Wednesday, June 1, 2011

For-profit Colleges (CECO, COCO, ESI) - Rising Vol on Senate Hearing

CECO, COCO and ESI are trading $22.26, $3.95 and $70.14, respectively each up at least 2.0% with IV30™ up 14.2%, 37.3% and 12.5%, respectively. The LIVEVOL® Pro Summaries are below.


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These are all for profit education companies. The news driving the vols is this:

U.S. Senator Tom Harkin, chairman of the Senate education committee, will hold a fifth hearing on for-profit colleges on June 7.

The hearing will focus on debt levels among former students of the colleges, said Justine Sessions, a spokeswoman for Harkin, an Iowa Democrat. A list of witnesses for the hearing is forthcoming, she said today in a telephone interview.

The Education Department is preparing to release regulations that will restrict government aid to for-profit colleges whose former students struggle to repay their loans. Harkin’s hearings have focused on the colleges’ recruitment techniques and their rising share of federal student aid. He has said he plans to introduce legislation to protect college students.

“We will not be surprised if this hearing has a decidedly negative slant on the industry,” Jeff Silber, an analyst at BMO Capital Markets in New York, said in a note to clients today. He has a “market perform” rating on the industry.
Source: Bloomberg - Senator to Hold Hearing on For-Profit Colleges on June 7, written by John Lauerman.

It is interesting to note the stock price moves and the order flow today. Let's focus on CECO, though the other two are similar.

The company has traded over 10,600 contracts on total daily average option volume of just 1,433. Calls have traded on a 5.3:1 ratio to puts with the action in the Jun 23 and 24 calls - combining for over 7,800 contracts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jun 23 calls are mostly opening (compare OI to trade size). I believe those are substantially purchases. The Jun 24 calls show a large OI almost equal to the trade volume (thus far). I believe the Jun 24 calls are purchases as well and I think that interest is long, but I'm not sure. It opened on 5-13-2011. Interestingly, on 5-12-2011, ESI Jun 77.5 calls opened substantially as well. So someone was opening positions in mid May on these guys.

The Skew Tab snap (below) illustrates the vols by strike by month. I've included all three.

The similarities are pretty obvious -- all three show substantially elevated vol in the front month (red line) to the back months. COCO does show an upward sloping skew, unlike the other two -- but COCO is also a $3.95 stock, so I dunno how much you can really read into that.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see the pop in IV30™, today. All three look like that. The stock price has stayed in a relatively tight range of late -- looks anticipatory almost -- waiting for a reason to go up or down.

Possible Trades to Analyze
Calendar spreads feel risky given the news that may be coming out. Having said that, they are still worth examining -- even strike-by-strike to find some nice trades. It doesn't look like there's any really good pair or triplets trades as these three essentially behave the same. At least ESI and CECO seem to correlate almost frighteningly high. COCO, as a penny stock (or close to it), does seem to have some more firm specific "stuff" going on considering it's about 80% smaller than both ESI and CECO in market cap. That may also be why the vol is 40% higher in COCO than the other two.

This is trade analysis, not a recommendation.

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