How Will the CARD Act Affect Bank of America, Capital One, and Discover Financial?


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The final provisions of the Credit Card Accountability, Responsibility, and Disclosure ( CARD ) Act, which aims to protect credit card users from lofty late payments, random interest rate hikes, and other exorbitant fees, went into effect on Sunday. While aimed to help the average Joe, this new legislation is raising concerns among financial institutions, which now have a much more elaborate process for issuing credit.

Among some of the companies that stand to be affected by the CARD Act are Bank of America Corporation ( BAC ) , Capital One Financial Corp. ( COF ) , and Discover Financial Services ( DFS ) . With this in mind, let's take a closer look at each of these financial institutions' technical and sentiment backdrops.

Bank of America Corporation ( BAC ) hasn't been doing so hot lately, with the shares shedding 16% in 2010. Since peaking near $20 in April, BAC has been driven steadily lower by its 10-week and 20-week moving averages -- located around $14 and $15, respectively -- which have helped the stock find lower highs and lower lows during that time. In fact, on Tuesday BAC hit a new annual nadir of $12.59.

Put players naturally rushed in to take advantage on BAC's technical situation, with 130,000 of these bearish bets traded on Tuesday -- well above the stock's expected single-session put volume of around 90,000 contracts.

Traders showed a keen interest in the September 12 put on Tuesday, with over 29,000 contracts traded at this strike -- the bulk of which changed hands at the ask price, suggesting they were purchased. Overnight, open interest swelled by 20,873 contracts, confirming that fresh bearish positions were added here. With over 100,000 contracts in open interest, this strike now holds the title of peak put open interest for the front-month series -- a title which formerly belonged to the September 13 put. Meanwhile, peak call open interest can be found at the September 14 strike.

Meanwhile, analysts remain quite bullish on BAC. According to Zacks , the banking issue has earned 20 "buy" or better ratings, four "holds," and zero "sells." As BAC continues its quest for new lows, a reversal of bullish sentiment could only add insult to injury.

At first glance, it appears that Capital One Financial Corp. ( COF ) has fared much better than BAC in 2010. The shares had lost just 2% year-to-date, thanks in part to strong support from the stock's 10-month moving average. This trendline had supported COF from July 2009 to July 2010 -- but this month, the shares have slipped beneath this important moving average. With COF poised at $37.27 -- almost three points beneath its 10-month trendline -- the stock is on track to close the month of August below this long-term support.

Option players don't seem too concerned, though, with COF's Schaeffer's put/call open interest ratio (SOIR) standing at 0.94, in the 16th annual percentile. In other words, short-term traders have been more bullishly aligned toward COF just 16% of the time during the last 12 months.

However, COF's bullish SOIR may not be as optimistic as it seems. In the past two weeks alone, short interest on COF jumped by over 10%, and now accounts for 4.6% of the stock's total available float. In light of this, a portion of these calls may simply have been purchased as hedges by the shorts. Should COF indeed close August beneath its 10-month moving average, an unwinding of call open interest -- by former bulls or the shorts -- could pressure the shares even lower.

Last but not least, we have Discover Financial Services ( DFS ) , best known for its eponymous "Discover" card. The company's performance has been consistent in 2010, with the shares hovering mainly between $13 and $16 since the start of the year. Throughout this time, DFS has relied on strong technical support from its ascending 80-week moving average -- which even contained the stock's pullback during the infamous "flash crash" in May.

However, for the past several weeks, DFS has trended steadily lower, and is currently hovering around $13.84. With peak open interest for the September series at the 13 strike, and peak call open interest at the 15 strike, DFS could find itself confined between these levels in the near term.

Option players are mixed when it comes to DFS, with the stock's SOIR of 0.68 perched at the slightly bullish side of neutral, in the 45th annual percentile. Analysts have a similar stance on DFS, with Zacks reporting that 10 brokerage firms call the stock a "buy" or better, while seven deem the shares a "hold."

Should analysts and traders grow weary of DFS' range-bound ways, an unwinding of optimism could send the shares reeling -- breaking the stock beneath its long-term trading range.

In conclusion , while some analysts say that the CARD Act will have a negative effect on banking institutions, it seems that many of these financial firms were already struggling before this legislation. I'd like to think that anything that will help consumers manage their finances would ultimately help the banks down the line -- but I guess we'll have to wait and see.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing Options
Referenced Stocks: BAC , CARD , COF , DFS

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