Friday, December 10, 2010

Education Management (EDMC) - Elevated Vol and a Time Spread

EDMC is trading $13.90, down 0.5% with IV30™ down 1.2%. The LIVEVOL™ Pro Summary is below.

EDMC is a provider of post-secondary education in North America, with approximately 136,000 enrolled students as of October 2009. There is some interesting news going on with these guys, more on that below.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

We can see how the front month is elevated to the back (red is above yellow) for the 12.5 and 15 strikes... nifty...

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

What I'm interested in here is the vol portion. I've marked in yellow lines the vol level of the Dec and Jan options. 

Check out how high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 84.79
HV20™: 36.76
HV180™: 74.10

So, in the words of Cheech Marin, "waas sapening?" Here's some news:

1. Education Management, for-profit postsecondary education provider, said its board approved a 300% increase to the size of its stock buyback initiative, from $50 million to $150 million, and extended the term of the program to Dec. 31, 2011.
Source: TheStreet

2. Twenty for-profit colleges reaped $521 million in U.S. taxpayer funds in 2010, seven times more than in 2006, by recruiting armed-services members and veterans through misleading marketing, according to a Congressional report today.
Source: Bloomberg

Other than that, the stock gapped down more than $3 on 10-14-2010. The news from Motley Fool on 10-14-2010 is below:

What: Shares of for-profit educators are getting slaughtered in early trading, after industry bellwether Apollo Group (Nasdaq: APOL) pulled its 2011 outlook on regulatory concerns, and forecast sharp drops in new student enrollments....

Now what: Naturally, today's news casts even more doubts about the industry's future. It's no secret that for-profit educators have been facing intense scrutiny about just how effectively they prep students for the job market, but Apollo's announcement shows just how real those regulatory risks are becoming. With the Department of Education pushing for rules that could restrict their program offerings, as well as access to financial aid, for-profit school stocks are about the last turnaround bets I'd consider making.
Source: MotleyFool

Ok, so now we see the "sit-i-ation." It's an industry wide phenomenon with always present company specific risk.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. Start simple:
Sell 1 Dec 12.5/15 strangle $0.40 (~87 vol).
Purchase the Jan 12.5/15 strangle for $2.00 (~82 vol).
The net debit is $1.60. This trade bets on essentially calm waters through Dec expo, then you either hold a cheap strangle into Jan hoping for a big move, or sell that long strangle @ > $1.60 (hopefully).

2. Do #1 and sell the Jan 10 put @ $0.35 (~95 vol). This reduces the debit to $1.25 and requires that EDMC not fall apart (go below $12.5) before Dec expo. to avoid a naked short option risk.

3. For you risk lovers:
Do #2 and sell the Jan 17.5 call @ $0.40 (~80 vol). This creates a net debit of $0.85, needs EDMC to stay in ($12.5, $17.5) before Dec. expo in order to avoid naked option risk. If the stock stays in ($15, $17.5) by Dec expo, the end position has a MaxLoss of $0.85 and MaxGain of
$1.65 or ~ 1.9:1 MaxGain:MaxLoss with a cheap little bet that the stock moves.

Ultimately, the question is - do you want to bet that EDMC behaves nicely for the next 7 days (to Dec. expo)?

This is trade analysis, not a recommendation.

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