It’s an Ugly Business But Here’s Why Geo Group (GEO) Can Rise Higher

When it comes to controversial investment categories, few sectors raise as many eyebrows as the private-prison industry. Technically and euphemistically, the entities under this label are known as rehabilitation centers or whatever sanitary language is conjured up. But don’t fool yourself – Geo Group (GEO) is very much a for-profit enterprise, raising significant moral questions.

To be sure, people who break the law must pay the consequences of their crimes; otherwise, a lack of deterrence would likely cause society to spiral out of control. At the same time, incarcerated individuals must serve their time to the state or federal government. Where an entity like GEO stock walks on thin moral ice is whether shareholders should benefit from the underlying service.

One of the biggest – if not the biggest – concern centers on the profitability motive and the temptations that can stem from it. By cutting corners, private prisons can boost profits at the expense of safety for both the inmates and corrections officers. Of course, it’s an ongoing debate and I don’t dare to presume to offer a viable solution.

Nevertheless, despite the ugliness of the sector, GEO stock facilitates upside potential. On a technical level, the Barchart Technical Opinion indicator rates shares as an 88% strong buy. Fundamentally, the underlying enterprise should benefit from political rumblings. Specifically, a local news report from Houston, Texas notes that the “total number of migrants held in U.S. Immigration and Customs Enforcement detention facilities has swelled to nearly 40,000 — the most since January 2020.”

Now, that’s not a direct catalyst for GEO stock. However, the broader theme is that demand for secure detention facilities may accelerate. That might be especially the case if former President Donald Trump gains momentum in his reelection bid.

Options Market Dynamics Points to Possible Growth in GEO Stock

During a slow session on Wall Street Monday, GEO stock enlivened the mood with a nearly 4% return. Over the past five sessions, it swung up 7.53%. And in the trailing month, it soared over 17%. Not surprisingly given this context, GEO made up the ranks within Barchart’s unusual stock options volume screener.

In particular, total volume reached 13,416 contracts against an open interest reading of 169,669 contracts. The delta between the Monday session volume and the trailing one-month average metric came out to 118.47%. Moreover, call volume hit 12,608 contracts against put volume of only 808. On surface level, then, the framework appears very positive for GEO stock.

In my opinion, it is, but not for the reason that the put/call ratio sits at 0.06X. To be fair, institutional investors appear to be moving into the call options with a Jan. 19, 2024 expiration date: 617 contracts purchased for the $12 strike and 2,011 contracts purchased for the $11 strike. That’s an optimistic sign in and of itself.

However, the real story within Fintel’s screener for options flow – which filters exclusively for big block transactions – could be the sold calls. Most notably, institutional traders sold 7,201 contracts of the Jun 21 ’24 11.00 Call on Nov. 7. At the time, GEO stock traded hands at about $9.42, seemingly a reasonable bearish play. For this transaction, the trader collected a premium of $618,126.

Steadily, though, that premium is at risk and then some. With the recent gains mentioned earlier, GEO stock closed the Monday session at $10.28. It only needs to move up 7% by June 21 of next year for call buyers to be in the money. I have a hard time believing the bullish traders won’t be profitable.

Yes, you must factor in momentum and market inertia. However, a greater incentive is the desire among the bulls to blow up the bears. By continuing to bid up GEO stock, the bears could be forced to panic out of their position given the long wait to expiration.

The Ghosts of Sold Calls Past Aren’t Helping the Pessimists

In early October, I warned readers that while GEO stock carried tremendous controversies, it was also a compelling wager. At the time, institutional traders were selling Oct 20 calls with $7 and $8 strike prices. Looking back, those bearish bets got blown up. Even more perplexing, a day after my article was published, pessimists piled into the Jan 17 ’25 10.00 Call.

Again, with shares trading at $10.28, the bears are feeling the heat. What’s worse, unless the pessimists plan on covering the transaction soon, circumstances could get much worse for them. It’s now the bulls that smell blood in the water because of the open liabilities that these sold calls represent.

Keep in mind that call buyers have the right but not the obligation to exercise the option. On the flipside, call sellers have the obligation but not the right to fulfill the terms of the contract under exercise. In other words, the bulls have taken over the driver’s seat. That’s a potent dynamic for the optimists and utterly toxic for the naysayers.

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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.