Unusual ITT play exploits industry panic

Fear abounds in ITT Education Services, and one investor is using it to get long.

optionMONSTER’s Heat Seeker tracking program detected an unusual combination strategy in the stock, using the extreme demand for downside protection to place an upside bet. Some 2,025 October 67.50 calls were bought for $5.30 and an equal number of October 55 puts were sold for $5.50, resulting in a credit of $0.20.

The remarkable thing about the transaction is that ESI was trading for $65.50 when the options priced, meaning the calls were much closer to the money than the puts. Under normal circumstances, it should have cost them money to place the trade. But they were able to collect a credit because implied volatility was 60 percent in the puts versus just 31 percent in the calls.

That means the market is pricing in a much greater probability that the stock will fall than rise. Taking a contrary bet lets today’s trader exploit that perception and positions them for huge gains if ESI rallies above $67.50. He or she also stands to lose money below $55.

The stock is down 0.92 percent to $65.94 in early afternoon trading and has been attempting to find its footing after the for-profit education industry took a beating in 2010 and early 2011.

ESI reported better-than-expected earnings and revenue yesterday morning, but student enrollment continued to decline. (See researchLAB for more)

Today’s bullish trade pushed overall options volume in the name to 8 times greater than average.

— Option Monster

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