There’s not much reason for player characters to get in a fight with a faerie dragon, unless they’re just bad people. Faerie dragons are cute, good-natured and mostly harmless, teasing passers-by with mischievous illusions—nothing harmful or spiteful, mind you. PCs who take their pranks in good fun have nothing more to fear from them. React aggressively, though, and they’ll respond in kind.
Faerie dragons are tiny and very weak, but their Dexterity is extraordinary, their Constitution above average. They’re also clever and very charismatic. They have nothing in the way of ranged attacks, so any fighting they do has to be the hit-and-run kind.
This is facilitated by their high flying speed—60 feet per round—and their Superior Invisibility, which lets them turn invisible at will for as long as they concentrate on staying that way. This means they can freely move, attack, use objects or even cast spells without becoming visible, although they can’t cast a spell that also requires concentration.
They can communicate telepathically with other faerie dragons nearby, meaning that if you find yourself fighting more than one, you’re in for a world of misery, because they’re going to call in all their friends for backup. By the third round of a fight with two faerie dragons, you’ll be fighting five. A couple of rounds later, you’ll be fighting a dozen. Then three dozen. Does this seem like dirty pool? I don’t care, man. You attack a good creature, you reap what you sow.
The main weapon in the faerie dragon’s arsenal is Euphoria Breath, a short-range effect that works a little like a limited confusion spell: if the target blows its saving throw (which isn’t super-likely, given that the save DC is only 11), it either runs around randomly or just zones out for a round. This ability recharges, making it available roughly once every three rounds.
It’s not much of a threat—from one faerie dragon. But from three dozen, well, figure that a dozen of them have their Euphoria Breath charged up in any given round, and divide that by the number of PCs attacking them. One DC 11 Wisdom save is easy to make. Two to six in a row, less so.
And, as mentioned, faerie dragons can do this while remaining invisible. But why would they do that when they can turn visible, use their Euphoria Breath on you, then immediately turn invisible again before you can react? “All right, that’s it—I Ready an Attack action against the first one I see appear within reach!” Nice try, friendo, but faerie dragons are smart. If they see you in the Ready stance, they simply won’t attack you—or they’ll use their Euphoria Breath on you while remaining invisible.
The faerie dragon’s Bite action is pretty paltry, doing only 1 point of damage on a hit. It won’t ever use this action unless its Euphoria Breath is on cooldown. Otherwise, it uses it the same way it uses Euphoria Breath: turning visible, biting, then immediately turning invisible again; or not turning visible at all, just biting, if the enemy is ready and waiting for it to appear.
The combination of their rapid flying speed and their superior invisibility means that even a small number of faerie dragons, by zooming from target to target, can make themselves seem like a larger number of faerie dragons, and this is in fact a staple strategy of theirs. They’re not trying to kill their enemies, just harass them, maybe scare them a little, and ultimately drive them off.
They also have the ability to cast a variety of illusion spells, gaining more spells the older they get. Every faerie dragon can cast dancing lights, mage hand and minor illusion. These aren’t going to have much application in combat. Color spray, however, is a handy way to potentially blind an enemy or two for a round; other faerie dragons have advantage on their attacks against the blinded enemy or enemies. Mirror image is yet another way of making a few faerie dragons seem like many. Suggestion isn’t going to get much traction once combat breaks out. Major image is a serious, multisensory illusion that can appear as anything from a charging rhino to a howling vortex to a shrieking wraith to a pillar of flame—but it requires concentration, so a faerie dragon can’t turn invisible while casting it. (Hopefully, the illusion will serve as enough of a distraction to keep any heat off the faerie dragon that’s producing it.) Hallucinatory terrain doesn’t require concentration, and can make the ground appear to be falling away, buckling or flooding. And polymorph, which also requires concentration, can turn an opponent into a toad, a badger, a slug or—for extra delicious confusion—
another faerie dragon. Nope, not another faerie dragon: polymorph can transform targets only into beasts. (Keep in mind, though, that any spell that the faerie dragon has already used before combat for its own amusement is no longer available once combat breaks out.)
Faerie dragons aren’t really into fighting for fighting’s sake, and they like being alive, so it doesn’t take much damage to drive them off: being moderately wounded (reduced to 9 hp or fewer) is enough to do the trick. But that’s just to drive off one faerie dragon, not the whole flight, which will keep gassing, nipping and deluding their assailants until their allies and their territory are safe and secure.