Monday, November 8, 2010

Apollo Group (APOL) - Calendar Spread in Play After Earnings Collapse

APOL is trading $36.34, up 1.7% with IV30™ down 1.8%. The LIVEVOL™ Pro Summary is below.


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I wrote about APOL a few weeks ago, the earnings vol looked elevated. Well... It wasn't a sale, the stock collapsed.

The stock just came up again on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I've highlighted the recent earnings collapse - the stock dropped $11.50 to $38 and since has drifted a bit further down. That abrupt move has turned the skew a touch steeper to the downside, which may provide a trading opportunity.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. Buy Dec and Sell Nov ATM straddle. That looks like it would go for ~: $2.75 - $4.05 = $1.30 debit. This probably loses if APOL moves more than the $2.75 away from 36 in Nov. It sells 54 vol and purchases 47 vol.

2. The OTM put calendar yields a slightly larger vol spread. The Nov/Dec 33 put spread purchases 50 vol and sells 59.

3. Stepping out to a riskier trade, sell 2 options in Nov and purchase one in Dec. In this case, if doing the puts, a purchase of one strike higher in Dec gives a bit of cushion - so a Dec 34/ Nov 33 1x2 for example costs ~$0.20 but is naked downside below $32 (ish) in Nov.

4. The call side is in play as well. OTM calendars look reasonable there as well.

This is trade analysis, not a recommendation.

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