Wednesday, May 25, 2011

BPI Event Arbitrage

[guest post by TS]

You read Monday about blogging colleague MM having jumped out of BPI, worried about the "political posturing" that is part & parcel with the whole for-profit college phenomena.  MM clearly used BPI as a learning tool, given all the posts, and we all have to get these lessons from the companies we research and buy/sell.

The problem (or beauty) with the market is that everything is event driven: one day, the gov't begins an investigation; the next, an analyst says the underlying is oversold. While my timeline is wildly skewed for demonstrative purposes, so is the share price of BPI.  How can you possibly move safely in these waters?

The answer:  you can't.  Just deal.  That said, you can follow the ups and downs as they occur with some degree of regularity and plan accordingly.  My thought experiment would be this: an investigation is still underway (shares down), but some analyst has said the magic word "oversold" (or perhaps "artificially depressed") (shares up).  If the investigation continues, then bad news could whipsaw BPI back down.  A perfect way to take advantage of a downswing would be put options.  I'm specifically looking at near term Aug 11 puts, at a strike price (below and out of the money) of $17.50.  Generally, one should stick with round numbers, but this looks well used (856 contracts in open interest) and the per contract price of $0.65 ($65 per) is just the amount I would want to spend.  [At the moment, bid is $.40 and ask is $.65, so while I may pay $.65, my position would be immediately revalued at $.40.]

Let's see how this trade goes.  If BPI spikes a couple more days, the per contract price could come down. When BPI tumbles (which its wont to do), this trade will be ready to appreciate.


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