Cybersecurity play FireEye Inc (NASDAQ:FEYE) has done little to protect a bear virus of sorts from taking over FEYE stock the past couple years. But if you have a stomach for volatility and can allocate some capital to a riskier name, an intermediate-term, out-of-the-money bull call spread in FEYE stock is worth considering. Let me explain.
Monday was a nice session for FEYE stock. Shares gained nearly 8.5% on the back of an upgrade by Bank of America’s Merrill Lynch unit. The firm issued an upwardly revised “buy” recommendation from “neutral” and price target lift from $13.50 to $18.
Behind the bullish upgrade, Merrill sees “significant upside potential” based on valuation and overly-bearish expectations after multiple failed buyout rumors. Moreover, new product solutions and changes to FireEye’s sales leadership should act as drivers for significant upside in FEYE stock over the next two years according to analysts at the firm.
Now for the bad news, FireEye loses money and has remained a money loser as both a business entity and in creating shareholder value during FEYE stock’s three plus years as a public company. But as trends are known to end, could 2017 finally be a turning point for FireEye, both off and on the price chart?
FEYE Stock Weekly Chart
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A bit more seriously, despite a couple periods of very robust gains, long-term holders of FireEye are deep underwater. Shares of FEYE are just off all-time-lows and 88% below a high of $97.35 set three years ago shortly after its initial public offering.
Optimistically, trends do change. Less so, not all trends change, as companies like FireEye Inc do, on occasion, fail entirely.
To embrace the potential for a turnaround in FireEye, the preference would be for shares to not forge a new low. At the end of the day, week, month and year, that’s not mandatory price action, either.
Without exception though, any potential trend change will require FEYE stock to eventually rally with staying power.
For this strategist, a level of interest would be above $14. That’s roughly 20% above the current price in FEYE stock, but allows confirmation of a new higher high and clearance of the 200-day simple moving average.
Bottom line, that still leaves about 600% of upside to the prior highs, without knowing if and when the FEYE stock bulls will ever be back. That’s a good price to pay.
FEYE Stock Bull Call Spread
For traders interested in FEYE today, potentially a better price to pay is the smallish price associated with an out-of-the-money, intermediate-term bull call spread.
Reviewing the FEYE options board, the Sept $14/$15 bull call spread is of interest. Priced for 15 cents with shares of FireEye at $11.60, profits at expiration will only exist if FEYE has confirmed our technical view of what’s necessary to support a bullish trend change based on today’s chart.
Above $15 a max profit of 85 cents or return of 567% is possible. Leaving the hype and most of the hope by the door, assigning 2% portfolio risk to the position works out to a gain of slightly more than 11% and decent use of leverage for a speculative position like FEYE.
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 Christopher Tyler’s 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.
