If AI causes workers to lose their jobs then households face credit stress
Household's face a wave of debt stress caused by AI-driven unemployment
The artificial intelligence trade may be struggling early Friday, but use of the technology is still expected by many to cause an earthquake for workers, and by extension, their ability to manage household debt.
And there's a trade for that, according to Patrick Ceresna, founder and chief derivative market strategist at Big Picture Trading.
In Thursday's Macro Voices podcast, he noted that if AI displaces workers and reduces their earning power, then the outstanding debt still needs to be serviced. "Productivity gains for businesses could therefore come with deteriorating credit quality for consumer lenders," Ceresna said.
Capital One's $(COF)$ exposure to credit cards and auto lending makes it a candidate for expressing that concern, Ceresna thinks. The stock peaked in January and has been under pressure since, and it's now sitting near its 50-day moving average.
A fall back below that support level could "reinforce the bearish structure" and so Ceresna suggests opening an option trade called a bear put spread, to capture a modest further fall for the stock.
That entails simultaneously buying a put option with a higher strike price and selling a put with a lower strike that's "out of the money" - both with the same expiry. Ceresna suggests buying the Jan. 15, 2027 put at a 200 strike and selling the 175 strike put.
Each transaction would cost a net $5.96. "The $25 spread offers a maximum profit of $19.04 per share against that $5.96 commitment, giving it approximately a three to one risk-reward ratio," said Ceresna.
"We're expressing a specific vulnerability in consumer credit through a stock already showing technical weakness, with a defined capital commitment and more than $3 of profit potential for every $1 risked," he added.
For braver traders, Ceresna notes that the implied volatility cost of Capital One options is currently near the bottom of its one-year range, meaning it's relatively cheap to buy a straight January 200 put to seek greater gains from any share price slide.
-Jamie Chisholm
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