TAL Education Stock Signals Strong Bounce

Short-term TAL options are pricing in low volatility expectations at the moment

by Karee Venema

Published on Jun 21, 2018 at 2:32 PM

TAL Education Group (NYSE:TAL) has been climbing up the charts over the long term -- with the stock nearly doubling in value on a year-over-year basis. More recently, shares of the Chinese tutoring firm pulled back sharply following accusations of fraud by Muddy Waters. TAL stock is now trading near a trendline that's marked a prime entry point in the past, suggesting it could be time to join the equity on its next leg higher.

Looking closer at the charts, TAL shares hit a record high of $47.63 on June 12 before closing the session at $45.65. The next day, the security plunged 10% after the Muddy Waters report, and was last seen at $39.44 -- trading within one standard deviation of its 80-day moving average.

tal stock daily chart june 21

According to Schaeffer's Senior Quantitative Analyst Rocky White, in the last 10 times TAL has pulled back to this trendline after a lengthy stay above it, the stock has gone on to average a one-month gain of 11.08%, posting positive returns on each occasion. Based on its current perch, another move of this magnitude would put the shares back near $43.81.

An unwinding of skepticism could also help create tailwinds. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.32 ranks in the 84th annual percentile, meaning puts have been bought to open over calls at a quicker-than-usual clip.

Plus, although short interest edged down in the most recent reporting period, there are still 13.18 million shares dedicated to these bearish bets. It would take nearly four days for shorts to cover, at TAL's average daily pace of trading.

Finally, it's an attractive time to buy TAL call options. The stock's Schaeffer's Volatility Index (SVI) of 42% ranks in the 27th annual percentile, pointing to relatively cheap short-term options, from a volatility perspective. Plus, the equity's 30-day implied volatility skew of 10.5% arrives in the 85th percentile of its 12-month range, indicating calls are currently pricing in lower volatility expectations than their call counterparts.

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