Discover Financial Services (DFS) 10/23/09 PriceWatch Alert At $12.72 Break Even

Posted: Friday, October 23, 2009 8:08 AM EDT

Discover Financial Services (NYSE: DFS) closed yesterday at $15.42. So far the stock has hit a 52-week low of $4.73 and 52-week high of $17.36. Discover stock has been showing support around 14.59 and resistance in the 15.85 range. Technical indicators for the stock are Bullish and S&P gives DFS a very positive 5 STAR (out of 5) strong buy rating. DFS appears on the Investors Observer Volume Leaders list. For a hedged play on this stock, look at an Apr '10 14 covered call (DFS DQ) for a net debit in the $12.72 area. That is also the break even stock price for this trade. This covered call has a 176 day duration, provides 17.51% downside protection and a 10.06% assigned return rate for a 20.87% annualized return rate (comparison purposes only). A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the DFS Jan '11 7.50 Call (XRF AU) and selling the Apr '10 14 call (DFS DQ) for a $6.10 debit. The trade has a 176 day life and would provide 11.80% downside protection and a 6.56% assigned return rate for a 14.00% annualized return rate (for comparison purposes only). Discover has a current annual dividend yield of 0.53%. [FBB-Seven Summits Research]

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