(This article originally ran at 1:47 p.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer and other writers earlier in the trading day.)
Telecom, utilities and energy stocks have been hit hard since the U.S. presidential election -- and it has presented buying opportunities for some investors who are seeking income.
Since reaching highs of $86 in July, Duke Energy (DUK) , a Charlotte, N.C.-based utilities company, has faced headwinds. Investors can use a LEAP buy/write strategy to find a "comfort level and collect some dividend income while waiting," said Ron McCoy, a portfolio manager on Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla.
In the aftermath of the election, interest rates have been increasing, with mortgage rates rising and the yields of the 10-year Treasury surging to 2.3%, an increase of 50 basis points from 1.80%. While bank stocks like JPMorgan Chase (JPM) and Bank of America (BAC) have rallied, telecoms like AT&T (T) and Verizon (VZ) and utilities like Duke Energy have been "caught in the draft," McCoy said.
One of the hardest things in buying stocks at a bargain is trying to find a bottom, McCoy noted. Using a LEAP buy/write strategy, investors with a bearish outlook on a stock can find a comfort level and collect dividend income while waiting. LEAPS are options with an expiration date out one year or more -- providing some downside protection and upside benefit while allowing an investor to take a long-term position in a stock.
Duke Energy is trading at $74 -- down from a 52-week high of $87.75. The company's earnings are estimated to be $4.67 this year and flat next year. At current levels, Duke yields 4.6%, but by doing a buy/write using LEAPS, investors can get their cost down almost 15% from current levels.
Investors would buy the stock and sell a January 2018 $65 call against the position for a premium of $1.75. This reduces the cost to $63.25 and has a maximum profit potential of 8% over 14 months.
"When doing deep in-the-money calls, it is possible to get called away early," McCoy said. "However, if it is called away before the next dividend of $0.855 in February, investors would still make $1.75 on a $63.25 investment -- or 2.7% in three months."