Investor Alert
Market Sentiment (Stocks on NYSE, NASDAQ, AMEX)

Jan. 16, 2013, 11:35 a.m. EST

Does online education have a future?

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

About Andrew Giovinazzi

Andrew Giovinazzi was a member of both the Pacific Exchange and the Chicago Board Options Exchange where he made markets in both equity and index option classes. During that period he never had a down year. In 1991, Andrew started and ran the Designated Primary Market Maker post for Group One, ltd in Chicago. In 2001, he co-founded Henry Capital Management. He became Chief Options Strategist and Option Pit Mentoring in the Fall of 2011. Andrew has a Bachelor's degree from the University of California, Santa Cruz in Economics. /conga/trading-deck/bios/giovinazzi_andrew.html 230100
The trading deck is powered by

By Andrew Giovinazzi

In my opinion, online education has a huge future, and I can say that from experience since Option Pit is an online education service for option investing.

We do not get a subsidy from the government to get students into our online classrooms, however. For us, it is mostly referrals that bring people in. The online education industry has really taken a beating over the last couple of years, and it is not the quality of the product they deliver but more how they fill the classrooms that has caused problems for the stocks. Revenue has been dropping as the companies have had to alter course. I think the industry is three years into this re-sizing. Most of, if not all, of the names have been dancing around multi-year lows.

Let's take the leading name like Apollo Group . It just reported earnings and the name is trading at very low multiples. I can hear the din of "value trap" in the background. The company still makes money and has been furiously trying to right the ship. The industry has basically taken a 50% haircut in 2012 to reflect the diminished-growth prospects.

Do I think the stocks will fly up? No, I think they will mostly go sideways for the year and maybe finish up 10% or so as the economy picks up steam. A sideways option trade is different from a trade that wants the underlying to go straight up.

What do I mean by that? APOL has just run to 20.36 from a low of 18.52 after earnings. There have been some issues with the company's rating by the education agency that oversees these education companies. What it looks like is that Apollo Group will ultimately have to take corrective action and then move forward. This news is enough to keep the upside muted for the short term. The forces pushing up are the low valuation, good cash flow and recent announcements to improve curriculum. In short, the name should bounce around, but there is some downside risk. Any trade has to take that into consideration.

In this case, I want a setup similar to the trade in the Select Sector SPDR-Financial (XLF). If APOL coasts, investors could collect theta from option decay, and a downward move still will help the position make money. Right now, the 30-day implied volatility is pretty low and, if there were serious concerns for the company, I think it would trade higher than the 40% I see Feb. trading.

Against this investors could buy an August put at relatively lower volatilities for this name. In this example, the trade looks like buying an August 17 put and selling a Feb 19 put. The debit with APOL trading at 20.36 would be about .94.

Think this way, if APOL closed around 18.50, the Feb. put is a breakeven, but the Aug put is up money, and short put is rolled to a lower strike and the trade continues. I like this strategy when a stock is really already at lows but there is pressure on it to keep things moving up too much. That pretty much fits this industry.

The trade works well when the position starts to finance itself after the third month (that could happen sooner if APOL slides back a bit). At that point, it might be possible to add a long call if the prospects improve.

Page 1
This Story has 0 Comments
Be the first to comment
More News In
Trading Deck

Story Conversation

Commenting FAQs »

Like & Follow The Trading Deck

/conga/commentary/columnist-competition/looking.html 234011

Partner Center

Link to MarketWatch's Slice.