Financial service provider Discover Financial Services (DFS) is up 61% over the past year. One trader sees shares pulling back over the coming weeks.
That’s based on the December 20 $120 puts. With 72 days until expiration, 4,349 contracts traded compared to a prior open interest of 119, for a 37-fold rise in volume on the trade. The buyer of the puts paid $2.85 to make the bearish bet.
Discover Financial Services last traded for about $145, so shares would need to drop by about $25, or 18%, for the option to move in-the-money.
Shares have been range-bound since July, and are trading near the high end of their range, near their 52-week high of $147.61.
The stock may have run up more than the overall market, but shares are still inexpensive at about 12 times forward earnings.
Plus, robust consumer spending has been good for earnings, up 70% in the past year, and revenues are up 48%. Even better, DFS sports a hefty 26% profit margin.
Action to take: Given the company’s fundamentals, it looks like a pullback over the coming weeks is possible due to the stock’s multi-month trading range. That could mean a small pullback, and investors could get in the low $130 range.
At current prices, Discover pays a 1.9% dividend.
For traders, the December $120 puts plays well to a potential technical drop in shares over the coming weeks. The options can likely see a mid-double-digit return on the options.
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.