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July 17, 2012  Tue 1:47 AM CT

Capital One Financial has been grinding higher, and an investor is using options to milk income from the name.

Our tracking systems detected the sale of 2,500 December 62.50 calls for $1.39. An equal number of August 57.50 calls were bought for $1.02, but volume was below open interest. This suggests that an existing short position was closed in the August contracts and rolled forward to December.

The investor probably owns shares in the credit-card company and sold calls against them to earn income while holding the long position. In addition to cushioning against a drop, the strategy reduces volatility because the short calls and long shares will move inversely to each other.

Another benefit is that the trader earns income from the passage of time. For example, yesterday's transaction let him or her collect an additional $0.37 of credit. The roll also increased by $5 the price at which the shares must be sold, so the trader also stands to make more money from capital appreciation.

That might be especially useful because the company reports earnings after the bell on Thursday, July 19. If the numbers are strong and it rallies, they might need that additional room to run to the upside. (See our Education section)

COF rose 1.23 percent to $55.09, and is up 30 percent so far this year. Option volume was 4 times greater than average in the session.
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