Discover Financial Services (NYSE: DFS - option chain) shares have moved higher today after the company announced it has received approval for a $1.2 billion in funds under the government's financial sector bailout package. DFS plans to become a bank holding and a financial holding company in order to receive the funds. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DFS.DFS opened this morning at $7.83. So far today the stock has hit a low of $7.61 and a high of $8.10. As of 11:55, DFS is trading at $7.67, up 6 cents (0.8%). The chart for DFS looks bullish and S&P gives DFS a positive 4 STARS (out of 5) buy ranking.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $5 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just five weeks as long as DFS is above $5 at February expiration. Discover would have to fall by more than 34% before we would start to lose money. Learn more about this type of trade here.
DFS hasn't been below $5 at all in the past year and has shown support around $7.40 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in DFS.
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Reader Comments (Page 1 of 1)
3-02-2009 @ 12:52PM
JT said...
What a joke to support credit card companies...they run the american people in the ground with debt with high interest rates of 10% to 20% and then they cant even manage their own business with the money they make and invest. then when the person quits paying their bill because of high interest rates they harass them over the phone...maybe the government better support the american people and dont let the credi card companies chare the interest they do. Let them go broke just like the regular american citizen does...or is there too much at stake for the politians in office? All card holders should quit paying their bill and let Discover go down the tubes....Why would any American open an accout at a bank or credit card company to borrow their own money back and pay such high ineterst on it when the banks are getting this money at 1%..Are WE STUPID AMERICANS?