Option Bulls Taking Another Shot At EDU

If you’ve been following Chinese stocks in recent months, it’s been a dumpster fire. CCP policies have taken aim at large companies that are considered “monopolies” and the share price carnage has been real.

The for-profit education industry has not been spared and the 74% decline on July 23, 2021 in New Oriental Education & Tech Group stock is an example. For EDU, the move was tied to new regulations on after-school tutoring and not allowing classes on weekends, holidays, and during some breaks. The reaction from the share price was palpable, but more importantly, it’s created significant uncertainty of CCP policy on publicly traded stocks.

However, option traders on EDU seemed to be willing to take some bullish risk on Monday. At least for today, some traders have been able to allay those uncertainties.

EDU Option Activity

The call and put volumes were sizzling today with values of 1.76 and 2.8, respectively. The call volume dwarfed the put volume with a put-to-call ratio of 0.194. Also, the calls were filled at the ask at a clip of 65%. That is an indication of significant call option buying in terms of volume and fill. The puts were mixed with 37% getting filled at the bid and 25% at the ask.

Here’s a breakdown of today’s significant option activity:

  • 28,000 19 Nov. 21 $3.50 calls, mostly BOT in 4 prints @ $0.15 to $0.25.

While the contract price wasn’t all that much at $15 to $25, the size of the trades and total volume makes it relevant. In this case, stretching the expected movement in the next month to $3.50 or higher. The expiration will likely carry it through the next earnings announcement in November.

EDU Technicals

Since the gap lower in July, EDU's price has been oscillating between $1.74 and $2.53 on declining volume. The lack of high volume days fails to build a strong case for accumulation and an expected bullish breakout. However, the accumulation of OTM calls does give a bullish indication and a potential target for the move.

Looking at the gap day, the high of $2.96 should act as an area of resistance. A close above that level is an indication that the EDU would be expected to close the gap to the previous day’s low near $6.19. That type of price movement would likely take some time and wouldn’t be indicated by the option activity. However, it does give an idea of the potential.

Conclusion

Option activity like what we’re seeing on EDU is often times early. However, it’s frequently timely if a large move is going to happen. While today’s activity may not lead you to make a speculative trade on EDU, you may take it as a signal that there may be some big movement coming soon. The OTM call option IV is such that it’s a pretty cheap lottery ticket for a long call vertical.

Disclaimer: Neither TheoTrade or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, ...

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