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Capital One trader seeks rebound

David Russell (david.russell@optionmonster.com)

Capital One Financial is down hard, but one investor expects a rebound.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 1,000 July 55 calls for $1.72 and the sale of 2,000 July 62.50 calls for $0.32. Volume surpassed open interest at both strikes, indicating that new positions were initiated.  

The trade cost $1.08 and will earn a maximum profit of 594 percent if the credit-card issuer closes at $62.50 on expiration. Gains will erode above that level and turn to losses over $70.

Selling more contracts than the number owned significantly reduces the cost basis, and therefore increases leverage. But it also creates the risk of losing money if the stock moves too far in the intended direction. (See our Education section)

The strategy, also known as a ratio spread because of the different number of contracts a each strike, could be ideal for a company such as COF because it peaked around $62.50 earlier this year. That could be leading some chart watchers to expect resistance at that level, giving them confidence that it won't go above it.

COF is down 0.19 percent to $51.49 in early afternoon trading and has lost 16 percent since the middle of last month. Much of that drop occurred on Jan. 18 when the company reported weak earnings and revenues.

Total option volume is still below average in the company today, but calls outnumber puts by almost 4 to 1.

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