Options Update: Traders Book Bullish Bets on ITT Educational Services and Corinthian Colleges, Inc.

Optimistic option traders converged on for-profit education concerns Corinthian Colleges, Inc. (COCO) and ITT Educational Services (ESI) on Friday, despite the stocks succumbing to hedge fund-induced speculation.

Earlier in the week, Steve Eisman — manager of hedge fund FrontPoint Partners — warned that per-share earnings of companies including COCO and ITT could drop by 50% if the U.S. government implements regulations limiting graduates’ debt-to-income ratios, which he said could force the schools to cut tuition or shutter programs altogether.

Nevertheless, front-month call buyers and longer-term put sellers swarmed both COCO and ITT on Friday. However, to get a better perspective on the traders’ expectations for the stocks, let’s examine each equity’s individual technical and sentiment backdrops.

Corinthian Colleges (COCO)
By Friday’s closing bell, COCO had seen about 7,600 calls and 5,600 puts change hands – more than double its expected daily volume of roughly 2,800 calls and 1,800 puts.
On the call side of the tape, traders honed in on the out-of-the-money June 15 call, which saw more than 5,500 contracts traded. More than half of the calls traded at the ask price, and call open interest at the front-month strike swelled by close to 4,800 contracts over the weekend, confirming our suspicions of buy-to-open activity. By purchasing the calls, the buyers are betting the shares of COCO will rebound atop the $15 level before June-dated options expire.

Meanwhile, the security’s out-of-the-money August 10 put saw 3,350 contracts change hands – 99% of which traded at the bid price, suggesting they were sold. Plus, nearly all of the puts translated into new open interest, pointing to sell-to-open activity. By writing the back-month puts to open, the sellers are expecting the shares of COCO to remain north of the $10 level through August options expiration.

However, Friday’s bullish bias contradicts the skeptical skew among most short-term options speculators, as indicated by the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.28, in the 79th annual percentile. In other words, near-term option traders have been more bearishly biased toward COCO only 21% of the time during the past year.

In the same vein, Zacks reports that nine out of 13 ranking analysts deem COCO a "hold" or worse rating. Meanwhile, short interest accounts for 27.6% of the equity’s total available float, representing more than seven sessions’ worth of pent-up demand.

Technically speaking, the pessimism plaguing COCO seems relatively justified, considering the stock has underperformed the broader S&P 500 Index (SPX) by 20% during the past 60 sessions. Now, the security is attempting to maintain a foothold in the $13-$13.50 neighborhood, which contained COCO’s pullbacks in late 2009 and earlier this year.

SCHAEFFER’S RESEARCH