Crystal is a single mother with three great kids.  Two years ago her mail box was stuffed with credit card offers.  Credit was so easy to come by then.  All she had to do was sign her name and mail back the application in the little postage-paid envelope.  A week or two later, her shiny new credit card arrived.

Crystal is a great mother, and her children are her pride and joy.  She owned her own home and always paid her bills on time… until she lost her job.

You see, Crystal had already tapped out her home-equity line of credit.  And the only way she could feed her kids was to buy groceries on her credit card.

Crystal’s credit card company was easy to work with… until she missed a payment.  That’s when she got hit with a $39 late-fee and her rate was raised to 29.4%.  Crystal wanted to pay her bills but she did the right thing instead, she fed her kids first.

The credit card company unleashed a vicious collection agency on Crystal that would harass her family and call at all hours of the night.  It got so bad that she had to file for bankruptcy to get the frustrating calls to stop.

In the bankruptcy, Crystal’s credit card debt was “discharged” by the judge, meaning the credit card company took the full hit and Crystal didn’t owe them any money.  At this moment, the good news is that Crystal still owns her home, her kids are great and she just landed a new job…

Stories like this are quite common in America today.  In fact, U.S. credit card defaults rose to a record high in May.  Consumers remain under severe stress and credit card losses across the industry are on pace to surpass 10% this year which would lead to write-offs of over $70 billion for credit card issuers.

Unemployment hit 9.4% in May, which is at the highest level since 1983.  If people don’t have jobs they can’t pay their bills.

Real estate prices have dropped so people can’t borrow against their home anymore–therefore they tend to run up their credit cards.  In fact, American households have been loading up on credit card debt like crazy, with balances rising 75% since 1999.  The average credit card debt per U.S. household is now well over $8,000.

Credit card issuers are attempting to protect themselves against defaults by lowering people’s credit limits and closing accounts.  They have also been hitting consumers with higher interest rates, jacking up fees and canceling reward programs.

But Uncle Sam is putting his foot down.  The U.S. government recently passed a law limiting credit card fees and interest rates.  This will stop credit card companies from socking-it to the American consumer.  But it will be even harder to get a credit card once this law goes into effect–and will increase defaults as consumers find it more difficult to refinance their debts.

Bottom Line:  Credit card issuers are doomed!  How can you play it?

Put options on the goliath credit card issuer Capital One could deliver you some hefty gains as their stock goes down.

You see, Capital One is still losing money hand over fist.  They had a net loss of over $111 million in the first quarter of 2009.  And they lost $46 million in 2008.

I expect Capital One’s revenues to continue to fall, due to slowing consumer spending and a troubled U.S. economy.

The company is in big trouble as a result of a continuing rise in delinquencies and charge-offs in Capital One’s credit card and home equity lines businesses.  Its credit card default rate rose to 9.41% and lower real estate prices have crushed their home equity line portfolio.

Plus, top rating firm Reuters has Capital One rated “Underperform”, and Standard & Poor’s rates the stock a “Sell”.

From a technical perspective, the 200 day moving average is falling which is bearish.  Furthermore, the Up/Down volume pattern indicates that the stock is under distribution, which means investors are offloading the stock.  See the chart:

Buy Put Options on Capital One Financial.

Please keep in mind that option trading is speculative.  Of course I can’t guarantee profits and losses are entirely possible. You should only invest funds you can afford to risk.

The high-powered, strictly limited-risk option I suggest trades under the symbol (YFNME).  I say limited risk because you can’t lose more than your initial investment.

One options contract will give you the option to sell 100 shares of the Capital One Financial stock (COF) at $25 per share.

This options contract (YFNME) gives you the right to sell (COF) until January 15th of 2010 at $25 per share.  If Capital One stock drops to $15 per share then you will have a minimum gain of 67%.  If it drops to $10 per share your gain would be 150% at the very least.

Here are the details for the option recommendation:

Option: January 2010 – 25.00 puts (YFNME)
Underlying symbol: COF
Breakeven point at expiration: $25.00 – $6.00= $19.00
Estimated Cost: $1,200 (2 contracts x 100 Shares x $6.00 premium)
Expiration date: January 15, 2010 at 4:00pm EST

After you have done your homework and if you agree with my recommendation, enter the trade online or call your stock broker and say:

“I want to BUY 2 contracts of Capital One Financial Corp. January 2010 Put Options, with a strike price of 25.00, symbol YFNME, at 6.00 points or less, to open.  This order is good ‘til cancelled.”

Close the position if the option trades 50% below your entry price.

Sell the first half of the position if the option trades 100% above your entry price.

Let the second half ride for maximum profits.

If you buy this position and the option is in the money you should exit this position on or before January 15, 2010.

Stock options give you the leverage you need in today’s fast moving markets.  I give 2 to 4 new options picks like this every month in my new options newsletter the Options Power Trader.  Click here if you would like to learn more.

Source: Capital One Is Doomed, Buy Put Options

This from The Smart Profits Report:

Believe me, there are times I’m sure the last thing you want to hear about is the stock market. Sometimes, that’s true for me, too! And I understand that with each day that your portfolio losses grow, that’s when panic and/or depression sets in. When I was a rookie investor, I felt that way, because I didn’t think there was anything I could do.

But take it from me: At times like this, you must avoid panicking at all costs.

The thing is, markets are not one-way streets. And although it’s tough to argue that fact when we’re in a midst of an extreme correction that can only be compared to a 100-year flood, events like this can happen and we simply have to deal with it.

So this is not the time for a pity party or complaining. Here’s why…

Picking Through The Rubble For Strength And Extreme Value

While the stock market looks like a tornado has whipped through it over the past few months, lurking in the rubble are companies trading at valuations we haven’t seen for decades.

What’s more, they’re good, solid companies. True survivors that will allow you to recoup your losses as the market bounces back. And while it’s important to note that this may take some time, if you don’t have a horse in the race, you have no chance of winning, or even placing.

So where does that leave investors like you and me? What’s the best way forward?

An Investor’s Best Friend

Over the past few months, one investment strategy has risen to the top of the pack.

In fact, people whom I never thought would embrace it are now raving about its benefits. But understand that this is a strategy for those who can look beyond the hype and promise of home run, triple-digit return promises and instead towards something that many investors crave right now: Steady, consistent income.

And it’s a strategy that has taught me that there are ways to benefit from volatile and even falling markets – perfect for the current climate.

I’m referring to covered call investing.

In a nutshell, the strategy has two parts…

1. You buy shares of a company.
2. You sell call options against your shares.

What does this accomplish? First, it allows you to reduce your basis in the share price by collecting a special “dividend” (known as a premium) from the proceeds of the options that you sold.

In a flat or range bound market, you can do this over and over again, consistently reducing your original cost and setting yourself up for big returns in the future. Here’s how it works…

The Breakdown Of A Covered Call Trade

Let’s say you like General Electric (NYSE: GE).

You buy shares of GE at the current price around $17.

Against this position you sell GE $20 call options that expire in January 2009.

What this means is that you’re obligated to sell your GE in January at $20 if – and only if – the share price is over $20 at the time. If not, you keep your GE shares and any proceeds you received for selling the option.

If GE closes below $20 at expiration in January, you can sell another option and collect more money and continue to lower your cost. The caveat here is that if GE closes above $20, you still only get $20. The loss of the upside is the price you pay for the safety of lowering your downside.

The money you receive for selling the option(s) is called the premium. For example, if GE January $20 options are trading for $1, you will receive $1 for each share that you own and have sold an option against it.

Remember, options trade in contracts, with each contract equal to 100 shares. So if you own 100 shares of GE, you can sell one call option contracts. At $1 per contract, you will receive $100 – 1 contract x 100 shares per contract x $1.

So let’s say you sell just one call option against your 100 shares. With the $1 premium, your cost in GE is now $16 and your upside is $4 – the difference between the strike price and your cost. The extra dollar you picked up is like an extra 6% dividend ($1 divided by $16 (your cost).

But I like to put my own twist on this. It’s not exactly the conventional way of covered call investing – but it’s a big reason why my Strategic Income service has managed to notch up a 70% win rate over the past 11 years. Here’s what I do…

An Even Better Way To Trade Covered Calls

Instead of selling a call option above the price at which you buy the underlying shares, you sell it below that price.

My rationale is this: We’re essentially saying to the market that we want to own GE shares… but we want to own them at a lower price. Our price. Here’s how it works.

~ We buy GE at $17

~ We then sell the January 2009 $15 calls against the position.

For doing so, we’ll automatically get $2 back – known as the “intrinsic value” ($17 minus $15.) But we’ll get more.

For time and risk, we’ll pick up an extra $1 to make the total premium $3 ($2 intrinsic plus $1 for time and risk). That lowers our original cost in GE to $14.

So we stand to make $1 profit on the trade, as long as GE closes above $15 in January. If this happens, our return is about 7% in a couple of months – a full $2 below the current price.

You see how this works? We’re not betting that the shares are going higher… we’re actually saying that if they go nowhere or even lower, we still stand to make money as long as the shares are above our cost of $14 ($17 purchase price minus $3 premium received).

Three Chances To Win In A Market Like This? I’ll Take It!

The bottom line here is that we have three chances to win…

1. If GE shares rise, we win.
2. If GE remains flat, we win.
3. If GE shares fall – but not under $14 – we win.

I don’t know about you, but I like those odds – especially in a market like this.

But what happens if GE slides under $14?

Well, since our cost was lower than the $17 we paid for the shares, there is an excellent chance that we’ll be able to sell more options and reduce our cost even further, while increasing our upside potential.

Source: The Best Investment Strategy For A Market Like This… The Truth About Covered Call Investing