E-Trade: Cboe Stock Could See Short Covering Rally

March 8, 2018 — 1:06 PM EST

The strong run higher for shares of Cboe Global Markets, Inc. (CBOE) ended when the stock market corrected in February. While the operator of the Volatility Index, or VIX, is down, it may not be out thanks in large part to short covering.

That's according to an analysis by  E-Trade, the New York-based online brokerage, which predicted that Cboe stock may move higher as the markets get used to this new environment of volatility. The VIX took a major hit in last month's sell-off as investors worried that the strong economy in the U.S. could prompt the Federal Reserve to get more aggressive with raising interest rates.

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"Cboe is home to the Cboe Volatility Index (VIX) futures and options that were used by many volatility-shorting trading programs that imploded when the VIX spiked more than 190% in two days as stocks sold off," wrote E-Trade Financial Corporation (ETFC) in a blog post. "Fears that demand for VIX instruments would subsequently plummet led some to reassess Cboe's attractiveness – including Goldman Sachs, which downgraded the stock from buy to neutral on Feb. 7."

The Cboe Volatility Index spent much of 2017 and the beginning weeks of this year at around 10. On Feb. 5, that level started to climb, eventually reaching a recent high of 50.30 in intraday trading on Feb. 6, per Yahoo Finance. More recently, the range of the VIX has been around 18, far below the levels of early February that kicked off panic among investors but significantly above where the index started the year.

Since the Goldman Sachs downgrade, Cboe shares have been range bound, with bulls coming out in the stock's defense. The company announced a $150 million share buyback program, and some Wall Street analysts have signaled that there could be upside given the likelihood of a rebound in VIX trading volume, which has happened in the past. Wells Fargo, for one, raised its price target on Cboe shares to $128 from $120, noting that the stock tends to bottom five months before a VIX trading increase happens, reported E-Trade.

As for Cboe's share buyback plans, with the new approval, it has $225 million of share buybacks left to complete. As a result of all that, E-Trade said that the stock may rally in the near term as shorts – or those who bet that the stock will go lower – will likely cover their bets to reduce their losses.