DFS long as earnings gap gets pierced
Today
DFS
pierced the bottom of the gap that was created on October 19, when the stock sold off following earnings.
The market's attitude this week has been that "bad is good". GDP forecasts are coming down, retailers are warning about consumers lowering their spending level,
AAPL
gave a muted earnings release. All this meant that the Fed left rates untouched at their FOMC meeting this week, and dollar and long rates pulled back pretty hard. I think the narrative that's in the market now, is that things are "not great", but the Fed is finally starting to see it, and so we'll at least be spared further rate hikes.
The point of that narrative is that we may get spared a hard landing, which means no recession, and no wide-spread unemployment. For banks and credit card lenders this means that all the loan loss reserves they built up over the past few quarters may not actually be required to cover future losses. Instead, they may get released, leading to higher future earnings, or at the very least, future quarters will not be depressed by further reserve builds. At the same time, the spend-down of the post-pandemic surplus household savings has brought significant increases in credit card debt, which is enormously profitable for lenders, as long as credit losses stay contained. So, this might be a Goldilocks scenario for stocks like $DFS.
Long story short: I am long a Dec 1 88/92 call spread @1.52. Risking $1.52 for the potential of earning $2.42 is not a tremendous risk/reward. Still, I accept it because I think that the narrative just works for this beaten down name. Why am I capping the trade at $92? Because I am playing the earning gap, and also because above $92 resistance from the VWAP off the YTD High will come into play (declining red line).
DFS
pierced the bottom of the gap that was created on October 19, when the stock sold off following earnings. The market's attitude this week has been that "bad is good". GDP forecasts are coming down, retailers are warning about consumers lowering their spending level,
AAPL
gave a muted earnings release. All this meant that the Fed left rates untouched at their FOMC meeting this week, and dollar and long rates pulled back pretty hard. I think the narrative that's in the market now, is that things are "not great", but the Fed is finally starting to see it, and so we'll at least be spared further rate hikes. The point of that narrative is that we may get spared a hard landing, which means no recession, and no wide-spread unemployment. For banks and credit card lenders this means that all the loan loss reserves they built up over the past few quarters may not actually be required to cover future losses. Instead, they may get released, leading to higher future earnings, or at the very least, future quarters will not be depressed by further reserve builds. At the same time, the spend-down of the post-pandemic surplus household savings has brought significant increases in credit card debt, which is enormously profitable for lenders, as long as credit losses stay contained. So, this might be a Goldilocks scenario for stocks like $DFS.
Long story short: I am long a Dec 1 88/92 call spread @1.52. Risking $1.52 for the potential of earning $2.42 is not a tremendous risk/reward. Still, I accept it because I think that the narrative just works for this beaten down name. Why am I capping the trade at $92? Because I am playing the earning gap, and also because above $92 resistance from the VWAP off the YTD High will come into play (declining red line).
Trade closed manually:
Sold the last third of my call spread position for $2.40 (58% profit). With only a day to expiration, I am ready to settle for less than the maximal profit. I continue to be long the shares.
Comment:
Today is the expiration date for the call spread I closed yesterday and
DFS
is making another big push upward. The spread I sold for $.2.40 yesterday reached its max value of $4 today. Close, but no cigar. Or, just a small one. C'est la vie.
DFS
is making another big push upward. The spread I sold for $.2.40 yesterday reached its max value of $4 today. Close, but no cigar. Or, just a small one. C'est la vie.
Even though today's partial profit protects most of my downside, and have a chance for a more substantial gain with the runner, I have to admit that this was not a pleasant trade to be in.