Interesting July Stock Options For Caterpillar

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 July expiration for CAT.The put contract our YieldBoost algorithm identified as particularly interesting, is at the $101 strike, which has a bid at the time of this writing of $1.24. Collecting that bid as the premium represents a 1.2% return against the $101 commitment, or a 11.5% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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Top YieldBoost CAT Puts »

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 2.2% and the contract is exercised (resulting in a cost basis of $99.76 per share before broker commissions, subtracting the $1.24 from $101), the only upside to the put seller is from collecting that premium for the 11.5% annualized rate of return.

Interestingly, that annualized 11.5% figure actually exceeds the 2.3% annualized dividend paid by Caterpillar Inc. by 9.2%, based on the current share price of $103.39. 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 2.25% to reach the $101 strike price.

Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of Caterpillar Inc., looking at the dividend history chart for CAT below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 2.3% annualized dividend yield.

CAT+Dividend+History+Chart

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.

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Top YieldBoost CAT Calls »

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:

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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%.

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