Let’s consider an earnings play in Apollo Education Group (APOL).  We know that over the last two years, the mean move on earnings has been 11.5%.  We have seen it move up as much as 28% and down by as much as -10.3%.  It has beaten expectations 5 out of 8 releases and 2 out of the last 4. 

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Looking at the price chart below, I can see no discernable trend.  But what I do see it that if it breaks this key resistance at $28.70, it has a great chance to fill the gap created from the last earnings report up at $31.78. 

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Looking at the implied volatility, we can calculate the expected move  through April of $31.75.  So, the technicals give us one piece of bullish evidence, and the past performance paints a slightly bullish bias.  If paid enough odds to take this risk, we considered the April 29/32 call spread for $0.60.  This gives us a risk reward of 4:1!  (distance between strikes ($3) less what we paid in premium ($0.60) divided by our max loss (0.60).  ($3.00-$0.60)/$0.60 = 2.40/0.60 = 4. 

  • I have made the case that this proposition is far from a “coin flip” and constructted a signal that will pay us 4:1.  That is maximizing leverage.

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