Keefe, Bruyette & Woods: How To Play American Express, Discovery Financial Post-Earnings

Brian Donlin of Keefe, Bruyette & Woods on Friday published an options strategy report on how investors should approach American Express Company AXP and Discovery Financial Services DFS post-earnings.

Donlin believes that selling options can be profitable over the long term, provided the proper analysis is done. The analyst adds that if positions are properly sized relative to capital, options selling can be a core profitable investing strategy.

The analyst recommends investors initiate a Synthetic Long by buying the March 87 Call $1.57 and selling the March 80 Put at $1.03 for a net debit of $0.54.

“Given the current valuation and dividend yield, we see downside support at the $80 strike level,” Donlin argued. “With current valuation of 14.42x on consensus 2015E earnings per share of $5.96, we find this as an attractive entry point on the stock using options to establish a synthetic long.”

Donlin also believes a Synthetic Long is an appropriate strategy for investors to play Discovery Financial. The analyst recommends investors Buy two April 62.5 Calls $0.65 and Sell one April 55 Put $1.35 for a net credit of $0.05.

“We think expectations are starting to be reset given management's commentary on modest NIM compression attributed to lower product protection revenue and higher funding costs,” Donlin wrote. “Regulatory expenses continue to be an impediment to operating leverage, although not surprising.”