As the hacking scandal of the Democratic National Committee continues to unfold, shares of cybersecurity firm FireEye Inc (NASDAQ:FEYE) have gotten a boost. With renewed takeover chatter and a potential upside breakout in FEYE stock, shares of FireEye appear poised to move higher.
Data breaches similar to those suffered by the DNC are likely to only get worse, not better, as the world becomes more and more cloud and information based.
And it’s cybersecurity firms such as FEYE that will likely feel the benefit of this heightened focused on protection of sensitive information. This not only will translate to the bottom line with higher revenues, but likely lead to more consolidation and acquisitions in the industry.
FEYE saw a huge rally Thursday, moving higher by over 9% from $16.49 to $18.09. Most of the move was predicated on more takeover rumors surfacing, this time by Cisco Systems, Inc. (NASDAQ:CSCO).
Previously, FEYE had been the subject of takeover talk regarding Symantec Corporation (NASDAQ:SYMC), with the company hiring Morgan Stanley last month to explore a possible sale.
Certainly, the options market was red hot about the takeover speculation in FEYE, with call volume exploding to over 50,000 contracts. Call volume exceeded put volume by more than 5-to-1. Often, unusual option volume can be a tell, with the big players taking a position in front of the news of an acquisition.
Click to Enlarge Technically, FEYE stock is approaching a potential break out at the $18.40 level.
Yesterday’s intraday high of $18.42 further reinforced the importance of this level. More importantly, the 200-day moving average of $18.45 on FEYE aligns alongside the technical resistance area.
A meaningful break through the $18.40 resistance would likely lead to a sharp rally higher in FEYE, with short covering fueling the rally further. So to position for both a potential takeover play and a technical breakout, a long call spread makes sense.
Buy FEYE Sept $17 calls and sell the FEYE Sept $20 calls for a $1.35 net debit. These are the regular monthly options that expire Sept. 16.
The maximum risk on the trade is $135 per spread, with maximum gain (if FEYE is above $20 on September expiration) of $165 per spread. Potential return on risk is 122%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
