Bullish Trade in Duke Energy (DUK) as Stock Retreats

Duke Energy bullish trade Duke Energy DUK lost some ground Tuesday following an analyst downgrade. RBC Capital cut its rating on the shares to “sector perform” from “outperform” and kept its 12-month price target at $19. The stock is currently trading around $17.50, so this target still allows for modest upside over the next year.

Over the past 12 months, DUK is little changed, up 3%. The stock was flagged on the OptionsHouse Hot List on Tuesday, however, and it appears as though at least one investor expects the shares to break free of this sideways trend and head higher. They evidently expressed this outlook by selling puts and simultaneously buying calls (otherwise known as a synthetic long stock strategy).

About 45 minutes into the trading day Tuesday morning, blocks of 5,000 contracts traded on both the April 16 put and the April 18 call. It looks like the puts were sold for 15 cents apiece (trading at the bid price) and the calls were bought for 24 cents apiece (changing hands near the ask price). The net debit for this two-legged trade was nine cents per synthetic long stock trade, or total premium of $45,000 (5,000 contracts times 100 times $0.09).

The chart below – of the strategy's profit and loss potential at expiration – was created in a profit/loss calculator, one of many tools available to all OptionsHouse customers, including those using virtual options trading accounts. This calculator allows users to change inputs to visualize the impact of a shift in volatility, change in stock price, or deterioration in time until expiration.

Profit and loss of Duke Energy (DUK) synthetic long stock

Because the synthetic long stock strategy synthesizes the returns of a long stock, it has unlimited upside potential and downside exposure all the way to zero. At expiration, gains are theoretically unlimited above the breakeven price of $18.09 and losses could be as much as $16.09 if DUK were to drop all the way to zero. Between the strike prices – 16 and 18 – losses are capped at the nine-cent premium paid.

Earlier this week, Duke announced plans to acquire Progress Energy PGN for $13.7 billion in stock (valuing PGN for $46.48 per share). It is possible the investor buying this spread viewed Duke's resulting pullback as a good entry point and expects this deal to help lift the shares over the next three months.

Photo Credit: mikebaird

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