Technically speaking, the shares of Capital One Financial Corp. (NYSE: COF, Stock Forum) have more than quadrupled since flirting with the $8 level a year ago. Since the start of 2010, however, the equity has become somewhat sluggish, advancing less than 1% year-to-date. Nevertheless, COF is poised to score a psychological victory this week, as the stock looks positioned to reclaim its perch atop its 10-week and 20-week moving averages. This duo of trend-lines guided the security higher during most of 2009, and could resume their supportive role.
However, even if the equity closes the week atop these moving averages, the stock could find a technical ceiling in the $42 neighborhood. This region has rejected all but one of the security's rally attempts during the past several months.
In light of the equity’s lackadaisical price action of late, it’s no surprise that one trader is expecting the shares of COF to stagnate in the short-to-intermediate term. Earlier this week, an equal amount of April 38 calls and puts changed hands for $1.75 and $1.63 each, respectively. All of the options traded closer to the bid price, suggesting they were likely sold. As such, the short straddle was established for a net credit of $3.38, which also represents the investor's maximum potential profit on the play.
By centering the straddle on the April 38 strike, the strategist is betting the shares of COF will remain pinned to the $38 level through April options expiration. In this case, both the call and put will expire worthless, allowing the strategist to pocket the premium received at initiation.
Elsewhere in the options pits, it appears the once-prevalent optimism is waning. Since tagging a 52-week nadir in early February, the equity's Schaeffer’s put/call open interest ratio (SOIR) has ascended to its current spot at 1.09, implying that puts now outnumber calls among options slated to expire within three months.
Meanwhile, most of the brokerage bunch remains leery of COF, too. According to Zacks, the stock has earned 10 "buy" or better endorsements, compared to 15 "hold" or worse recommendations.
As contrarians, we like to see a notable amount of pessimism levied against an up-trending stock, as this configuration often points to potential buyers on the sidelines. However, in the case of COF, the shares will likely need to prove they can power past long-term resistance in the $42 neighborhood before any of the bears abandon ship.
Disclaimer: Andrea Kramer has no financial interest in any of the equities or products mentioned in this column.
