Credit service provider Discover Financial Services (DFS) is up 33% over the past year, and just fell 20% off its recent highs. One trader sees shares trending lower over the coming weeks.
That’s based on the April $150 puts. With 31 days until expiration, 7,400 contracts traded compared to a prior open interest of 146, for a 51-fold rise in volume on the trade. The buyer of the puts paid $7.80 to make the bearish bet.
Discover shares recently traded for about $160, so shares would need to drop by $10, or just over 6%, for the option to move in-the-money. Shares are now about midway between their 52-week low and high range of $119.31 to $205.76.
Operationally, Discover is just one of a few oligopoly players in the credit card network provider space. That allows the firm to operate with hefty 35% profit margins. And with shares trading at 12 times earnings, Discover looks like a value play here.
Action to take: Longer-term investors may want to use this 20% pullback to start acquiring shares. Further market weakness can be used to add to the position. Discover also pays a 1.7% dividend at current prices.
For traders, the short-term trend is sharply down. While that may reverse soon, until it does, a trade like the April $150 puts could perform well. Traders can likely see double-digit returns off of the trade, but if shares start to flatten out or trend higher, it’ll be time to take profits.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.