For-profit educators have come under fire recently. Apollo Group (APOL) was one of a number of educators that received request for information from the U.S. Senate’s education panel on Friday. Investors are concerned over the new legislation proposed in the Senate that would put many educators at risk of losing access to federal funding for financial aid, which represent 90 percent of most companies’ revenues.
The result has been a battering of education-related stocks over the last two weeks. However, the selling pressure seems a bit overdone as the proposed legislation would only force educators to change their way moving forward. It does not contain any evidence that federal funding will be pulled from any current educators, even those accused of misleading applicants.
Therefore, it seems likely that a short-term bounce is coming in educational stocks. Apollo Group has shed more than 15 percent of its stock price over the last two weeks and on Friday made new three-year lows, matching prices not seen since the crash of 2008, where the stock has found support as of late.
The stock was able to bounce in late day trading on Friday to close down less than a percent. At these levels, we expect to see some buyers come into the market. Technically, a double-bottom could be forming in the short-term with a longer-term W bottom developing.
The setup offers good risk/reward by selling the high volatility priced into the August puts with only two weeks until expiration. A tight-stop will be required however as this trade has higher Gamma risk with expiration just around the corner. However, even consolidation in price will allow for rapid Theta and Vega decay, meaning the setup could still be a winner without major buying.
SELL -10 VERTICAL APOL 100 AUG 10 41/40 PUT @.28 LMT
The trade has a possible ROI of 28 percent over 11 days. Our 5-day risk on the trade -$225, which means if this position is down by that amount at any point this week we will exit the trade. As it stands, we have about 1.5 ATR between the current price and our stop loss level.
