An investor bought a calendar spread on ITT Educational
Services yesterday, creating several ways to profit from the
heavily shorted college stock.
A block of 4,948 June 70 puts was purchased for $3.90 and an
equal number of May 70 puts were sold for $2.40, resulting in a
net cost of $1.50. Volume was above open interest in both
strikes, confirming it was a new trade.
The position essentially makes the investor long volatility in
the stock because the June puts have a higher vega than the May
puts, meaning they will increase in value more quickly if option
premiums increase overall in the name. (See our Education
Another benefit is that the May contracts will lose value more
quickly because they are closer to expiration. For the trade
benefit from these mechanisms, however, ESI must remain above $70
through May 20. It was at $71.62 when the transaction appeared.
Afterwards, it continued falling and ended the session down 5.19
percent to $69.62, which presents the investor with an
interesting situation. If ESI remains at this level or goes
lower, he or she will be obligated to buy shares for $70 on or
before May expiration.
While this is not normally the intention when a calendar spread
is implemented, it offers another potential route to profit. In
this case, the investor would be long shares for $70, while also
owning the June puts as protection for less than half of their
This comes as ESI is potentially ready to turn higher. Last year,
the education sector got crushed as investors worried about
falling enrollment and tighter student-lending standards. But
unlike other industries at moments of distress, these companies
have no bankruptcy risk because they carry no debt. At a certain
point it's hard for them to continue falling.
Short interest was also a hefty 50 percent of ESI's float in
mid-April, so if no one is left to sell the stock, it could get
squeezed higher. Additionally, the company reported
better-than-expected results on April 21, which could add further
fuel to the upside. It popped on that news and has held most of
the gain since then.
Overall option volume in ESI was 7 times greater than average
yesterday, with puts accounting for 87 percent of the total.
(Chart courtesy of tradeMONSTER)