The stock market has been in turmoil all year. Ever since the correction started in February, investors have had to pay more attention to headlines than company fundamentals. We have a boom in business P&Ls thanks to tax advantages in the U.S. and global growth, yet most short-term trading is happening as knee-jerk reactions to headlines.
The world is abuzz with tariffs war threats between the U.S. and most of its business partners and denuclearization talks the North Korea. Nevertheless the overall indices are still near or at all time highs in spite of all the fears.
The tech industry has been especially vulnerable because of its makeup of momentum stocks. These move fast in either direction, so investors tend to get in and out of their positions faster than they would in other sectors.
FireEye (NASDAQ:FEYE) is one of those momentum stocks. For example, it fell over 20% just since the highs in April. Moreover, the price now is but a sliver of the $90 highs of 2014. This morning, investors are piling into the stock as it’s up 5% on an upgrade from Piper Jaffray so maybe the bottom is in for now for FEYE stock and therein lies my opportunity.
Technically, this bounce should have much more upside to go. If the bulls succeed in breaking out of the lower-high trend, the upside target of this rally should take FEYE above $18.50 per share.
But as I said, this is a trading environment of headlines so instead of risking $16.80 per share with no room for error, I rather bet that the bottom is in then to try and capture the remaining upside hopium.
Click to Enlarge Fundamentally, FireEye stock is not cheap. But this is a growth trade thesis, so profitability is not the primary concern. We currently live in a world where more of our lives depend on technology than ever. Furthermore, the adoption rate is exponential, so demand on FEYE services will remain strong for decades. Companies like this that service this industry will prosper for years to come.
If the stock continue on its upward trajectory, Wall Street experts will have to adjust their ratings on it. As it is now, more of them have a hold rating on fire I and the stock is trading closer to the high end of their price target ranges. Maybe this upgrade will invite more analysts to do the same.
My trade setup today does not need a rally. I merely need the stock to hold recent support to retain maximum gains. But if a rally ensues, then my profits will materialize faster.
FEYE Stock Trade Idea
The Trade: Sell the FEYE Jan 2019 $14 put and collect 80 cents per contract to open. Here I have a 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $13.20.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the FEYE Jan 2019 $14/$12 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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