Wednesday, January 7, 2015

APOL: Volatility play

Update 1/17/2015: My short options spreads expired out-the-money and so without value, providing maximum profit.

During the nine day lifespan of the position, shares declined by -20.3%, for an -824.5% annual rate.

The options produced a 100% yield on debit, or a 4,055.6% annual rate.

The private online and campus-based higher education company Apollo Education Group Inc. (APOL), headquartered in Phoenix, Arizona, published earnings before the opening bell on Thursday, Jan. 8. [APOL on Wikipedia]

Another symbol, GBX, had appeared on the schedule as publishing earnings before the opening bell on Jan. 8, but it instead released the report before the opening bell Jan. 7, removing my opportunity to trade.



Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

Implied volatility stands at 64%, in the 99th percentile of the rise from Nov. 13, 2014 to a peak on Jan. 5.

The one standard deviation range implied by option prices, encompassing 68.2% of trades in the nine days remaining before the January options expire, carries a potential gain or loss of 8.8%, and the two standard deviation range, covering 95% of trades, a gain or loss of 18%.

Click on chart to enlarge.
APOL 90 days 4-hour bars
The chart has been in a downtrend since the first trading day of the year, coming off a Dec. 23, 2014 high of $34.53. Above it lies another high of $35.52 set in January 2014. The two combined limit upside potential.

Major downside potential comes at the October 2014 low in the lower $20s, with a much less significant support level at $31.56 in mid-December.

Although APOL is clearly on a downward path, it will take a lower low below the $31.56 level to make it a clear downtrend.

The Trade

Bear call spread, short the $35 call and long the $36 call
sold for a credit and expiring Jan. 16
Probability of expiring out-of-the-money
The proposed trade puts nearly all of the one standard deviation range in a position to expire for maximum profit and all of the chart range. It is a high probability trade.

The risk/reward ratio is 4:1.

Decision for My Account

I've opened a bear position as described above. The share price was $32.15 when the options order was filled.

-- Tim Bovee, Portland, Oregon, Jan. 7, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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