Add APOL Calls

Plus: Hold AIG, FFIV, MS, and DXD

PLAY: Buy the APOL August 70 Calls (OAQ HN) at or under $2.15, good for the day. Place a protective stop limit at $1.00 and a pre-determined sniper sell at $3.00.

Dear Bottarelli Research Member,

Good morning. We’ve only been trading today for 60 minutes, but we’ve already seen large price swings and sharp reversals. It’s just another typical day on Wall Street, I suppose. For example, the Dow opened lower, lead down by the financials. In particular, Morgan Stanley (MS – NYSE) aggressively gapped down at the open, which pushed our MS August 28 Puts (MS TS) up to a high of $2.50. But just as quickly, MS recovered all of the losses, and is now flat on the session.

As I’ve mentioned before, this market is running on fumes. But inexplicably, every single dip is quickly bought up and pushed higher. Everybody knows that the market cannot sustain this level of upside movement forever, yet the buying intensity continues to escalate with each passing day. When the sentiment reverses course, things could get ugly very quickly. Therefore, I want to continue holding our DXD August 46 Calls (DXD HT), MS August 28 Puts (MS TS), and AIG August 15 Puts (AIG TO). Looking specifically at AIG, Jim Cramer said, “AIG is a big sell, it brings in even more suckers. I want you to sell it and sell it and sell it again.” I’m not sure if that’s a good or a bad thing, but when it comes to our AIG position, CNBC’s biggest mouthpiece is on our side.

At the same time, we’re also holding the FFIV August 35 Calls (FLK HG). As you know, we entered these calls on July 20^th for $2.95 per contract, and they’ve traded as high as $3.20 in today’s session. With FFIV scheduled to report earnings after today’s close, I’d like to see if we can use any upside buying momentum going into this announcement to lock in a profit. If we are faced with this situation, it might also be a good idea to lock in profits on half of our calls, and then hold the remaining half going into earnings. That way, if the stock rallies, we can participate in this upside as well. I’ll follow up as the day progresses.

In terms of a new trading position, I think we have a nice upside opportunity in shares of Apollo Group (APOL – NASDAQ). APOL is one of a handful of for-profit education companies on the market. I watch this group closely, and it often seems that they move in reverse order of the markets. For example, if the major market averages are up, APOL (and others like ESI) are down. And if the markets are down, APOL is up. It’s a strange correlation, but it happens more often than you’d think.

Recently, APOL insiders sold off their shares on the news that President Barack Obama introduced a new $12 billion community college initiative, which could have an impact on for-profit education companies that offer associate degrees. You see, when it comes to associate degrees, they’re APOL’s bread and butter. According to the U.S. Securities and Exchange Commission, they represent 44% of APOL’s enrollment (as of May 31^st) due to their shorter time (2 years) and flexible time schedules. This makes is possible for someone to work full-time and take classes.

But when it comes to the President’s new community college initiative, a further look reveals that it won’t make a significant difference on APOL’s bottom line. The amount of money earmarked for the program, for example, leads to marginal budget increases for community colleges. Therefore, this new plan would have a very, very small impact on APOL. So, it looks like the recent insider selling was a knee-jerk reaction. As a result, I’d like to take an upside position in APOL going into August. And remember, if the markets finally begin to sell-off, APOL typically rallies in the midst of this selling pressure. This offers you an extra layer of protection on your upside call play. So let’s get positioned now!

PLAY: Buy the APOL August 70 Calls (OAQ HN) at or under $2.15, good for the day. Place a protective stop limit at $1.00 and a pre-determined sniper sell at $3.00.

And as always…

Lock and load!

Sincerely,