A spike in yields and a bearish chart could mean lights-out time for utility Duke Energy (DUK). To take advantage of a move lower, put some power into a bearish play with this well-priced, intermediate-term long put trade in DUK stock.
Bullish equity investors continue to be on their best behavior in the face of escalating rates; the iShares Barclays 20+ Year Treasury Bond Fund (TLT) hit fresh year-to-date lows Wednesday.
That action hasn’t gone unnoticed in utility plays like Duke Energy and shares of DUK, and rightfully so.
The simple fact is, as an industry group, most utilities like Duke Energy are strongly affected by interest-rate increases. Heavy debt loads and typically attractive dividend payouts become Achilles heels for these types of companies. During periods like this, investors being offered safer yields from bonds will bail from stocks and/or simply wait on the sidelines.
They’ll return, but only until the expectations for returns become more attractive — usually as a result of lower stock prices driving yields higher.
DUK Stock Charts
A look at Duke Energy’s daily chart shows that Wednesday’s bearish distribution in DUK is looking to break the neckline of a continuation head-and-shoulders pattern. This is a first base (or consolidation) after shares broke a longstanding uptrend line back in January this year — again, adding to the bearish implications for DUK stock.
Additionally, a death cross is in place. The 50-day simple moving average crossed below the longer-term 200-day SMA during the development of the pattern head. And since that signal, shares of Duke Energy have been quite supportive of bears during the creation of the right shoulder.
A conservative downside price projection for DUK is $68 a share. That’s based on a measured move of $6 from DUK stock’s head and vertically down to the neckline. The dollar amount is then subtracted from the point where the right shoulder breaks through the neckline.
DUK Long October Put Strategy
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Not only are Duke’s statistical volatility and option premiums at their lowest levels all year, but the spread between the two is marginal — not a situation that presents itself every day.
The out-of-money Oct $70 put for $1.60 is one favored contract. The softer-to-start delta of about 30 means that if you need to exit before expiration, you should be able to salvage some of the debit paid.
With time and volatility on the bears’ side, a measured move to $68 would be nice, but probably not required to realize a sizable profit.
Because of the benefits embedded in the price of the Oct $70 put, we’re likely to see a nice return before DUK stock reaches our target price of $68. However, our target price would pay out 4.7% — beating Duke stock’s five-year average dividend yield of 4.7% annually, not to mention its current 4.2% yield.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
