Option Traders Put Bearish Bet on Capital One

Options pits are becoming increasingly aware of the growing concerns about consumer debt. Some apparently agree with Peter Eavis, whose recent column articulated the potential troubles facing credit companies, especially lenders servicing the subprime market. As a result, traders are putting their money on the table.

One of the largest bearish bets is being placed on Capital One Financial (COF - Cramer's Take - Stockpickr). Its stock has come under pressure lately, dropping some 50% over the past six months to its current low $30 level. Some seem to think the stock may have a lot further to fall.

Getting Busy

The last week of November saw a tremendous spike of activity in Capital One options, specifically in the 2004 January 5 put and the 2004 January 10 put. (Puts give the buyer the right, but not the obligation, to sell stock at the designated strike price.) Volume surged, with an average of 19,000 contracts trading from Nov. 22 to Nov. 26. Open interest in those two strikes has ballooned to 18,623 in the 2004 January 5 put and a whopping 72,495 in the 10 put. The buyer of that 10 put is betting that Capital One shares will drop below $10 before the put's expiration day on Jan. 17, 2004.

The table below provides some open interest data for Capital One.

Open Interest Here's the current open interest in a cross sample of COF puts as of Dec. 26
Option Strike	Price	Open Interest 12/26/02
'03 January 25 Put	$0.60	12,975
'03 February 25 Put	1.60	5
'03 June 25 Put	3.70	1,039
'04 January 25 Put	5.30	4,903
'04 January 10 Put	1.45	72,495
'04 January 5 Put	0.35	18,623
Source: CBOE

To get a sense of the magnitude and the unusual nature of this activity, consider that the average daily volume in the most active Capital One options, usually the near-term at-the-money strikes, is a few hundred contracts. The open interest of 2003 January 35 puts and calls stands at 2,987 and 7,817, respectively.

For a benchmark, consider the fact that Citigroup (C - Cramer's Take - Stockpickr), whose options are consistently among the most actively traded, typically posts an average daily volume of about 2,800 contracts in near-term at-the-money strikes, with open interest hovering around 20,000 contracts. A comparable long-term out-of-the money put in Citigroup, the January 2004 20 put, has an open interest of 5,200 contracts.