|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|
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), 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 BustAt 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 ( PVN) 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.