Making the grade

●Leading online education tech provider cools off in recent months after two-year rally

●Stock fell sharply on Tuesday’s earnings but rebounded yesterday


There may be plenty of debate regarding the value of online higher education degrees, but there’s little doubt that virtual learning has become big business. In recent years the number of students taking online courses has outpaced the overall enrollment rate for US universities.1

Some estimates forecast the “e-learning” industry could triple in size from 2015’s $107 billion to $325 billion by 2025.2  With increased growth—and sophistication—comes increased technological demands, and 2U (TWOU) is the company supplying the tech infrastructure for many universities’ online education programs, everyone from the University of Denver and the Simmons School of Nursing to the University of North Carolina, Vanderbilt, and Harvard.

But if the past four months had been a college semester, TWOU may have considered dropping out and moving back in with its parents. The following daily chart shows the stock got schooled in September and October, dropping some 40% from its early September high around $90 to Tuesday’s close of $53.43:

2U (TWOU), 7/24/18–11/7/18. 2U (TWOU) price chart. Earnings drop and rebound.

Source: OptionsHouse

But just as one lousy semester doesn’t define an academic career, the chart doesn’t show what happened before: TWOU’s 114% rally in 2017 or its 52% gain this year as of May. The chart also shows Tuesday’s -15.6% downdraft came as the company released its most recent earnings—which beat estimates, by the way, and may at least partially explain yesterday’s roughly 7% intraday rebound.

A climactic “blow-off” move to the downside? Since the stock’s four-month downtrend has been attributed in some circles to worries about its formerly lofty valuation rather than fundamental weaknesses,3 some bargain-hunting investors and contrarian short-term traders could be weighing the potential for upside, especially in light of Tuesday’s favorable quarterly numbers, yesterday’s rally, and the prospect of a larger tech rebound and a broad-market tailwind.

Some bullish traders looking for less exposure than an outright stock play may be considering options, since TWOU implied volatility (IV) has dropped sharply post-earnings (and could continue to drop), and lower IV often translates into lower options prices. LiveAction scans yesterday showed TWOU options IV was down around 38% from the previous week:

LiveAction scan: Big implied volatility (IV) declines, 11/7/18. 38% IV drop from previous week.

Source: OptionsHouse

The following chart shows the risk profile for a representative December $55-$65 “bull call spread” consisting of a long December $55 call option and a short December $65 call option. The long call provides long-side exposure while the short call reduces the position’s total cost, while also capping the trade’s profit potential as well as its loss. Yesterday, the position cost around $380 to put on, and had a maximum profit a little above $620, which would be reached if the stock rallied to or above the upper strike price by expiration.
TWOU call spread, 11/7/18. Bullish options play.

Source: OptionsHouse

Many traders may be eyeing potential long options positions, as market-wide IV dropped after the midterm elections—yesterday, in fact, the Cboe Volatility Index (VIX) fell more than 15% to its lowest level since October 10.

The votes are in: The market apparently liked the outcome of the US midterm elections—yesterday the S&P 500 (SPX) rallied nearly 2% intraday after gaining 0.9% on Tuesday.

Today’s numbers: FOMC meeting announcement (2 p.m. ET).

Today’s highlighted earnings: Brookfield Asset Management (BAM), Cardinal Health (CAH), DR Horton (DHI), Johnson Controls (JCI), Scientific Games (SGMS), Worldpay (WP), (WUBA), Activision Blizzard (ATVI), CRISPR Therapeutics (CRSP), Dropbox (DBX), Walt Disney (DIS), Yelp (YELP).


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1 Who Is Studying Online (and Where). 1/5/18.

2 Forbes. E Learning Climbing To $325 Billion By 2025 UF Canvas Absorb Schoology Moodle. 7/31/18.

3 The Motley Fool. Why 2U, Inc. Stock Dropped 15.9% in September. 10/10/18.