Discover Financial Services: The Worst Is Yet to Come

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Credit card lender Discover Financial Services (NYSE: DFS) reported its second-quarter results on Thursday, and they were ugly. Total revenue fell 7%, while net income swung from a $753 million profit a year ago to a $368 net loss. The company set aside a whopping $2 provision for loan loss, or a net $1.3 billion reserve build after accounting for $767 million in charge-offs last quarter.

Unfortunately, Discover increased its reserve even over the large build taken in the March quarter during the early days of the pandemic, admitting to a worsening outlook compared with three months ago. Management also forecast charge-offs increasing later this year and into 2021.

On the other hand, Discover’s balance sheet and customer base also seem in much better shape compared with the last financial crisis in 2008. And if the government comes through with another round of stimulus, things may not be turn out

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September 4th Options Now Available For Discover Financial Services

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Investors in Discover Financial Services (Symbol: DFS) saw new options begin trading today, for the September 4th expiration. At Stock Options Channel, our YieldBoost formula has looked up and down the DFS options chain for the new September 4th contracts and identified one put and one call contract of particular interest.

The put contract at the $49.00 strike price has a current bid of $1.65. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $49.00, but will also collect the premium, putting the cost basis of the shares at $47.35 (before broker commissions). To an investor already interested in purchasing shares of DFS, that could represent an attractive alternative to paying $51.13/share today.

Because the $49.00 strike represents an approximate 4% discount to the current trading price of the stock (in other words it is out-of-the-money by that percentage), there is also

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