Apollo faces downside risk toward $110 due to difficult exit environment for asset managers; bearish stance.

Well, I see that you are also looking at Apollo , but you are standing on the other side of the spectrum here as you observe Apollo. So, explain your thesis to me here.

I'm looking at Apollo simply because private equity has rebounded a bit. Although we saw some pressure on some of these names earlier this year, they have recovered so far. Now some of these names that have recovered are beginning to show some weakness here.

Recently, Apollo stock rebounded from the $115 level , trading upwards to the $140 range, and is now beginning to decline again to the $120 range. This is where I really think there may be more downturn, particularly for asset managers who have been exiting their portfolio companies to generate returns for shareholders, as the environment has become difficult for them to do so.

This is exactly what we have seen some decline in for these managers. For Apollo, I will wait until the weekly options expire on October 30, which gives us about 6 weeks of time.

I am looking to buy a vertical put option at approximately the market price , attempting to buy the put option at 126 and sell the put options at 110 for that. The put options at 110 effectively represent the low levels we saw earlier this year.

By targeting those lower downside levels today, you can pay around $5 for that debit spread, and that will give you a risk-to-reward ratio of slightly more than two to one. This again protects you from any further downturn in the financial sector if you have exposure to that particular sector.

Yes, this is partly because Apollo has already declined from the 140 level to the 125 level. So, the implied volatility of Apollo options has become slightly more expensive. Therefore, if I buy a put option at 126 directly, I will pay a large premium to buy that protection against the pullback.

And with each day that I hold this contract, the time erosion of the put option at 126 works against me in this case. So, what I'm doing here is selling a put option at 110, collecting some premium, which will offset the cost of purchasing this pullback protection.

This will reduce the amount of capital required, and the effect of this will be to increase my rate of return if I am right and Apollo drops to the 110 level by the expiration date on October 30.

The secret here is choosing the right strike price to sell the put option, and that's why I chose a price of 110, which is roughly one standard deviation from the expiry date of October 30.

This means that there is only a 15% probability, based on current market volatility , that the stock will fall below 110 by that date. Therefore, I choose the execution price. I am trying to find the right balance here to offset the cost of my put option at 126, without giving too much away on the downside if the stock falls significantly between now and the expiry date on October 30 .