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September 13, 2013  Fri 12:22 PM CT

DFS: SEE CHART GET CHAIN FIND STRATEGIES
Discover Financial Services has been working for the bulls, and one investor stands to earn massive profits if it keeps climbing.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 1,950 January 55 calls for $1.20. Equal-seized blocks were sold at the same time in the January 44 puts for $0.80 and the January 60 calls for $0.35.

The complex strategy combines a vertical spread with short puts. Selling additional contracts lowers the cost to just $0.05, and the trader now stands to collect $5 if the credit-card issuer closes at or above $60 on expiration--a potential profit of 9,900 percent.

The main risk is to the downside, because the investor will be forced to buy shares for $44 if DFS goes below that level by early next year. He or she doesn't stand to make any money unless it climbs almost 10 percent above $55. (See our Education section)

DFS is off 0.08 percent to $50.81 in afternoon trading but has been steadily trending higher since the market bottomed in 2009. The stock was sitting at its 100-day moving average barely a week ago when the Heat Seeker detected buying in the September 50 calls for $0.37 to $0.40. It proceeded to climb along with the rest of the market and those contracts have now almost tripled in value.

Total option volume is almost 5 times greater than average in the name so far today, according to the Heat Seeker.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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