitute a correction of 32% and 13% below the collar’s protection.
Additionally, were that to occur, as the FEYE stock collar loss is contained to a much smaller amount, the trader using this strategy might contemplate rolling the collar down and even accumulate additional shares. This type adjustment does incur additional, but again, well-controlled risk and allows the trader to be in a stronger position to begin making money much sooner, if shares of FireEye stock rebound.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
