Name That Trade(s) – $FEYE of the Beholder

by Dan February 11, 2015 1:35 pm • Commentary

Cyber security outfit FireEye (FEYE) reports Q4 results tonight after the close, and the options market is implying a one day move, in either direction of about 12%*, vs the 6 qtr avg since going public of about 12%.  It is important to note that the stock has declined the next day after all six reports with the largest decline of 22% this past may.

* With the stock at $36 the Feb13th weekly 36 straddle (long the put and the call) is offered at $4,30, if you bought that you would need a move above $40.30, or below $31.70 by Friday’s close to break-even, or about 12% 

To be frank, I have no view on the company’s fundamentals, and the valuation is absurd as the company loses lots of cash and trades at 9x 2015 expected sales that I expect gets nicked a bit following tonight’s report. Anecdotally, it seems that every hacking headline is good for these guys, and it seems they have booked some new business almost immediately following some recent high profile hacks (see recent Sony & Anthem deals).

As for sentiment, after a dismal 2014 that saw the stock rise 125% in the first couple months of the year, the stock closed the year down 67%.   Since the Sony hack in December, FEYE has risen 30%, and is up 16% so far in 2015. I think it is safe to say that sentiment is a bit better than it was in 2014, and the recent gains could be fueled by short interest that sits at about 18% of the float.

From purely a technical standpoint, taking into account the recently improved sentiment and high short interest, the stock looks like a coiled spring on the slightest bit of good news, that likely has to come in the form of increased guidance as the quarter just reported is not particularly important at this point given the recent deals with Sony and Anthem.  On the flip side, the stock’s increase has been slow and steady since trading $30 in early Jan, but has lacked the sort of momentum to cause a meaningful breakout on volume that would confirm the recent upward trend:

FEYE 1yr chart from Bloomberg
FEYE 1yr chart from Bloomberg

A couple weeks ago we highlighted some bullish options activity in the stock where a trader defined a wide range where they would be put the stock down at 25, or have long exposure between 35 and 50, but capped at 50.

From Jan29th:

FEYE – after being very much out of favor in 2014, closing down 70% from the highs, the stock appears to be attempting to put in a little bottom in the last month, up 20% from the December lows.  Options volume ran hot today at almost 2x average daily volume, with calls outnumbering puts 2 to 1.  The stock saw a very bullish options trade in the form of a call spread risk reversal in Jan2016 expiration.  When stock was 31.83 a trader sold 5k Jan 25 puts and bought 5k Jan 35/50 call spreads paying .80 for the package, the trade breaks even at 35.80 with max gain of 14.20 at 50 or higher, but the trade is a loser at 25.80, with the worst case being put the stock at 25, in addition to the loss of the 80 cents in premium or $400,000 in premium with the potential of being put 500,000 shares of stock at $25.

My View: an inline quarter and another guide down causes a re-test of the low $30s, and if much worse than expected, the stock will be in the high $20s again in the coming weeks.  That said a high quality beat and raise, stock is a coiled spring, and has NO overhead resistance to the high $40s.

Hypothetical Trade Structures Depending Upon Current Positioning & Directional Inclination:

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Bullish/Stock Alternatives:   

FEYE ($35.70) Call Spread Risk Reversal: Sell the March 30 put to Buy the March 40/50 call spread for .65

– Sell 1 March 30 put at .65

– Buy 1 March 40 call for 1.55

– Sell 1 March 50 call at .25

Rationale – Let’s face it, if you are interested in this stock it’s for its outsized risk/reward set-up and this structure is probably better than owning stock for that purpose. It gives a little bit of protection to the downside as you are only put the stock at $30 and you would participate in most of the gains between 40 and 50 (9.35 potential profit).

Or

Selling a put is a risky endeavor in a name like this so if it’s not the stock alternative one is looking for but simply a lotto ticket for this thing to take off, one just does the call spread:

FEYE ($35.70) Buy the March 40/50 call spread for 1.30

– Buy 1 March 40 call for 1.55

– Sell 1 March 50 call at .25

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Slightly Bearish:

FEYE ($35.70) Buy the Feb 35/30/25 put butterfly for 1.25

– Buy 1 Feb 35 put for 1.85

– Sell 2 Feb 30 puts at .35 (.70 total)

– Buy 1 Feb 25 put for .10

Rationale – $30 seems like healthy support near term, down about 15%, but the structure offers profit potential down to $26.25 on Feb expiration.  we prefer this sort of strategy opposed to short stock if you are bearish.

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Hedge of long stock:

Let’s say you’re in this stock. It’s a risky one with big potential reward to the upside but serious risk on events like this to the downside. So how do you stay in the stock through an event with an implied 12% move?

FEYE ($35.70) Sell the June 50 call and Buy the Feb13th weekly 32.50 put for a .25 credit

– Buy 1 Feb13th 32.50 put for .80

– Sell 1 June 50 call at 1.05

Rationale- This is a similar trade to the one we did in our TWTR long last week. It gives good protection for disaster on the earnings and only gives up the stock up at the $50 level. Of course, the June 50 puts are 20 deltas so a big move higher in the stock on the event and you’ve sacrificed some of the upside of your move. But in order to hold onto a long sometimes you need to make those tough calls.

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