Turning to the other side of the option chain, we highlight one call contract of particular interest for the January 2016 expiration, for shareholders of Caterpillar Inc. (CAT) looking to boost their income beyond the stock's 2.8% annualized dividend yield. Selling the covered call at the $105 strike and collecting the premium based on the $3.80 bid, annualizes to an additional 2% rate of return against the current stock price (this is what we at Stock Options Channel refer to as the YieldBoost), for a total of 4.8% annualized rate in the scenario where the stock is not called away. Any upside above $105 would be lost if the stock rises there and is called away, but CAT shares would have to climb 23% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 27.4% return from this trading level, in addition to any dividends collected before the stock was called.
The chart below shows the trailing twelve month trading history for Caterpillar Inc., highlighting in green where the $65 strike is located relative to that history, and highlighting the $105 strike in red:The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the January 2016 put or call options highlighted in this article deliver a rate of return that represents good reward for the risks. We calculate the trailing twelve month volatility for Caterpillar Inc. (considering the last 249 trading day closing values as well as today's price of $85.40) to be 19%.
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