Did You Make This “Synthetic VIX” Trade?

At the center of the student loan bubble story are two publically-traded companies. Apollo Education Group (Nasdaq: APOL) is the parent company of the for-profit online educator, University of Phoenix. And Sallie Mae (Nasdaq: SLM) is the private lender with intimate ties to federal student loans programs.

I’ve written before that I’d expect Apollo Group’s stock to outperform Sallie Mae’s any time investors fear a bust in the student loan bubble. The premise of this is simple…

Sallie Mae is the entity “holding the bag” of potentially worthless student loans. That’s why its stock should falter as investors grow increasingly concerned about default rates and the sheer size of the student loan bubble.

Meanwhile, Apollo Group appears to benefit from the government-originated loans Sallie Mae deals in (not to mention a weak job market), while shouldering none of the risk related to defaults.

In studying these companies and their stock’s reaction to market fears, I stumbled across a relationship that could be very valuable during downturns.

Calculating a ratio of the stock prices of Apollo Group and Sallie Mae (APOL-to-SLM) produces the white line below. Meanwhile, I’ve shown the VIX — a common measure of volatility — in blue. Take a look…

See larger image

I first shared this chart with you last October, calling the relationship “stunning.” Since that time, volatility has been on the rise… and the APOL-to-SLM ratio has shot higher along with it!

Here’s an excerpt from my October 8 article, outlining the action to take:

Knowing this, investors looking to hedge against the possibility of another blow to long-stock portfolios could trade the APOL/SLM spread. The trade to make would be equally dollar amounts of:

1) Long APOL stock.
2) Short SLM stock.

Now, four months later, let’s see how Apollo’s and Sallie Mae’s stock have performed alongside rising volatility. Here’s a chart showing their percentage changes since October 8:

See larger image

As you can see, Apollo Group has gained 60% since October 8, while Sallie Mae’s stock lost 6.5%.

Buying APOL and selling short SLM would have made for one heck of a nice trade if you followed my advice last October. The question is…

Did you make this trade?

Write to surviveandprosper1@gmail.com and let me know.

Playing both sides of the market is vital in choppy markets, like today’s. Click here to learn more about how you can make money when the market is up, or down.

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About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.