Apollo Flunks — Play for More Pain With a Bear Credit Spread

by John Kmiecik | June 26, 2013 1:51 pm

When an individual is learning how to trade, he or she generally looks for education in the form of books or courses on trading. Here’s a trade idea on a company whose goal is to get students the proper education and increase enrollment but is struggling to do so — we can take advantage of the situation.

Apollo Group (APOL[1]) owns the biggest U.S. for-profit college, the University of Phoenix. The company announced earnings on Tuesday after the close. Net income declined to $80 million for the period from $134 million a year earlier. Students signing up for classes also declined by about 24%; even the CEO had to admit that the drop in enrollment is “difficult to accept.” The U.S. government has been examining for-profit colleges’ marketing and student loan practices — and the scrutiny has been murder for APOL stock.

APOL chart
Click to Enlarge

The stock has dropped from around $36 to where it is currently trading after this latest fall. And frankly, nothing about the fundamentals or the chart suggests a change is coming to the upside. In fact, the next target for the stock is a support level around $16 from previous price levels.

Just in case the stock does rise, there is a resistance area right around $20 that has acted as support and resistance in the past. In addition, the current implied volatility is higher than historical levels — which makes selling options like a credit spread advantageous. Taking into account the softening balance sheet and the current “non-bullish” market, this credit spread trade idea looks to be fundamentally solid.

Trade: Sell the June 20/22 call credit spread — selling the June 20 call and buying the June 22 call — for $0.20 or better.

The maximum potential profit for this trade is $0.20 if APOL is trading below $20 at June expiration; both call options would expire worthless. The maximum loss is $1.80 (2 – 0.20) if APOL is trading above $22 at June expiration — but that doesn’t seem likely given the fundamental and technical overhangs. Breakeven is $20.20 at expiration based on a credit of $0.20.

At the time of publication, Kmiecik had no positions in the securities mentioned.

  1. APOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=APOL

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