Hey, it’s Blake.
Question for you…
What happens when borrowers who financed cars at $50,000 can't make payments on vehicles now worth $35,000?
I've been positioning for this credit reality for months.
While everyone focuses on AI partnerships and crypto volatility, I've been building short positions in consumer lenders.
This problem isn't going away.
The Numbers Don't Lie
Ally just dropped into the oversold yesterday, traded back up into the overbought, then closed all the way down. If it stays below 37.45 by the close, I think we're heading to 35.52.
Capital One Financial? Yesterday it went end zone to end zone. From $210 all the way down to $200. That's a 5% drop in a single day.
But here's the thing - we're not in these trades for a single day. I'm talking about a problem that could push these stocks into March, April of next year.
Why Consumer Lenders Are Toast
I've been talking about this on Thursday afternoons and Mondays for months. Doug can confirm - at least six weeks of hammering this thesis.
The problem is simple: these companies did massive lending when car prices were at absolute peaks. Ally and Capital One Financial wrote tons of paper when borrowers were barely qualified at zero percent rates.
Now rates are higher, asset values are lower, and those borrowers can't pay.
The Technical Setup
Even with today's bounce, look at the levels. Capital One could close above 201 and probably bounce to 206. Fine. We've gone from 222 to 198 - that's 10%. A bounce back up to 206 is only about a third of that move, and we're gonna fade that.
My only concern is we're past the two standard deviations on the momentum indicators. That probably means all the sellers have sold. But if we get the bounce back to fair price, I'm setting up the next short position.
How I'm Playing This (Without Chasing)
We can't chase these moves anymore. They're too late. But can I fund an out-of-the-money long put for a longer time period with short call verticals?
Here's the structure on Capital One: If it retests that 206 level, I'm selling call verticals and funding long-term puts. March or May expiration.
On Ally, same setup. If this bounces and retests 38.28, same structure. This is one-ninth the cost of the Capital One trade.
Why This Isn't About the Market
Everyone's focused on AI stocks and crypto bleeding into equities. That's noise. The real story is what happens when consumers can't make their payments.
These lenders wrote paper at the peak of everything. Auto loans, credit cards, personal loans - all with borrowers who were stretched thin even at zero rates.
The Long-Term Trade Setup
This isn't a momentum play. This is about companies that will struggle with credit losses for quarters.
If Capital One bounces to 206, I'm selling the 210/220 call vertical and using that premium to fund a 190 put in January.
Total outlay about $2.60. Risk is $12.60. But if this drops to the expected move target - about $10 in the money - that put could be worth $21.
That's 10-to-1 return on investment, 2-to-1 risk-to-reward. And all we need is for the math to work.
Why I Sleep Well
I don't need the market to crash. I don't need some macro event. I just need basic credit cycle reality.
Credit card balances at record highs. Personal loan delinquencies already ticking up. The green line is rolling over on these charts.
While everyone else chases the next AI partnership, I'm positioned for what happens when the bills come due.
Stay Sharp,
Blake Young