Call Options Or Put Options On Capital One Financial (COF)?

| September 12, 2012 | 0 Comments

COF OptionsCapital One Financial (COF) is a bank holding company.  COF provides consumers and small businesses with credit card lending, auto loans, mortgages, as well as savings, checking, and other deposit accounts.

COF currently trades for $57.82 per share.  The shares are up 60% from the 52-week low of $36.18 and they’re near their 52-week high of $58.64.

Is this an opportunity to buy call options on COF as it breaks out to new highs?  Or should you buy put options on COF as it runs into resistance?

The bulls make a convincing argument…

COF has been busy acquiring other financials while they’re out of favor with investors. 

Earlier this year, COF received approval to purchase the largest direct banker in the US, ING Direct, from ING Group.  This was a good move to expand COF into internet banking and lays the foundation for them to continue growing their business without the cost of running additional branches. 

The acquisition of ING Direct boosted deposits 73% and set the stage for them to acquire HSBC’s credit card business.  COF is now one of the top five credit card lenders in the US.   

At this point, more people than ever have a Capital One credit card in their wallet.  As the business continues to grow, the stock has the potential to break out to new highs in weeks ahead. 

But the bears have a compelling case as well… 

The addition of HSBC may not be all it’s cracked up to be.  Sure, COF is bigger… but the bigger they are, the more likely they’ll draw attention from the new Consumer Financial Protection Bureau.

They’ve already been forced to refund $150 million in fees to consumers and were hit with $60 million in fines for tricking customers into buying add-on services like credit protection and identity theft protection. 

Clearly, the new consumer protection agency isn’t shy about going after big credit card companies.  In fact, they’d love to string them up for misleading sales practices. 

But COF needs to push their higher margin products and services to make the acquisition of HSBC’s credit card business worthwhile.  And that will be tough to do with the new consumer protection agency looking over their shoulder.

It’s already apparent the portfolio of credit cards COF got in the HSBC deal is riskier than their legacy portfolio.  Losses and delinquencies jumped in July when HSBC was included. 

If COF can’t up sell their higher margin products to the customers they acquired in the HSBC deal, their earnings are going to suffer.  And that spells trouble for COF when they report earnings next month. 

If you think the bulls are right, take a look at buying the COF December 2012 $60 Call for around $2.00. 

If you think the bears are right, take a look at buying the COF December 2012 $55 Put for around $1.90.

***Editor’s Note***  Tomorrow our colleague Gordon Lewis is adding a new stock to his Penny Stock All-Stars Portfolio.  This one’s a tiny company that buys technology patents… and then ‘sues’ companies that are violating these patents!  You’ve seen how profitable that can be with Apple’s billion dollar victory over Samsung in their recent patent case.  Click here to check out his newsletter so you can be among the first to get the name of this innovative penny stock.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.