Options Traders Could Triple Their Money on Chegg Stock

Chegg has pulled back to a historically bullish trendline

by Patrick Martin

Published on Aug 23, 2019 at 11:46 AM

Education technology company Chegg Inc (NYSE:CHGG) was having a successful summer, climbing all the way up to an earnings-induced record high of $48.22 on July 30. While the stock has been mired in a pullback since then, it's taken CHGG to a trendline with historically bullish implications for options traders. 

More specifically, Chegg stock has pulled back to its 70-day moving average after a lengthy period atop the trendline. According to Schaeffer's Senior Quantitative Analyst Rocky White, this signal has flashed nine times before, and the stock has averaged a one-month return of 14.4%, which would place CHGG a chip-shot from its record high, based on the stock's current perch of $41.05. 

Daily Stock Chart CHGG

Digging deeper, implied volatilities on the equity are at low levels. The equity's Schaeffer's Volatility Index (SVI) of 38% registers in the 11th percentile of its annual range. If the SVI holds steady around its two-year average over the next couple of weeks, White's modeling shows that an at-the-money CHGG call option could potentially return 184% on another expected bounce from support at the 70-day trendline. In other words, prospective call buyers could almost triple their money on a 14% gain in the shares.

Short sellers have been piling on and could get squeezed should the equity pivot higher. Short interest increased by almost 10% in the two most recent reporting periods to 19.93 million shares, the most since May 2018. This accounts for 20% of CHGG's total available float, and almost 14 days' worth of pent-up buying power, at the stock's average pace of trading.

There could also be an unwinding of pessimism among options traders. The security's Schaeffer's put/call open interest ratio (SOIR) of 1.03 ranks in the 85th percentile of its annual range, which indicates near-term traders have rarely been more put-biased toward the educational stock.

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