Markets

Apollo (APOL) call buyer ties bullish play to stock

Shares of Apollo Group Inc. (NASDSAQ: APOL ) are underperforming the broad-market weakness. Options action on the tape suggests an investor boosted call volume in anticipation of increased volatility during the long term.

Around 12 p.m. EDT, several blocks totaling more than 10,100 out-of-the-money (OTM) January 2011 75 calls changed hands for 46 cents per contract. This price was closer to or at the ask when the blocks crossed. These calls are home to current open interest of just 1,800 contracts. It looks like investors paid 46 cents per contract to open long call positions on a bet that APOL shares will be trading higher than $75.46 at January 2011 options expiration. This represents a 63% rise from the stock's current level. The investor is betting that the stock could be trading up near its 52-week high at expiration.

If the stock climbs significantly and is trading higher than the breakeven price, this long call position could theoretically turn unlimited profits to the upside. This trade caps maximum losses at the debit paid. The investor will take back some of the debit if the stock is trading between the strike and the breakeven.

A closer look at time and sales shows the investor tied a short stock position to this bullish options trade. While this trade probably still expresses bullishness, this investor might be more interested in trading volatility instead of direction. A block of roughly 50,000 shares crossed the tape for $46 per share around the same time as the call trade. By tying the calls to a stock position, the investor has managed to only purchase volatility from the market makers rather than delta. This enables the investor to get a cheaper options price because the option market makers do not have to take stock price risk at the time of the option purchase.

The investor may have bought the stock in the market prior to buying the calls hoping that the price paid for the shares will be less than what would be implied in the option price. The investor then sells the stock to the market makers and is left with the long calls. Implied volatility of the January 75 calls is 44% compared to the stock's 30-day historical volatility of 38%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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