Elite Inside Trader

Since featured in our Elite Inside Trader monthly picks back in March at $15.39, Discover Financial Services (DFS) stock has moved up over 25%.  At $16.16, we posted for our members to watch out for a technical breakout to the upside as the stock moved above it’s neckline in an inverse head and shoulders chart pattern.  Technichians are now looking for another move to the upside if the stock can move above $20, which is a key resistance level for the stock.

We are now issuing an earnings alert for investors to watch for Discover Financial Services (DFS) earnings release this Thursday.  We expect good numbers, but so do options traders.  How bullish are they?  On Friday, 6400 “December $20, 2010″ calls traded.  The stock was trading around $19 when the volume started picking up in the calls.  Discover finished up the day 2.66% and is holding onto that gain (at least in early morning trading).  Buying the December $20 calls means the investment only has one week to profit, and time is against him.  If the stock finishes below $20, the options expire worthless.   What’s the kicker?  Discover reports its earnings on Thursday and if the numbers are good, the 6400 options will move almost penny for penny as if the option trader bought 640,000 shares of stock in a move above $20.  The options started the day at 10 cents and traded as high as 30 cents.

Fueling the earnings is that charge-offs are decoupling from the unemployment numbers.  Consumers who are unemployed have already defaulted, as long as the job market can stay even or improve, credit card companies can put up great earnings as loss reserves require less capital, and can even release some capital.  In addition, swipe volumes and earnings have already improved.  Discover beat expectations last time and it seems investors are betting they will again.

Keep an eye on the stock this week and on related stocks like Capital One Financial (COF), and American Express (AXP).  Make sure to do your homework and decide if it’s time to take profits or to hold the stock for the chance at more upside potential.

Disclosure: Author, Kevin D. Monaghan, Senior Account Executive at Elite Investment Group is long DFS

IMPORTANT NOTICE: "Any information we give you is not our recommendation or advice to take (or not to take) any particular course of action in relation to your investments. You should take your own independent advice based on your specific circumstances."

Tags: American Express, AXP, Capital One, Capital One Financial, COF, Credit Cards, DFS, Discover Financial Services, Earnings, Earnings Alert, Options Trade