Discover Financial (DFS) is down 25 cents to $12.23 and 5000 Sep 12.5 calls hit bid-side for 60 cents on CBOE. Trade was tied shares at $12.13 and probably part of a buy-write.

Recall that, in a buy-write, the investor normally sells 1 call for every 100 shares. Since the multiplier for an options contract is 100, the sale of a DFS Sep 12.5 call for 60 cents will reduce the cost of owning 100 shares of the stock to $11.53–which becomes the downside breakeven for owning the stock. If shares are below that level at the September expiration, the position will show a loss. On the other hand, if DFS moves above $12.5, those calls will be assigned (shares called) at expiration, and the investor will sell the stock for $12.50, or an 8.4 percent profit.

Therefore, the “buy write” is a bullish play and in DFS is possibly in reaction to comments from FBR analysts today. The firm said that recently July trust data supports their few that Discover’s credit will hold better than peers (COF and BAC) and they believe loss levels in the second half of 2009 and early 2010 will be contained.

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