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9:00am (EST)
Option trading can be like playing poker sometimes. To be a good – no make that great – player or option trader, you have to read people or the market, study habits, store information, and make your move when the timing is right….
The Flop
For those of you who have been with us for a few years, you know we like to keep golden nuggets of information tucked away in our research vaults. As an option trader or a poker player, you may not need the news right away but it can come in handy down the road. Sometimes the timing is just right but you still might miss a major move in the stock or miss a big pot because you folded the moment the news comes out or the flop. This is how you find trades and win big pots. You store information and use it to your advantage.
Now, on Sunday night, we went over the earnings for the upcoming week and if you will notice on the website, the companies in BOLD letters were/ are the stocks we are watching this week. Check out the ones on Tuesday. The very first one of the bunch was Apollo Group (APOL, $72.97, down $0.23).
When I was doing the Weekly Wrap I put a Post-it note on my computer to remind myself of the event. Basically, it was a “note to self” because I got excited.
Like a backdrop out of the movie Rounders, when I saw the name I knew there would be a game. And my first thought was put options.
The Turn
Here is where we have to decide when to make our play or how much money we need to put in the pot. From the research vault which can be archived on the website, from March 6th, 2009 (quotes are from that day):
“I know we have a lot going on but there is one stock that I have been watching this week that really looks ready to fold like a cheap lawn chair. Many of you have probably heard of the company before and I’m sure you have seen the commercials for online education popping up like mad lately. I’m also sure that many of you have heard about the proposed $150 billion education stimulus package.
Obama’s budget means that most of the nation’s nearly $90 billion in student lending will run through the direct-loan program run by the U.S. Education Department. Stocks of “non-profit” and “for-profit” education providers slipped on the news. Many of these stocks have fallen dramatically since the news but some have held up better than others.
For instance, Sallie Mae (SLM, $3.38, down $0.60) which is a “non-profit” entity has dropped over 50% in less than two weeks, falling from a high of $8.89 to nearly $3. The one stock I am targeting is Apollo Group (APOL, $66.79, up $0.28) which is a “for-profit” business and runs numerous educational programs and services at high school, college, and graduate levels. Perhaps you have heard of The University of Phoenix, Inc.?
What has been interesting with Apollo’s stock is that it held up pretty well until yesterday when shares broke below $70. That is when my “Watch List” alerted me of the stock. I’m not sure if the “for-profit” stocks are supposed to benefit from the package at the expense of the “non-profit” businesses but what really got me interested in shorting Apollo was the shady business practices and lawsuits I have been reading about. Type in “Apollo Group Lawsuits” in a search engine and you will find some interesting stories.
Student lenders were embarrassed by a scandal in 2007 that revealed some had given money and gifts to college financial aid officers to A-B-C (Always Be Closing…) business and these stocks were punished back then. As for Apollo, there are allegations of misconduct and “Boiler Room” practices which are locked up in lawsuits.
In fact, there was a lawsuit that was re-filed back in January that portrays this unmistakable boiler room work environment. The former employee claims that he was harassed because he would not commit “unlawful acts” in recruiting students. The suit also confirms that his salary was based on enrollment goals. Apollo Group has said they do not pay their enrollment counselors incentive compensation for performance.
What is really a red flag is the amount of insider selling that Apollo’s management has dumped over the past 3 years. Sales are in the hundreds of millions of dollars while at the same time, the company continues to delay the inevitable court cases that are on its agenda. This could get messy.
The U.S. Education Department is set to assess the value of $2.5 billion of government guaranteed student loans being funneled through Apollo and that could also get interesting. Given the current crackdown environment that the government has bestowed on Wall Street, this could really get interesting if some of the company’s officers are found guilty of engaging in unethical practices.
I could go on and on but after doing some chart work, I’m convinced that Apollo Group could be headed for a major sell-off. The stock recently broke through its 100-day moving average and is poised to bust below its 200-day. Where there is smoke, there is usually fire and I’m getting that feeling with Apollo.” (END)
Here is where our information is going to come in handy…
The River
Apollo Group reported earnings after the bell on Tuesday and it doesn’t matter that they beat Wall Street’s expectations. There were so many clues from that March 6th post that something just isn’t right with this company.
The big news last night was that the SEC has launched an informal probe into how the company accounts for revenue. And here is the news or cards we are looking at:
- profit fell 60% as it set aside millions to cover a lawsuit settlement. (We covered that and have accounted for that card)
- In the conference call the company said it knew about the inquiry last week, but yesterday seemed like an “appropriate time” to let the public know since they were reporting quarterly results anyway. (We may have some poker collusion going on here. And why in the heck is our government letting companies get away with this after the “crackdown” on Wall Street? After all, don’t shareholders have rights about a SEC probe, especially since the stock is down 20% in after-hours?!)
- “What is very disconcerting is that the SEC targeted Apollo which is a large, publicly-traded, for profit institution,” said one Wall Street analyst. (We can count this dude out of the hand…he has no clue. Reminds me of the Enron analysts who were pounding the table to buy the stock at $50!)
- “It is either something related to Apollo and we just don’t know what it is, or it is related to the industry, about how it recognizes revenue related to student attendance, and they just picked on Apollo because it is the biggest player in the space” said another player at the table. (This player or trader is confused, lost, and hasn’t got a clue on who has the best hand)
- Ten years ago Apollo had to pay the U.S. Department of Education and other lenders about $650,000 after the same department completed a year-long review of its accounting practices. (the bluffer, sometimes these are the hardest players to figure out and something doesn’t sound right about a government wing getting paid to find a publicly traded company guilty of accounting hiccups, especially when there is a relationship)
Time To Place Your Bets
Apollo said it is going to be working hand-in-hand with the SEC to solve this mess and that it would have no further comment. Imagine that.
It seems we are going to have a lot of players in this hand and all we are hoping for is that we survive the hand and take a piece of the pot from the others who went all-in before the river.
The stock was down 20% to $58 in after-hours trading so we are going to miss the initial sell-off if it holds when the opening bell rings. In other words, the stock closed at $73 on Tuesday and will gap lower if the losses hold. We will have to see how the rest of the betting goes once the opening bell sounds today to see if we are going to play the hand or fold. We are looking at the possibilities before placing our bets and will list them in the Members Area as to which options might win the hand. We will have to see how the options open and analyze the remaining players at the table but we will have some ideas in our 1pm update today. Of course, we have updated our Current Trades for this morning’s 9am update and they are posted in the Members Area…
Perhaps Matt Damon sums up our current situation with Apollo Group the best…”You were lookin’ for that third three, but you forgot that Professor Green folded on Fourth Street and now you’re representing that you have it. The DA made his two pair, but he knows they’re no good. Judge Kaplan was trying to squeeze out a diamond flush but he came up short and Mr. Eisen is futilely hoping that his queens are going to stand up. So like I said, the Dean’s bet is $20.”
As we head to press, Dow futures are down 30…
Housing Market Still Hurting
Wednesday, October 28th, 2009
12:10pm (EST)
We have been talking about the market’s direction a lot lately because it is important to remember when trading options. We say that because if you are in a bullish position and are buying call options then you want the market or stock to go up. Same on the bearish side. When the market is going down, you want to buy put options.
Of course, this isn’t an exact science and we buy call options in bear markets and put options in bull markets because stocks can go up when the market is tanking or go down when the market is rallying. If you will notice, pull up our track record from 2008 and 2009. We list all of our winning and losing trades and we don’t hide them. We do this for a reason.
Our MAIN goal is to teach you how to look for trades and to understand how the market works. We try to keep our approach simple and yes, we have been working on a trading manual, but our priority is to keep you informed on the market and possible trades that have an opportunity to build your wealth. Having said that, for 2009, we have profiled over 200 trades and right now we are showing about 50 losers.
Most of the losers are “grouped” together and it shows how the market can effect your trades if you are buying calls in a bear market or puts in a bull market. What it also shows is that the market is in transition but you have to keep trading. If you are good at option trading and you have a set of rules you stick by then chances are you are going to make some money doing this gig. You keep a track record because it keeps you honest and it also shows you what the market is doing. Right now, we are still enjoying a success rate of over 75% on our trades but the market gets tough when it is in transition.
We have done well in this current climate but realize that some positions are going to get whipsawed or stopped out for no good reason. Imax (IMAX, $10.10, down $0.30) is a recent example of a good trade that was stopped out due to market conditions. We had profiled a trade back in August and were up 75% on some March call options before they got stopped out yesterday for a 11% profit. Yes, we could have cashed out for a bigger return and we told subscribers our thoughts when the stock was over $11 but sometimes the market takes you out of the position. The bottom line is we still showed a profit but we weren’t ignorant to what the market is doing to the position.
We mentioned the Dow trying to hold the 10,000 level and more recently the 9,900 level. We also had a short-term target of 10,300-10,400. Remember, we have been calling this market rally since March and in July when the Dow was under 9,000 we were calling for Dow 10,000 before anyone even had a clue. In August we said September and October might not be that bad. It is still hard to believe we have almost made it through the month of October without some kind of correction though as it is notorious for some of the greatest market corrections of all time.
Now that we are at these levels, the market has been searching for the next leg and we have a feeling it could be down. We are not pure bull or pure bear so we don’t care if the market goes lower. In fact, if we are headed for a major correction then we would be excited. That may sound bad but all we want is volatility and market direction.
We know we have been long winded today but we have been getting a lot of emails on who we are and what we are all about. Which is a good thing. We want our service to be the best service out there when it comes to option trading but we also want to educate you. To quote a famous Chinese proverb…Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Well, that is our goal is…
In economic news today…
The Commerce Department reported new home sales fell 3.6% to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Wall Street had expected a number of 440,000. It was the first decline since March as sales were down nearly 8% in September from a year ago.
As you might imagine, the Home Building stocks are getting crushed today…KB Home (KBH, $14.31, down $0.80), Lennar (LEN, $12.70, down $0.95), Pulte Homes (PHM, $9.17, down $0.40), Ryland Group (RYL, $19.30, down $0.75) and Toll Brothers (TOL, $17.20, down $0.74) are all getting spanked…
Elsewhere, have you noticed the drop in Research in Motion (RIMM, $60.88, down $2.87) over the last week? The stock was at $67 last Thursday and has been struggling ever since the company released earnings. On September 25th, shares fell from $83 to just under $69 after the report and has spent much of October struggling with the mid-$60′s. The chart is getting interesting…
Apollo Group (APOL, $61.27, down $11.70) is getting hammered and we hope you enjoyed this morning’s article and the whole poker thing. BTW, our favorite poker player is Sammy Farha who we hear trades options…
Anyway, we profile an option trade on Apollo in the Members Area. The sector is likely to report good earnings which could have an adverse effect on Apollo but we think there is a chance to grab some of the huge pot that is on the table.
Current Subscribers, check the Members Area now for the update.
Tags: $12.70, $14.31, $17.20, $19.30, $9.17, down $0.40), down $0.74), down $0.75) and Toll Brothers (TOL, down $0.80), down $0.95), KB Home (KBH, Lennar (LEN, options mentoring, options trading, Pulte Homes (PHM, Ryland Group (RYL
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