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Skeptics Brace for Another Bearish Gap from Apollo Group

Put options are drawing a crowd as APOL readies its third-quarter earnings report

by 6/22/2012 3:27:56 PM
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Put options have been in heavy rotation lately on Apollo Group, Inc. (APOL - 33.55), according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the past 10 sessions, speculators have bought to open 3.98 puts for every call on APOL, as bearish bets have been roughly four times more popular than their bullish counterparts.

This negative sentiment toward the for-profit education stock is also evidenced by its lofty Schaeffer's put/call open interest ratio (SOIR) of 2.37. This reading indicates that puts more than double calls among options set to expire within three months, and it also ranks higher than 95% of other such readings taken during the past year. In other words, short-term options players have been more put-heavy toward APOL only 5% of the time.

Short sellers have also been piling on. During the most recent reporting period, short interest on APOL ballooned by 14.7%, and now accounts for 13.3% of the equity's available float. At APOL's average daily trading volume, it would take eight days for all of these shorted shares to be covered.

This rising tide of pessimism precedes the company's upcoming turn in the earnings spotlight. APOL is due to report its fiscal third-quarter financial results after the market closes next Monday, June 25. Analysts are expecting a profit of 97 cents per share, down from $1.45 per share in the year-ago quarter.

APOL has surpassed Wall Street's bottom-line estimates in each of the last four quarters -- but following its late-March report, the stock gapped dramatically lower. Judging by the recent uptick in put volume, traders could be bracing for a similarly negative reaction after Monday night's announcement.

Of course, APOL is also sitting on a steep year-to-date drop of more than 38.3%, so put buyers may simply be looking for a continuation of the stock's longer-term decline.

 Daily Chart of APOL since December 2011

While it may seem that there's a healthy amount of pessimism priced into this laggard, it's worth noting that nine out of 15 analysts have deemed APOL worthy of a "buy" or better rating, with not a single "sell" to be found. As a result, the shares could still be vulnerable to an unwinding of lingering bullish sentiment in the event of a disappointing report.

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