Undeniably, private prison and detention center operator CoreCivic (CXW) courts significant controversy. Like it or not, it comes with the territory of the underlying business. To be sure, people make choices in life and they must accept the consequences of poor ones. However, a raging debate exists about individual shareholders profiting from those regrettable decisions.
To be clear, I’m not going to dive into the politics of CXW stock; that’s really up to investors to decide for themselves. However, one of the reasons I was concerned about CoreCivic as a market idea centered on the unignorable controversy. Among the biggest concerns focus on the safety of both inmates and correctional officers when private prisons decide to cut corners to boost profits.
Amid brewing economic pressures, the temptation for such cost cuts almost surely rises. In addition, CXW stock doesn’t align with broader efforts to instill environmental, social and governance (ESG) directives. You can dress up CoreCivic in myriad ways. For example, it used to be known as Corrections Corporation of America. But at the end of the day, it’s still a private prison.
Obvious objections aside, though, CXW stock – after going through a long stretch of largely sideways trading – has been on a run recently. In the trailing 30 days, shares bounced up over 16%. At this rate, it wouldn’t take too long for CXW to break even for the year.
What’s going on with CoreCivic and should you join the rally?
Unusual Options Activity Undergird CXW Stock
Following the close of the Sept. 1 session, CXW stock represented one of the top highlights for unusual stock options volume. Specifically, total volume reached 6,907 contracts against open interest of 54,050. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 746.45%.
Looking at the transactional breakdown, call volume hit 6,814 contracts while put volume only mustered 93 contracts. This pairing yielded a put/call volume ratio of 0.01, on paper dramatically favoring the bulls. However, headline data can be deceiving and that might be the case with CXW stock options.
Turning to Fintel’s options flow data – which filters for big block trades likely made by institutions – we can see that 5,000 of the $10 calls expiring on Jan. 19, 2024 were sold. That has bearish implications because the traders selling (or writing) the calls anticipate that CXW stock may stay about the same at worst or drop to and even below $10 at best (CXW closed at $11 on Friday).
Logically, that’s because at $10 or below, the calls will expire worthless. However, that’s not the only major trade that’s occurring.
On Sept. 1, bullish traders also bought $10 calls with an expiration of Oct. 20, 2023. This multi-sweep transaction involved the acquisition of 1,304 contracts. Also, open interest for this trade only sat at 22 contracts, implying a sudden surge of demand. Put another way, institutional traders may be near-term bullish but long-term skeptical about CXW stock.
One last wrinkle focuses on CoreCivic’s volatility smile or the implied volatility (IV) plotted at various strike prices. For CXW stock, IV rises from 0.28 at strike price $11 to a whopping 3.56 at the $2 strike price. This dynamic may indicate that traders are leery of a sudden downturn in shares.
At the same time, many traders are also bullish. From 0.28 at $11, IV rises to 1.15 at the $20 strike price. Therefore, while the smart money may be hedging their bets, they also recognize CXW’s upside potential.
A Risky and Cynical Investment
Fundamentally, I previously discussed the wide-ranging concerns that private prisons like CoreCivic face. However, there is a cynical side to CXW stock that – if we’re being completely honest and politically agnostic – may tempt certain investors.
Although another vigorously debated topic, back in 2009, police chiefs in the U.S. stated that the economic downturn (i.e. the Great Recession) fueled a rise in crime. They also stressed that budget cuts may hamper their ability to tackle the crime rise, per Reuters.
Assuming that such a framework is valid, it’s possible that CoreCivic could see a lift in “demand,” for lack of a better word. Although it’s an ugly concept, it just might work at this juncture. Notably, the Barchart Technical Opinion indicator rates CXW stock a 72% strong buy. Also, among two analysts, CXW stands as a unanimous strong buy.
Due to the controversies surrounding CoreCivic, some investors will not touch CXW stock no matter the upside viability. However, for those who are completely agnostic about the ideologies underlining certain investment categories, CXW may swing higher, at least in the short term.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
