APOL – Apollo Group, Inc. – Shares of the provider of educational programs and services rallied as much as 2.8% today to reach an intraday high of $42.65. Apollo’s shares seem to be continuing on the road to recovery this week, but one options investor populating the stock constructed a bearish stance in case the firm encounters bumps along the way. APOL’s shares, which are currently trading at $42.50, are down 36.3% since April 22, 2010, when the stock was at $66.69. The education provider recently touched down at a new 52-week low of $38.39 on August 13, 2010. The options trader prepared for the possibility that APOL’s shares could reverse direction by purchasing a put tree, buying 7,000 puts at the October $40 strike for premium of $2.69 each, selling the same number of puts at the October $35 strike at a premium of $1.20 apiece, and finally shedding another 7,000 puts at the lower October $30 strike for a premium of $0.48 a-pop. The net cost of the transaction is reduced to $1.01 per contract. Thus, the put player is poised to profit should Apollo’s shares plunge 8.25% lower to breach the effective breakeven point to the downside at $38.99 by October expiration. Maximum potential profits of $3.99 per contract are available to the trader should APOL shares tumble 17.65% from the current price of $42.50 to settle at a new 52-week low of $35.00. The uncovered short position at the October $30 strike indicates the investor is willing to have 700,000 shares of the underlying stock put to him at $30.00 each in the event Apollo’s shares collapse below $30.00 and the puts land in-the-money by expiration day. We note that the investor could be utilizing the put tree to protect the value of a large position in APOL shares rather than employing the strategy as an outright bearish bet that shares are set to decline in the next couple of months.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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