Wall Street is known to overreact, so could FireEye Inc (NASDAQ:FEYE) offer a turnaround opportunity for bulls following its pessimistic earnings reaction? This strategist believes so. But before investors rush in to buy FEYE stock, using a limited-risk options spread position to secure more favorable odds looks like a better approach.
Let me explain.
This past Thursday was an ugly one for FEYE shareholders. Following the company’s Q3 confessional, FireEye stock sunk by more than 10%. But it begs the question, could this be yet another exaggerated situation by a Street known for its sometimes criminal-like behavior in ransacking a stock without just cause?
The immediate reaction in FEYE stock is largely tied to investors worrying over slightly lower near-term guidance after FireEye posted better-than-expected top and bottom-line results for the third quarter. But not everyone is buying into the fear.
Morgan Stanley sees FEYE’s earnings report as signaling an “early turnaround” in its business. Supporting this view is the company’s improving new product adoption, stronger cost discipline by management, increased operating margins and anticipated turnaround in billings growth next year.
The firm notes some patience is required with FEYE stock, but it reiterated its Overweight rating and $19 price target.
At the same time, analysts at Oppenheimer noted FireEye’s results as “decent,” while pointing out management is “executing well” with a renewed product portfolio. Similarly, the firm acknowledges it’s not all rainbows and puppy dogs as predictability remains a slight headwind, but it also retained FEYE stock’s Outperform and $22 price target.
FEYE Stock Daily Chart
Click to Enlarge
Thursday’s earnings-related move certainly wasn’t what bullish investors were looking to see. But if one believes an overreaction to the report has occurred, FEYE stock is offering a nice opportunity to initiate a long position as a layered support zone within an uptrend is tested.
Currently shares of FireEye are testing the 200-day simple moving average, 50% retracement level and the prior quarter’s reaction low within an inside doji pattern after filling a bullish price gap.
As mentioned, it looks nice. But could it be “too nice?” The other reality is that playing this sort of easy-to-see support too tight and technically correct, in our experience, often leads to a costly and aggravating trade.
FEYE Stock Bull Call Spread Strategy
Click to Enlarge
However, being cognizant that technically attractive bottoms often yield less-desirable lows before all is said and done, a low-cost, modestly out-of-the-money vertical, which vastly reduces and limits risk, is a favored play in this situation.
Reviewing FEYE stock’s options for ideas, the Dec $15 / $16 bull call spread is attractively priced. With shares of FireEye at $14.54, the spread is priced for 25 cents.
That’s just under 2% stock risk, but it gives the trader the opportunity to capture 75 cents or a return of 300% above $16 if FEYE can climb 10% through expiration.
I don’t know about you, but that almost seems criminal to pass up as a more secure way to buy into FireEye stock.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!
