Based purely on the headlines, investors wouldn’t be blamed for wanting to stay far away from online bank and credit card provider Discover Financial Services (DFS). Earlier this week, Barchart content partner The Motley Fool reported that Discover CEO and board of directors member Roger Hochschild will vacate his posts. Effective immediately, the company did not provide a reason for the abrupt resignation, sending DFS stock into a tailspin.
Naturally, many investors turn to financial firms for their comparative stability. Discover being one of the top names in the sector, the C-suite rumbling did not sit well with market participants. In the trailing five sessions, DFS stock gave up 14% of equity value. In the trailing one-month period, Discover finds itself down 25%, a staggering turn of events from just a few weeks ago.
Unfortunately, the executive departure isn’t the only drama that the financial firm is dealing with. In the back half of July, Barchart contributor Rich Asplund noted that Discover would suspend share buybacks. As well, management was “in discussion with regulators over how it misclassified some of its credit cards.”
Moreover, Discover at the time posted its second-quarter earnings report, which did not go over so well. Specifically, the company posted net income of $901 million or $3.54 per share. However, this figure fell short of Wall Street’s consensus target calling for $3.66 per share.
In fairness, the credit card issuer posted adjusted sales of $3.88 billion, beating the analysts’ estimate of $3.87 billion. Still, it has not been a great time for DFS stock. Having said that, some unusual activity in the derivatives sphere may intrigue speculators.
DFS Stock Makes a Curious Entry in the Unusual Options Screener
Following the close of the Aug. 16 session, DFS stock ranked among the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 70,714 contracts against an open interest reading of 86,938. Further, the delta between the Wednesday session volume and the trailing one-month average metric came out to 595.05%.
Regarding the transactional split, call volume hit 44,750 contracts while put volume came in at 25,964 contracts. This pairing yielded a put/call volume ratio of 0.58, which on paper presents a bullish framework. Notably, the put/call open interest ratio clocked in at 0.77, which is a tad on the high (bearish) side given the upward bias of the market.
Nevertheless, it’s difficult to decipher on “straight” options statistics transactional intent. As a sort of cheat sheet, I refer to Fintel’s options flow data which filters out much of the distracting noise and focuses on the trades of significance.
Notably, during the Aug. 16 session, the volume associated with bullish trades – which include both bought calls and sold puts – dominated volume tied to bearish trades or those including bought puts and sold calls. The ratio came out to slightly over 15X in favor of the optimists.
Presenting a countervailing point, though, is the Barchart Technical Opinion indicator, which pegs DFS stock as a 56% sell. Not surprisingly, short-term gauges point to significant pessimism. However, even the long-term indicators – such as the 200-day moving average – suggest bearishness might cloud Discover for some time.
On the other hand, analysts are overall positive on DFS stock, which carries a consensus moderate buy view. This breaks down as six strong buys, one moderate buy and 12 holds. However, over the past few months, the magnitude of optimism has faded for the enterprise.
While it’s a contested arena, the underlying fundamentals could help swing the narrative decisively in favor of the bulls.
Rising Consumer Pressures Cynically Help Discover Financial
Based on the latest economic news, inflation data is trending in the right direction, implying that the Federal Reserve’s efforts to curb accelerating consumer prices have started to gain traction. However, the main issue is that the core inflation figure remains well above what policymakers seek. And the pain is apparent on Main Street as it has been on Wall Street in recent sessions.
When media outlets interview people on the ground floor of the economy, a familiar theme cuts through the cacophony: rising prices for everything have forced regular folks to cut down on their spending. For many, few have little recourse other than to whip out their credit cards to make ends meet. That’s not the most heartwarming catalyst for DFS stock. Nevertheless, it exists.
Obviously, the longer the collective pain continues, the likelier it is that this current potential tailwind for DFS stock may transition into a worrying headwind. However, so long as the labor market continues to be reasonably strong – and it has been exactly that and then some – consumers just might be able to ride out the storm with their plastic.
Again, it’s a cynical argument for DFS stock. But with options traders betting bullishly on shares, it might be quite intriguing for speculators.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
