Options traders engage near support

  • DFS rallied Thursday one day after hitting 14-month low
  • Stock’s support level reaches back to June 2022
  • Call volume heavy—in expiring options

On a soft day for the major indexes, a stock that rallies more than 3% on high call volume is likely to capture the attention of at least a few traders, especially those in search of bullish momentum in a soft market.

That was the case Thursday morning for Discover Financial (DFS), which was up around 3.5% as the S&P 500 (SPX) struggled to stay in positive territory. The stock was also toward the top of the scan for high call volume. The 17,759 contracts that had traded by noon ET was more than 16 times average, but as its options chain shows, the lion’s share of that activity was in the at-the-money $93 calls expiring today:

Chart 1: Discover Financial (DFS) August calls, 8/17/23.  Discover Financial (DFS) options chain. Big volume in calls expiring today.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

That also happened to be the DFS option with the highest open interest (15,200), which was also higher than the day’s volume at that point. A look at the option’s price chart showed that the majority of the trading in the $93 calls occurred on Wednesday, when DFS shares closed at their lowest level ($90.26) since June 2022. In other words, not only did these expiring options not have any implications beyond today’s trading session, there was a distinct possibility that traders were getting out of positions they had established just a day earlier.

The daily inset in the following price chart shows this week’s downturn was highlighted by Tuesday’s 9.4% sell-off amid the unexpected announcement of the CEO’s departure1—a little more than three weeks after DFS sold off following its earnings release:

Chart 2: Discover Financial (DFS), 12/1/19/24/23–8/18/23.  Discover Financial (DFS) price chart. Latest sell-off tests long-term support.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The main (weekly) part of the chart shows this downswing is just the latest test of a long-term support level extending back to June 2022.

Bucking the market on a single day is one thing, defying it on a longer-term basis is another. Questions some traders may be asking: Has DFS gotten all its “bad news” out of the way? Will the stock be able to rally off support again if the broad market’s pullback deepens? Either way, yesterday’s heavy call volume may not have been as bullish as some traders initially thought.

Today’s numbers include (all times ET): Quarterly Services Survey (10 a.m.).

Today’s earnings include: Deere (DE), Estee Lauder (EL), Palo Alto Networks (PANW).


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1 The Wall Street Journal. Discover Stock Drops After CEO Roger Hochschild's Exit. 8/15/23.

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