Why Steeper Losses Could Be In Store for Slumping FireEye Inc (FEYE)

FireEye Inc's (NASDAQ:FEYE) new low may not be its last

Jan 11, 2016 at 2:18 PM
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Cybersecurity concern FireEye Inc (NASDAQ:FEYE), last seen down 9.9% at $16.68, earlier touched a record low of $16.39, even after the firm announced a new partnership with Parsons, an infrastructure and technology firm. Instead, the Street is apparently responding to a price-target cut to $21 from $27 at Wedbush. 

FEYE's consensus 12-month price target among covering brokerage firms still sits at almost double current levels, coming in at $32.57. What's more, while 13 brokerage firms give the shares a tepid "hold" rating, nine still consider them a "strong buy," with zero "sell" recommendations on the books. 

And in the options pits, sentiment is extremely bullish. For starters, FEYE's Schaeffer's put/call open interest ratio (SOIR) of 0.49 marks an annual low. So, going back one year, short-term option traders have never been more call-skewed.

On top of this, the cybersecurity stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 11.03. While this is noteworthy just for the fact that 11 calls have been bought to open for every put in the past two weeks, this ratio is also only 2 percentage points from a 12-month peak. In summary, there's been a highly unusual preference for FEYE calls lately. 

Often such an intense interest in an underperforming stock's calls is a sign of short sellers hedging. But FEYE's short-interest ratio sits at a modest 3.00, meaning it'd take just three days for bears to cover their bets, going by average daily volumes. Plus, short interest on FEYE declined by 22.9% during the past two reporting periods. Today, however, the stock has landed on the short-sale restricted list.

FEYE options are running hotter than usual this afternoon, and the equity's at-the-money implied volatility has surged 18.8% to an annual high of 83.1%. However, most of the action has centered on what could be a long-term long strangle, wherein the trader bought 2,000 January 2017 10-strike puts, and simultaneously purchased an equal number of January 2017 28-strike calls. The maximum risk on the trade is the net debit of $2.82 (per pair of contracts), and the position will profit if FEYE either sinks below $7.18 (put strike minus net debit) or rallies north of $30.82 (call strike plus net debit) by January 2017 options expiration.

As alluded to, FireEye Inc's (NASDAQ:FEYE) performance on the charts has been dismal. The stock has steadily moved lower since its annual high of $55.33 in mid-June, falling over 70% beneath its 10-week trendline. Given the cheery sentiment backdrop detailed above, FEYE is a prime bearish target, from a contrarian standpoint. 

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