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) - Get Report

. 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.

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


(C) - Get Report

, 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.

Going for Bust

At the closing price of $1.45, the current open interest in the 2004 January 10 put represents a $10.5 million position. Even assuming that some spreading and hedging have been deployed, someone has clearly bet big that Capital One shares are headed for a huge tumble.

Although it's difficult to ascertain exactly who's behind the activity or the exact position, the chatter is pegging a hedge fund. Telephone calls to Platinum Trading, the designated primary market maker in Capital One options at the Chicago Board of Trade, were not returned.

But Stan Lewis, head of trading at T.A. Partners, a Chicago-based hedge fund, says, "This has the earmarks of a hedge fund, one that's probably also holding bonds and has decided that either COF has made proper risk assessments and will emerge healthy when the economy turns, or it's going to spiral down into a black hole of defaults and have no access to capital." T.A. Partners currently has a "slightly bullish posture" on Capital One.

Et Tu?

You only have to look a chart of

Providian Financial


to understand the precedent and rationale behind the put-buying. Providian was flying high until lax lending practices, deficient reserves and a high default rate led to the stock's plunge and sent its Moody's credit rating down three notches to "BBB-minus," one level above junk rating.

Next to Go?
Some seem to think Capital One is headed down Providian's path

Providian and Capital One are in similar businesses, where lending practices have deteriorated and debt levels have risen over the past 12 months. If Capital One joins its competitor down in the single-digits, I'm sure we'll then learn the identity of that smart money. In the meantime, keep your eye on option activity in the rest of the sector.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Steve Smith.