Undoubtedly, CoreCivic (NYSE:CXW), the operator of private prisons and detention centers, finds itself immersed in substantial controversy. Controversy appears to be an inherent aspect of its core business. Individuals inevitably make choices in life and must face the consequences of their actions. Nevertheless, a fervent debate persists regarding whether individual shareholders should profit from these unfortunate decisions.
To be clear, this discussion will not delve into the political aspects of CXW stock; that decision ultimately rests with investors. However, one of the primary concerns that initially raised red flags about CoreCivic as an investment idea revolves around the inescapable controversy. Among the most significant concerns is the safety of both inmates and correctional officers when private prisons prioritize profit margins over security.
In the midst of mounting economic pressures, the temptation to implement cost-cutting measures undoubtedly increases. Furthermore, CXW stock does not align with the broader push to incorporate environmental, social, and governance (ESG) principles into investment decisions. One can attempt to rebrand CoreCivic in various ways; for instance, it was formerly known as Corrections Corporation of America. However, at its core, it remains a private prison operator.
Setting aside the apparent objections, CXW stock has experienced a recent surge in value, following a prolonged period of mostly sideways trading. Over the past 30 days, its shares have rallied by over 16%. At this pace, it may not be long before CXW breaks even for the year.
What’s the Current Scenario with CoreCivic, and Is It Wise to Join the Upward Momentum?
Unusual Options Activity Fuels CXW Stock Interest
After the close of the September 1st trading session, CXW stock emerged as a significant focal point due to unusual options trading volume. The total trading volume reached 6,907 contracts, compared to an open interest of 54,050 contracts. Moreover, the delta between the trading volume on Friday and the trailing one-month average was a staggering 746.45%.
Analyzing the transactional breakdown, it becomes evident that there were 6,814 call contracts traded, while only 93 put contracts were in play. This led to a put/call volume ratio of 0.01, seemingly heavily favoring bullish sentiment. However, surface-level data can sometimes be misleading, and that may well be the case with CXW stock options.
Delving into Fintel’s options flow data, which sifts through large block trades typically executed by institutions, we find that 5,000 of the $10 calls expiring on January 19, 2024, were sold. This suggests a bearish outlook, as those selling (or writing) the calls anticipate that CXW stock may remain relatively stagnant at worst or potentially drop to, or even below, $10 (CXW closed at $11 on Friday).
Logically, this bearish sentiment arises because, at $10 or below, the calls will expire worthless. However, this isn’t the only significant trade occurring.
On September 1st, bullish traders also purchased $10 calls with an expiration date of October 20, 2023, in a multi-sweep transaction that involved acquiring 1,304 contracts. Notably, the open interest for this trade was only 22 contracts, implying a sudden surge in demand. In other words, institutional traders might be optimistic in the short term but skeptical about CXW stock in the long term.
Another noteworthy aspect is CoreCivic’s volatility smile, which reflects the implied volatility (IV) across various strike prices. For CXW stock, IV increases from 0.28 at a strike price of $11 to a substantial 3.56 at the $2 strike price. This dynamic suggests that traders are wary of a sharp downturn in CXW shares. Simultaneously, many traders express bullish sentiments, with IV rising from 0.28 at $11 to 1.15 at the $20 strike price. Therefore, while smart money may be hedging their bets, they also acknowledge the upside potential for CXW.
A Risky and Controversial Investment
From a fundamental perspective, we’ve previously discussed the wide-ranging concerns faced by private prisons like CoreCivic. However, there exists a cynical aspect to CXW stock that may tempt certain investors, regardless of their political leanings.
Although this is a vigorously debated topic, in 2009, U.S. police chiefs claimed that the economic downturn, often referred to as the Great Recession, led to an increase in crime. They also highlighted that budget cuts could hinder their ability to address this surge in criminal activity, as reported by Reuters.
Assuming the validity of such a framework, it’s conceivable that CoreCivic could experience increased “demand,” for lack of a better word. While this concept may be unsavory, it could potentially work at this juncture. Notably, the Barchart Technical Opinion indicator rates CXW stock as a strong buy at 72%. Additionally, among two analysts, CXW maintains a unanimous strong buy rating.
Given the controversies surrounding CoreCivic, some investors will steer clear of CXW stock, irrespective of its upside potential. However, for those who are impartial about the ideological aspects of certain investment categories, CXW may present an opportunity for short-term gains.
Featured Image: Unsplash @ Wance Paleri
