Cyber-security play FireEye (FEYE) has been anything but hot. In fact, shares of FEYE look more like a stock that has been hacked by bears in recent months.
With FEYE now trading at a deep discount — especially with Wednesday’s drubbing — it’s time to consider securing a long bull call spread off a potential bottom of some significance.
After enjoying the support of growth traders in one of 2015’s early sweet spots for theme-based investing, FEYE stock has gone steeply downhill.
Since mid-June’s high of $55.33 which boasted an outsized year-to-date gain of 75%, shares of FEYE have slid all the way past where they began 2015 — and in fact are now down 7% for the year.
The total loss of investor favor has made FEYE’s yearly performance worse than the S&P 500 ETF (SPY), which is down 2.8%, but also was up less than a handful of points at its high point back in May.
That same loss of confidence in FEYE is seen relative to the Purefunds ISE Cyber Security ETF (HACK) which holds FireEye stock, Palo Alto Networks (PANW), Fortinet (FTNT), CyberArk (CYBR) among its holdings.
At its best in 2015, the HACK ETF was up 28% or approximately half of what FEYE captured for its shareholders back in June.
Now HACK is actually outperforming FEYE stock, as the former is off 2.8% compared to FireEye’s 7% plunge.
But again, don’t let those FEYE price chart losses or even FireEye’s stiff quarterly losses throw you off — there is increasing value in this cybersecurity play. And in our technical assessment, the current picture is also looking fairly opportunistic. Let me explain.
FEYE Stock Chart
The weekly chart of FEYE is certainly less pleasant for bullish trend traders than it was in July when shares were near $48. In full disclosure, this strategist discussed a limited-risk collar position during a pullback into support within FireEye’s then-uptrend.
The good news in all of this is that FEYE stock is doing an admirable job of setting up a pattern low just below the 76% Fibonacci level. Specifically, I’m eyeing the three weeks of tight consolidation setting up near FEYE’s August 24 mini flash crash low.
In trying to spot a FEYE stock bottom, I will stress most stocks which fail to hold their 62% retracement level are more likely candidates for a full 100% retest of the cycle low. In this case, FEYE is just below its 76% and the 100% retracement is down at $24.81.
Given the situation, I’d suggest waiting for price confirmation which takes out this week’s high and contingent on the August 24 low holding or FEYE managing a quick test, then reversing higher.
FEYE Stock Bullish Long Call Vertical
I recommend is the use of a FEYE bull call spread. Price hacking of FEYE stock is still possible even at these levels, and vertical spreads are an effective way to reduce risk.
Additionally, I like the idea of a shorter-term vertical position. The time and dollar commitment are reduced and given the tight technical parameters we’ve discussed above for FEYE, fits in well with our outlook.
Checking the FEYE options board, the November $32/$36 bull call spread is attractive. Based on a current price of roughly $1.15, if a trader were to allow for price confirmation, i.e. a reversal, of 4% in FEYE stock to $32.01; the spread should fetch $1.45 or $1.50.
There’s obviously a cost to this FEYE strategy. In dollar terms, the cost increase is 30 to 35 cents. At the same time, this type of entry is designed to not enter into a position prematurely, which would put the whole $1.45-$1.50 at even greater risk.
Earnings are expected on November 4, so if the position gets elected, the trader has the opportunity to be in FEYE stock through its report, but with a lot less risk than a naked long stock position.
And if FEYE manages to secure a good, but historically proven reaction from investors, gains of about $2.50 or return of roughly 170% are possible above $36 by expiration on November 20.
Disclosure: 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
