Trader Getting Long APOL on the Sell-Off

APOL ($17.72, off 1.66 on 9.34 mm shares), one of the world’s largest providers of education and training services  on-campus and on-line with a market cap of about $2.0 billion, is currently experiencing a setback in demand and consequently net income. Though its Q3 net revenue at $946.8 million increased 13.47% from last quarter, this was a significant decrease from 2012’s Q3 revenue of $1.1 billion. The most shocking statistic was a 40% drop in income over the past 12 months in net income from $221.4 million to $132 million for this quarter. The combination of the company’s deteriorating EPS and failing revenue is merely a bump in the short term says CEO Greg Cappelli.

The recent slip in revenue has been mainly credited to the decrease in class enrollment, which is the main source of APOL’s income. The University of Phoenix Degreed Enrollment and the New Degreed Enrollment were down a collective 41.5% from last year, and to counter these losses, APOL has been forced to cut its own costs. It plans to cut $300 million by the end of this fiscal year (August) and drop $400 million in 2014’s expenses while also predicting an estimated $3.65 billion in revenue for 2013. This is much lower than the analyst-predicted $3.71 billion, meaning that APOL is experiencing a slight drop in its financial confidence.

According to graphs, APOL been on a downslide ever since the three-month high back on June 10th at $22.24. Analysts have cited its stocks as having poor past performance, and it has maintained a generally negative-sloping trend in the past five years. At the opening today APOL started nearly $1.30 lower than yesterday’s opening price of $19.26, and it is down almost $1.60 so far today.

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are initiating trades can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial.  We offer this service  with all entries, exits, and unusual options activity tweeted all day long.

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

The “Institutional Trade”:

A trader bought 9000 APOL Nov 22 Calls and sold 9000 of the Nov 15 Puts for $0.12 credit.  This is a bullish to neutral trade, but lets break it down:

Risk: $1488 per 1 lot (15 put minus the $0.12 credit)
Potential Reward: Unlimited

Breakeven: $14.88
Cash Received: $108,000

If APOL closes between $15 and $22 at Nov expiration, both option positions would expire worthless.   (Full Disclosure: I do not have a position on in this stock).