Options: Lessons From Apollo

A look at some trades in this highflying education stock.
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Education provider

Apollo Group


has been near the head of the class for equities during the last year. The stock has nearly doubled from just above $40 on April 1 to $79 a share today. The company's education services include high school, undergraduate and graduate programs, with the University of Phoenix online degrees as its headline business.

The stock previously registered multiyear highs in January. This move followed APOL's third consecutive upside earnings surprise, which spurred analysts to raise their forecasts in the future.  

A large option order hit the tape this morning right after the open in the APOL March 95 calls. More than 17,000 calls were sold for 50 cents, on open interest of 2,300. Most likely, this strategy was used to capture some premium while holding the underlying stock position.

A covered call writer typically maintains a bullish view and is looking to take in revenue as time elapses on the calls sold so the premium can be banked at expiration on March 20. Even if Apollo makes new 52-week highs, and the options are exercised with the stock above $95, the long shares have significant profit to offset any loss of participation above the strike sold.

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This option strategy possibly has become a monthly pattern with a far-out-of-the-money option seller at work Feb. 2 as well. A previous Options Update noted: "In the first two hours of trading today, over 10,000 of the APOL Feb 100 calls were sold vs. an open interest of 3,177. The prices of the sales ranged from 10 cents up to 20 cents with the stock trading around $83.85. That equated to an implied volatility of 45, but as I have noted in this column before, when an option is this far out of the money, it is more of a lottery ticket than a volatility play."

Even as the broad market continues to get hit on the downside , the adult education sector remains strong. Everyone is trying to outsmart the sometimes cruel financial markets with Apollo teaching us how.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."