The Hotlist scans unusual option volume during the trading day and is available to all OptionsHouse customers, including those who sign up for a virtual trading account. Refer to this article for more information on Hotlist works.
There has been a lot of uncertainty surrounding for-profit education companies of late as the Obama Administration works to broaden the educational system and boost the nation’s percentage of college graduates. The shares of Apollo Group Inc. APOL, parent of the University of Phoenix network, have reacted rather negatively to these developments.
Since topping out near the 65 level in late April, APOL has spiraled consistently lower, shedding almost 35% of its value during this time. The shares are now within 10% of their 52-week low, up 58 cents today at $42.07.
APOL has hit the Hotlist today as a trio of October put options has gotten some unusual attention. It appears as though a large- investor is expecting significant downside (of at least 16%) in the shares over the next two months.
To me, it looks as though this may be a put tree strategy. This is similar to a ratio put spread, or a put 1×2, but the trader is buying one near-the-money put and selling two different lower-strike out-of-the-money puts.
In today’s case with APOL, he appears to have bought 7,000 of the October 40 puts, paying a debit of $2.69, and sold 7,000 of both the October 30 and October 35 puts, collecting credits of 48 cents and $1.20, respectively. The net debit for each three-pronged spread is $1.01 apiece, or $707,000 in premium for the 7,000-lot. This is the most the trader can lose if APOL is above the 40 strike at expiration.
The maximum gain for this position, if APOL is between 30 and 35 when the puts expire, is $3.99 per spread, or the difference between the long put and the higher-strike short put, less the debit paid (40 minus 35 minus $1.01). South of the downside breakeven mark of $26.01, losses are theoretically unlimited down to the zero mark because of the “uncovered” short 30-strike put.
Another name on the Hotlist today is American Eagle Outfitters AEO, which is up more than 6% today after its second-quarter earnings report. The apparel retailer booked profit of 13 cents per share, excluding items, matching the Thomson Reuters estimate. Revenue was relatively in line as well, as was the company’s third-quarter guidance.
Implied volatility is coming in on the name with earnings out of the way and investors are taking an interest in the out-of-the-money November 15 calls. Nearly 7,700 contracts have changed hands versus open interest of 2,850. Around 10:00 a.m., some large blocks crossed the tape for 40 cents apiece, which was near or at the bid price at the time.
These calls are up just five cents versus a 74-cent jump higher in the shares. Judging by its delta, these calls should be up closer to 21 or 22 cents, but the implied volatility implosion coupled with potential selling demand is pressuring the call price lower.
If investors are selling these calls to open, they stand to keep this 40-cent premium as profit if the stock is trading anywhere below the 15 strike when the options expire on November 19. Above the 15 strike, the investor would likely be assigned and required to deliver 100 shares of AEO for every call contract sold.
If these calls are “uncovered” (meaning the call seller does not already own AEO shares), losses are theoretically unlimited above the breakeven price of $15.40.
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