Tuesday, May 20, 2014

*FireEye (FEYE) - Gigantic Risk into Lock-up Period Ending Tomorrow. Is this the Most Interesting Story of the Year-to-Date?

FEYE is trading $31.67, popping up 9.4% with IV30™ up 6.2%. The Symbol Summary is included below.

Provided by Livevol

FireEye, Inc. invented a purpose-built, virtual machine-based security platform that provides real-time protection to enterprises and governments worldwide against the next generation of cyber attacks.

This is a volatility and stock note and has so many interesting facets in play at the same time.  If you do nothing else, please at least read these facts -- if for nothing else, pure enjoyment.

1. Stock is up today because Nomura re-iterated a buy and a price target of $55.
Shares of FireEye (FEYE) are up $1.66, or almost 6%, at $29.54, after Nomura Equity Research’s Rick Sherlund today reiterated a Buy rating on the stock, and a $55 price target

Source: Barron's via Yahoo! Finance FireEye Up 6%: Nomura Pounds the Table; Look Past Lock-up Expiry, written by Tiernan Ray.

2. This stock finds a lot of action whenever internet security (cyber security) becomes a headline... and oh my, how the US / China "thing" has now turned into an international debacle.
China summoned the U.S. ambassador after the United States accused five Chinese military officers of hacking into American companies to steal trade secrets, warning Washington it could take further action, the foreign ministry said on Tuesday.

Source: Reuters via Yahoo! Finance China confronts U.S. envoy over cyber-spying accusations, written by Sui-Lee Wee.

3. The stock's lock-up period ends tomorrow and 82+ million shares will be available to sell.  Total shares outstanding are 145 million. W.H.O.A.

4. The stock is down ~70% in two months. The stock's all-time high is $97.35 (3-5-2014).

I tell you what, this is one of the most interesting stories I have come across in a while and the option market illustrates just how ambiguous this rally (and sell-off) have been..

Let's get into the options analysis.  The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

So, the firm's all time-high is ~equivalent to a market cap of $14B which is just below that of Alcoa ($15B) right now.  FEYE revenue for the year ending 12-31-2013 was $161M and a net loss of $120M. The last three years of Net Income (Loss) look like this:

2011: -$16.8M
2012: -$35.8M
2013: -$120.6 M

Not a good trend, although revenue have risen immensely from: $33.6M --> $83.3M --> $161.5M

In any case, Nomura's target is ~60% higher than the current price which is still 50% lower than the all-time high reached in March.

Time for the options. Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can see that the current implied volatility (30-day forward looking risk for FEYE stock price per the option market) has dipped after earnings (normal) and has actually risen into this lock up period ending (also normal).  What seems a little "abnormal" is how little the volatility has risen coming into the lock up.  As one example, the TWTR lock-up period end was a general disaster with the stock dropping 33% below it's first print on the NYSE.

But there's more... The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

I have included the skew charts for the weekly options expiring on Friday, next Friday, the Friday after that, and finally for Jul monthly expiration.

Forget any math or crazy analysis, just look at the level of the curves.  There is immensely higher risk in the immediate term options than the July options.  In fact, the May 23 weekly options are priced to 125% vol, while Jul is priced to 70.5%.

So yeah, the lock-up period ending is no joke.  Risk. Is' Here.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Check out the $31.50 strike in the May23 weekly options (expiring Friday).  The options reflect a price range of [$28.50, $34.50] in the next three (and a half) days.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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