Shares of credit service provider Capital One Financial (COF) are down about 40 percent in the past year. One trader sees further downside in the coming weeks.
That’s based on the October 28 $90 puts. With 21 days until expiration, 20,715 contracts traded compared to a prior open interest of 395, for a 52-fold rise in volume on the trade. The buyer of the puts paid $1.70 to bet on a further drop in shares.
The stock recently traded for about $99 per share, so the option would move in-the-money on a 10 percent decline in shares. The strike price is right at the stock’s 52-week low of $90.
Earnings are down 40 percent in the past year, and revenue is down 16 percent, indicating the economic slowdown underway. Even with that drop, shares trade at about 5 times forward earnings and the company has a hefty 33 percent profit margin.
Action to take: Shares look oversold at current prices, but may trade lower with the overall market in the months ahead. Investors may want to gradually start buying shares on a drop in the coming months. At current prices, shares yield 2.5 percent.
For traders, the put options are a reasonable bet given the market’s recent rally, and the overall poor economic data coming in now. Traders could see mid-to-high double-digit gains on another market drop that sends shares lower.
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.