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Bulls Target Chegg Inc (CHGG) Amid Rally, Business Model Change

Option traders foresee Chegg Inc toppling $7.50 soon

by 8/5/2014 2:43 PM
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Chegg Inc (NYSE:CHGG) shares are soaring today -- up nearly 21% to trade at $7.12 -- following a successful turn in the earnings confessional last night, as well as the announcement of a new, margin-boosting business model. Not surprisingly, call volume has exploded to 22 times the average intraday pace, while the stock's 30-day at-the-money implied volatility has suffered the usual post-earnings implosion.

CHGG's most active strike is the August 7.50 call, where 2,025 contracts have changed hands. It appears the majority of the calls have been bought to open at a volume-weighted average price (VWAP) of $0.27, as traders gamble on extended gains for shares of the textbook rental company. Specifically, the buyers will see green if the stock is perched above $7.77 (strike plus VWAP) at the close on Friday, Aug. 15, when the front-month contracts expire. Conversely, they will part with no more than the initial premium paid, should CHGG be perched below the strike at expiration.

On the charts, Chegg Inc (NYSE:CHGG) has been underperforming since its November 2013 trading debut. Even after accounting for today's strong price action, the stock is off roughly 16.5% year-to-date. What's more, CHGG saw a late-March rally top out around the $7.50 level, and could again struggle to surmount this overhead mark. Earlier, in fact, the equity ran out of gas just short of this strike, at $7.46. Given this technical backdrop -- and with 24.4% of the stock's float sold short -- it's possible that some of today's call buyers are actually short sellers looking to hedge against a continued short-term rally.


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