Shares of asset manager FS KKR Capital Corp (FSK) are down about 15 percent, the same as the S&P 500, over the past year. One trader sees the possibility for a further decline in shares in the coming weeks.
That’s based on the November 18 $17.50 puts. With 52 days until expiration, 15,775 contracts traded compared to a prior open interest of 257, for a 61-fold rise in volume on the trade. The buyer of the puts paid $0.60 to make the bet.
Shares recently traded for about $18.40, so the stock would need to drop about 5 percent for the options to move in-the-money. Shares have a 52-week low near $18, so moving in-the-money would represent a new 52-week low for shares.
The asset manager may continue to drop in the next few months, but shares are inexpensive at 7 times forward earnings, and trading at about three-quarters of their book value.
Action to take: Asset managers trading under their book value will likely revert higher in time, although shares may get cheaper in the coming weeks. Right now, the company is also paying a large dividend over 12 percent, which may come down in time. Patient investors can look to start accumulating shares in the coming weeks.
The November puts are well positioned for a further drop in the coming weeks. Traders can likely nab mid-to-high double-digit gains on this option if the market continues to trend down.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.