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Discover Financial Services (DFS - option chain) stock is trading lower today after the company reported earnings this morning, posting a fourth-quarter profit of $352.1 million, or 63 cents per share, beating analysts' forecasts of 19 cents per share. However, DFS also reported its credit card charge-off rate rose to 8.43 percent during the quarter, compared to 8.39 percent in the third quarter. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on DFS.This morning, DFS opened at $16.35. So far today the stock has hit a high of $16.36 and a low of $14.76. As of 12:05, DFS is trading at $14.86, down $1.56 (-9.5%). The chart for DFS looks bullish and S&P gives DFS a positive 5 STARS (out of 5) strong buy ranking.
For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $17.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 20% return in four months as long as DFS is below $17.50 at April expiration. DFS would have to rise by more than 17% before we would start to lose money. Learn more about this type of trade here.
DFS hasn't been above $17.50 at all in the past year and has shown resistance around $16.80 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 controls bullish hedged positions in DFS. Both these and the trade above can expire profitably at the same time.
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