NEW YORK -- Bullish option traders are positioning for a short squeeze in ITT Educational Services ( ESI) .
OptionMonster's Heat Seeker system detected the purchase of about 2,100 April 13 calls for $1.44 on Friday. Volume was more than 40 times the previous open interest in the strike, which indicates that this is fresh buying.
These long calls give traders the right to buy ESI for $13 by April 17 no matter how high it might go during that time. Investors use the options to make sure a stock doesn't run away from them, and their cheap cost can result in significant leverage.
The April contracts, for instance, will more than quadruple in value if the shares double. That would translate into profits of more than 1,000%.
ESI was up less than 4% when the options hit but continued higher and ended the session with a 15% gain to $10.35. Value investors may like the company because its enterprise valuation is barely twice EBITDA. There's also the potential for major short-covering because bearish bets account for more than half the float.
The operator of for-profit colleges has been trending lower since it peaked around $130 in 2009. Other companies in the industry have been trying to recover. Apollo Group, for instance, gave our premium subscribers two big winners in the last six weeks.
Total option volume in ESI was nine times greater than average on Friday, with calls outnumbering puts by a bullish 10-to-1 ratio.
-- Written by David Russell of OptionMonster
Russell has no positions in ESI.