Discover Financial Services: Heads Into Earnings With A New High

Discover Financial Services, (DFS), is making a new high as it heads into earnings. It has reached the top Bollinger band® and 6 of the last 7 times that has happened it has pulled back. The 7th time it took 4 days before it turned lower, and it is extended from the Simple Moving Averages (SMA). It is also at the top of the rising channel. A double whammy! The Relative Strength Index (RSI) is in bullish territory but flattening with the Moving Average Convergence Divergence (MACD)

indicator pressing higher. The long term bias is to the upside after a series of higher highs and higher lows, but it may need a short term pullback first. There is no resistance higher and the Measured Move to 54.82 is nearby. Support comes lower at 53.40 and 52.80 followed by 51.15 and 48.40. The reaction to the last 6 earnings reports has been a move of about 2.96% on average or $1.60 making for an expected range of 52.30 to 55.60. The at-the money November Straddles suggest a larger $3.10 move by Expiry with Implied Volatility at 24% near the December. Activity in the options market sees call buying in November and January.

Trade Idea 1: Buy the November 55 Call for $1.00.
Looks for a shallow pullback and then goes higher, or just continues.

Trade Idea 2: Sell the November/January 55 Put Calendar for a $0.85 cent credit.
This looks for a pullback to sell the long November Put and then a recovery over 55 to let the short January Put Expire.

Trade Idea 3: Buy the November 55/January 50 Put Diagonal for $1.05.
This also looks for a pullback to sell the long November Put but then has more downside protect as you are short the January 50 Put, $5 lower than in trade #2.

Trade Idea 4: Sell the November 50 Puts for a $0.30 credit.

Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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