Looking To Discover DFS’s Upside

Oil fell below the $60 level overnight, a day after slipping into a bear market. That means U.S. crude is now down by around 20% since early October as rising supply and concerns of an economic slowdown pressure prices. Fresh U.S. sanctions are unlikely to cut as much oil out of the market as initially expected with Washington granting temporary exemptions to Iran’s biggest buyers. American production has also reached a new record high of 11.6M bbl/day.

*Source:  Seeking Alpha

Let’s consider Discover Financial Services (Ticker: DFS):

The VantagePoint platform recently indicated continued upside momentum.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out four significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average on November 6th.  We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position the day before.  This indicator measures strength and weakness for a 48-hour period, in this case, strength.  The move to the GREEN position further makes the case for a potentially bullish scenario. We also have the predicted high and low above yesterday’s actual high and low indicating further weakness.  Lastly, all three predictive differences are positively sloped and the short and medium term ones are above the zero line.  I want to play the VP bullish indication.

Strategy Discussion

For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation.  You will first want to calculate your target strike.  In order to do this, you will need three pieces of data:  current price, expiration date and the implied volatility associated with that expiration date.  For DFS, that yields a targeted strike of ~$73.00.  You may want to consider the DFS November 23rd weekly expiration71.5/73 call spread, buying it for $0.35.  The most you can lose is the premium paid and the most you can gain is the width of the spread less any premium paid.  Max risk = $0.35 and max reward = $1.15.  This means that you are getting odds of 3.29:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.