For Profit Education Names Soar; Time to Sell? (COCO, APOL, ESI)

Many of the for-profit education names are soaring this morning on no apparent news. There has been some chatter about less harsh regulation for the space, though nothing has been confirmed. To name a few of the greatest movers: • Apollo Group APOL is currently higher by 8.01%, trading at $49.22 • ITT Educational Services Inc. ESI is currently higher by 9.66%, trading at $94.89 • Corinthian Colleges Inc. COCO is higher by 16.37%, trading at $11.09 • Career Education Corp. CECO is higher by 10.38%, currently trading at $27.53 The moves in these names are very interesting, especially considering all of the negative news that has been seeping from the sector as of late. For instance, last week COCO and SLM Corp. SLM were audited and found to have violated federal rules that govern the Federal Family Education Loan Program. It addition to that, the recently passed fin-reg bill is chock full of potential restrictions on student lending, given that “sub-prime-esce” lending practices are starting to surface en masse from nearly all major for-profit schools. It appears that student lending officers at theses companies may have been pushing large, federal loans on students who have no chance of paying back those loans given the predicted future income of the industry they are trying to enter. Most notable of all may be that Apollo Group’s Vice Chairman of the Board, Peter Sterling, has sold another 250,000 shares of the company. While he still owns 7,000,000 shares, he has been selling very large chucks of stock for the past year. While some of the sales made sense when the stock was trading near $75, with the stock off over 35% you expect savvy insiders to come in and buy shares to signal that the sell off is not warranted. Mr. Sterling’s sale is in fact confirming the sell off, though, which is notably bearish. With that said, it is imperative to note that options action is bullish on some of these names. APOL is seeing call buying on the August $50 and $55 calls, where 1,500 and 8,000 contracts have traded, respectively. Volume exceeded open interest on both lines. Traders should consider getting short some of these names in some way. Let’s take a look at shorting Apollo Group. Depending on your level of bearishness, there are several strategies you can employ: • Cautiously Bullish: if you believe that the names have been beaten down enough and think that they are decent longs, but are worried about potential volatility in shares, consider buying the stock at $49.60, and selling the November $49 call and November $37 put for a total of $6.75. That’s 13.6% of shares. • Neutral: if you believe that shares will remain largely range-bound over the next month, as all these bullish and bearish forces play out, considering selling the August $50 straddle for $4.90. That is 9.87% of shares. • Bearish: if you are mildly bearish on the name, consider buying the November $47/44 put spread for $1.20. Max gain is $1.80 and this spread was 100% in-the-money just a few days ago. The November contracts also give you some time for the trade to work. • Very Bearish: consider buying the above spread, but also selling the November $60 call for $1.62; the trade will now give a net credit of $0.42 and raise the max gain to $3.42. Learn how to find the best stocks to trade each day in our 70 page E-Book and 90 minute online video for free.