Turning to the other side of the option chain, we highlight one call contract of particular interest for the July expiration, for shareholders of Caterpillar Inc. (CAT) looking to boost their income beyond the stock's 2.3% annualized dividend yield. Selling the covered call at the $104 strike and collecting the premium based on the $1.79 bid, annualizes to an additional 16.2% 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 18.5% annualized rate in the scenario where the stock is not called away. Any upside above $104 would be lost if the stock rises there and is called away, but CAT shares would have to advance 0.7% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 2.4% 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 $101 strike is located relative to that history, and highlighting the $104 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 July 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 251 trading day CAT historical stock prices using closing values, as well as today's price of $103.39) to be 18%.