Unusual activity in out-of-the-money (OTM) Duke Energy Corp (DUK) put options today highlights the underlying value of DUK stock. For example, the company pays an annual dividend of $4.10 per share. At $90.78 today, DUK stock yields 4.46% for investors.
As a result, the Barchart Unusual Stock Options Activity Report on Sept. 27 on DUK put options stands out. It shows that some investors have traded in huge volume in the DUK put options that expire on Nov. 17 at the $85.00 strike price.
That expiration date is 51 days from now and the strike price is well below today's spot price, i.e., it is out-of-the-money (OTM). In fact, DUK stock would have to fall by $5.78 per share, or 6.4%. At that point, the puts would only begin to have any intrinsic value.
We know that these puts have unusual activity because over 10,000 contracts traded exceed 21 times the normal outstanding number of existing contracts. This strike price normally has less than 500 open put contracts.
This leads to the conclusion that some institutional investors decided to short these puts in order to collect the premium income. This is because the $1.10 per contract in income that is received from selling short these puts works out to 1.294% of the $85.00 strike price.
That means that the investor, if they can repeat this trade every 2 months can make an expected return of over 7.764% annually. If they already own the underlying shares that would be in addition to the 4.46% dividend yield.
In other words, they could potentially make a total return of over 12.2%.
High Dividend Yield Likely to Rise
Moreover, the dividend that the company pays out is likely to rise.
For one, Duke Energy recently reaffirmed its guidance that adjusted earnings per share (EPS) would reach $5.55 to $5.75 per share. That is more than enough to not only cover the $4.10 per share dividend, but also an increase.
This is because Duke Energy has lifted its dividend every year for the past 11 years, according to Seeking Alpha. Moreover, the company is likely to raise its dividend after the next announcement in late October.
So long-term investors in the stock are likely to make a higher than 4.46% dividend yield. That provides a solid underline for the stock that could prevent it from falling below $85.00, the strike price for the Nov. 17 expiration puts.
Selling OTM Puts Here Makes Sense
For example, even if the investors shorting these OTM puts are forced to buy the stock at $85.00 (if the stock falls to $85.00), their dividend yield would then be 4.82% (i.e., $4.10/$85.00). And if the company raises the dividend later this year, the yield for short-put investors could approach 4.90%.
In other words, it makes perfect sense for long-standing shareholders in DUK stock to sell short these OTM puts and collect the additional income. There may be less risk that the stock could fall to that strike price if the company decides to raise the dividend.
That shows why it is likely that the initiating investors in this unusual put options activity in DUK stock could be short sellers of the puts. They are taking advantage of the high put option premiums to make extra income.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
