Options Traders Quadrupled Their Money on This Stock

At the time of our recommendation, short-term TAL options were fairly priced

Managing Editor
Jun 25, 2021 at 9:52 AM
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Last week, Subscribers to Schaeffer's PowerTrend service just scored a 332% profit in just under two months with China-based TAL Education Group (NYSE:TAL) August 20, 2021 60-strike put. Below, we're going to take a look back at why we were bearish on the Chinese education platform, and how TAL performed after we suggested the put option. 

When we entered the position on Thursday, April 29, TAL shares were seeing dual resistance in the form of their year-to-date breakeven level and their 40-day moving average. The latter was a prior resistance level to end 2021. Plus, earlier that week, the stock's post-earnings reaction was a bearish outside day candle.

Nevertheless, 28 of the 32 brokerages in coverage maintained "buy" or better ratings, with not a single "sell" to be found. Despite being overloved, TAL moved lower on April 27 after an upgrade, hinting at what could come if more analysts changed their tune. 

Meanwhile, short interest had been on the rise since January, yet at the stock's average pace of trading, it would have taken shorts only two days to cover their bets. In other words, there was still plenty of room aboard the bearish bandwagon.

There were options-related headwinds too. There was a large amount of 60-strike put open interest.  This big buildup of puts down to the 50 strike could potentially act as as magnet in the wake of additional weakness, as sellers of the puts would be forced to hedge via shorting additional shares of TAL if those strikes came into play.

Lastly, short-term TAL options were fairly priced. This is per the security's Schaeffer's Volatility Index (SVI) that ranked in the 9th annual percentile.

At the time of our recommendation, Tal Education stock closed at $58.64. It proceeded to carve out a channel of lower lows, aided by an analyst downgrade on June 7. This drop allowed our subscribers to lock in a 332% profit on the TAL put, in a little under two months after our initial recommendation.

TAL Stock Chart

 

 

 

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