Two Apollo Group (APOL) Options Trades: Short Iron Condor and a Bear Call Spread
RBC Capital upgraded its rating on for-profit education company Apollo Group (NASDAQ: APOL) to “sector performer” (hold) from “underperformer” (sell) Tuesday morning. RBC also lifted its 12-month price target to $75 from $66. The investment bank cited the fact that APOL has new initiatives in place to improve student quality and retention. Monday morning ahead of the open, APOL announced better-than-expected second-quarter earnings and guided its third-quarter earnings and revenue above estimates. The stock opened on this news but then sold off gradually throughout the day, closing at $63.16. In Tuesday’s session, the stock has lost additional ground at $62.20.
A “sector performer,” or “hold” rating isn’t particularly exciting for stock traders, as there isn’t a whole lot for them to do. There are certain options strategies, however, that assume a neutral stance and can yield profits even if the underlying stock stays perfectly still.
Below are just two examples of ways stock traders might consider using options to trade APOL – one neutral, one bearish. The trades outlined below are not buy-sell-hold recommendations, just demonstrations of two potential options strategies.
*Option prices given as of Tuesday afternoon
Neutral Option Strategy: Short Iron Condor
For those of you who agree with RBC’s neutral stance, a short iron condor using August-dated options might be your speed. This is a strategy that will likely succeed as long as the underlying stock stays within a pre-determined range. Iron condors have four legs, and are essentially comprised of one bull put spread and one bear call spread (both of which are credit spreads). Selling both the 55/60 put spread (by selling the 60 put and buying the 55 put) and the 70/75 call spread (by selling the 70 call and buying the 75 call) yields an overall net credit of $3.20.
At August expiration, if APOL is trading in between the 60 and 70, the trader keeps the entire credit. The breakeven prices are $73.20 to the upside and $56.80 to the downside. Above $73.20 or below $56.80, losses begin to accrue but are capped at a maximum of $1.80.
Bearish Option Strategy: Bear Call Spread
Investors who think APOL has additional downside in its future could sell a longer-term call spread. The November 65/70 call spread is currently priced at $1.70 (the remaining net credit after selling the 65 call and buying the 70 call). This credit is the maximum potential profit, which the call spread seller can keep if APOL is trading below $65 when the options expire on November 19th. The maximum potential loss, achieved if APOL is trading north of the $70 level, is $3.30. Breakeven for this trade is $66.70; anywhere below this level, the spread trader will keep some or all of the maximum potential profit.
Your Take?
Earnings are out of the way and analysts are beginning to weigh in. Are you an Apollo fan or do you have reservations about its ability to perform in the intermediate-term?
If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in a virtual trading account.
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