Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Caterpillar Inc. (CAT). So this week we highlight one interesting put contract, and one interesting call contract, from the January 2015 expiration for CAT. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $72.50 strike, which has a bid at the time of this writing of $4.30. Collecting that bid as the premium represents a 5.9% return against the $72.50 commitment, or a 4.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to CAT's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. So unless Caterpillar Inc. sees its shares fall 14% and the contract is exercised (resulting in a cost basis of $68.20 per share before broker commissions, subtracting the $4.30 from $72.50), the only upside to the put seller is from collecting that premium for the 4.8% annualized rate of return.
Worth considering, is that the annualized 4.8% figure actually exceeds the 2.9% annualized dividend paid by Caterpillar Inc. by 1.9%, based on the current share price of $84.27. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 13.97% to reach the $72.50 strike price.