Buy the Dip On This Educational Stock

Short-term CHGG options are pricing in low volatility expectations

by Patrick Martin

Published on Apr 3, 2018 at 12:12 PM
Updated on Jun 24, 2020 at 10:16 AM

Chegg Inc (NYSE:CHGG) stock has been on a roll the past year, but like much of the broader stock market, ran out of steam last month. However, if history is any guide, it could be time to buy short-term call options on the online education platform.

At last check, Chegg stock was fractionally higher to trade at $20.11. Looking closer at the charts, CHGG has more than quintupled since its 2016 lows, culminating in a record high of $23.22 on March 9. However, since then, the shares have pulled back to within one standard deviation of their rising 40-day moving average.

Pullbacks CHG

According to Schaeffer's Senior Quantitative Analyst Rocky White, in the seven other times CHGG stock pulled back to this moving average after spending a significant amount of time above it, it's averaged a 21-day gain of 14.6%, and was higher more than two-thirds of the time. Another move of this magnitude would put the shares around $23.05, a new record high.

A short squeeze could extend the stock's ascent. Short interest fell 10% in the two most recent reporting periods, but there are still more than 21.85 million shares sold short. This accounts for a whopping 29% of CHGG's available float, and more than two weeks of pent-up buying power, at the equity's average pace of trading.

And while the internet stock has flown under the radar of options traders, lower-than-usual volatility expectations are currently being priced into short-term contracts -- a potential boon to those purchasing premium. This is seen by the stock's Schaeffer's Volatility Index (SVI) of 44%, ranked in the 18th annual percentile.

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