Use your money with options

The Chinese Education Stock was overdue for downgrades

Last week, Schaeffer’s subscribers PowerTrend service just made a 332% profit in just under two months with the China-based company TAL Education Group (NYSE: TAL) August 20, 2021 60 strike put. Below we take a look back at why we were pessimistic on the Chinese education platform and how TAL performed after we proposed the put option.

When we entered the position on Thursday April 29th, TAL stocks saw double resistance in the form of their breakeven year-to-date and their 40-day moving average. The latter was a previous resistance level at the end of 2021. Also, the stock’s reaction after the gains earlier this week was a bearish outside-day candle.

Nonetheless, 28 of the 32 brokerages in the coverage retained the “Buy” rating or better, with not a single “Sell” being found. Although TAL was overvalued, it went down after an upgrade on April 27, suggesting what could come if more analysts change their minds.

Meanwhile, short interest had increased since January, but given the stock’s average trading speed, it would have taken shorts only two days to cover their bets. In other words, there was still plenty of room on board the bearish train.

There was option-related headwind also. There was a large amount of 60-Strike Open Interest. This large accumulation of puts up to the 50 strike could potentially act as a magnet in the wake of additional weaknesses, as sellers of the puts would be forced to hedge by short selling additional TAL stocks when these strikes come into play.

Finally, short-term TAL options were offered at fair prices. This corresponds to the Schaeffer’s Volatility Index (SVI) of the security, which is in the 9th percentile of the year.

At the time of our recommendation, Tal Education stock closed at $ 58.64. With the help of an analyst downgrade on June 7th, a channel with lower lows was carved out. That drop allowed our subscribers to see a 332% profit on the TAL put in just under two months of our original recommendation.

TAL share chart


Please enter your comment!
Please enter your name here