Options Update: Capital One Financial Sees Spike in Put Volume on Stock Offering
Like many members of the financial sector, Capital One Financial
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PowerRating) has come under tight scrutiny in recent weeks.
However, most analysts have concluded that COF was one of the few banks which has a capital position strong enough to weather the current storm. At least that was the consensus opinion until the company’s 14-million-share stock offering this morning.
When the deal was first announced yesterday, Stifel Nicolaus analyst Chris Brendler said in a client note that although the deal is small, it came “as a rather large surprise since COF was widely perceived to be one of the few banks with a strong capital position thanks to robust internal capital generation (minimal mortgage exposure).”
As a result of the offering, many analysts lowered their earnings expectations for COF, citing shareholder dilution. Others, such as Calyon, Friedman, and Jefferies all either raised their price-targets or upgraded the shares outright. Still, the analysts’ commentary hasn’t stopped COF from falling about 4.75% to $49 per share (the stock offering was for $49 per share) in today’s trading.
Naturally, options players have flooded the stock with put volume today, as many speculators could be placing bets that COF will extend this poor price action. More than 13,203 puts have traded on COF so far, nearly tripling the stock’s average daily put volume and placing the stock on today’s Intraday Volume Explosion List. The most active contract was the out-of-the-money October 40 put, which caught my eye this afternoon.
Turning to today’s trading example, I am running with the idea that our hypothetical trader at 9:56 a.m. bought (to open) 100 COF October 40 puts for $1.75. Keep in mind that volume at this strike does not exceed open interest, so we could be looking at the closure of existing positions. However, given the negativity surrounding the financial sector, and the inability of traders to short COF due to the current ban, I am pressing forward with the put-buying example.
The Anatomy of a COF Put Position
Specifically, in this situation, the trader bought 100 COF October 40 puts for $1.75, or a total outlay of $17,500 — ($1.75 * 100)*100 = $17,500. For this trade to reach breakeven, COF would need to fall about 23% to $38.25 per share. We arrive at this target by subtracting the cost of the option ($1.75) from the strike of the purchased 40 put ($40 – $1.75 = $38.25). The total loss for this position is limited to the initial investment of $17,500.
Given that COF has held up pretty well amid the current market turmoil, today’s put volume appears to indicate that investors are waiting for the other shoe to drop for the company. After all, Lehman Brothers, American International Group, and other have issued the “all clear” before, and we know how those situations ended. As for COF, let’s see if the stock’s sentiment or technical backdrop provide any clues.
Getting Technical
After plunging to the 48 level shortly after the open this morning, COF has bounced back in afternoon trading. Most importantly, the stock has reclaimed the round-number 50 level. This region has provided support and resistance for COF since November 2007, and a close above 50 today could be a bullish sign for the equity. Furthermore, the stock’s 20-day moving average marked COF’s intraday low. This short-term trendline and its 10-day counterpart have presided over the security’s 63% rally from its mid-July lows.
While COF has dipped below its 10-day moving average in today’s trading, a close back above this trendline despite this morning’s knee-jerk reaction would be another sign that the stock still has ample buyers in the market. Of course, these technical support levels do not bode well for a COF October 40 put.
The Sentiment Drivers
The sentiment backdrop for COF is also a drawback for a potential October 40 put on the shares, as pessimism reigns supreme for this member of the financial sector. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 2.16 indicates that puts more than double calls among near-term options. What’s more, this ratio ranks above 78% of all those taken during the past year. Should speculative options traders begin to unwind these positions, it could provide additional buying pressure for COF.
Meanwhile, more than 20% of the stock’s float is sold short and all 10 analysts covering COF rate the shares a “hold” or worse. Should the company receive additional kudos from the brokerage bunch due to its capital on hand, upgrades would be a boon for the shares. Likewise, short sellers can only cling to COF so long before the stock’s uptrend becomes too painful to bear in their portfolios. As such, short covering could become a factor for the equity if the stock can extend its recent uptrend.
The Verdict?
With a potential “bailout” of the U.S. financial system working its way through the annals of Capitol Hill, investors bearishly inclined toward the sector have to be at least a little bit wary. Furthermore, with COF’s reputation as one of the better capitalized U.S. banking concerns, I am even less likely to side with the bears on this equity. Certainly, COF’s rebound from its lows of the session could be seen as a positive for the shares, and a close above the 50 level would be a very bullish signal. In fact, instead of an October 40 put, I would be eyeing a November or December 45 call to take advantage of a potential unwinding of negative investor sentiment amid COF’s strong technical performance.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.