One Put, One Call Option To Know About 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 January 2016 expiration for CAT.The put contract our YieldBoost algorithm identified as particularly interesting, is at the $70 strike, which has a bid at the time of this writing of $1.52. Collecting that bid as the premium represents a 2.2% return against the $70 commitment, or a 1.4% 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 35.5% and the contract is exercised (resulting in a cost basis of $68.48 per share before broker commissions, subtracting the $1.52 from $70), the only upside to the put seller is from collecting that premium for the 1.4% annualized rate of return.

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 2.6% annualized dividend yield. Selling the covered call at the $125 strike and collecting the premium based on the $3.80 bid, annualizes to an additional 2.3% 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 4.9% annualized rate in the scenario where the stock is not called away. Any upside above $125 would be lost if the stock rises there and is called away, but CAT shares would have to climb 15.1% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 18.6% 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 $70 strike is located relative to that history, and highlighting the $125 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 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 251 trading day CAT historical stock prices using closing values, as well as today's price of $108.53) to be 18%.

In mid-afternoon trading on Monday, the put volume among S&P 500 components was 688,336 contracts, with call volume at 1.38M, for a put:call ratio of 0.50 so far for the day. Compared to the long-term median put:call ratio of .65, that represents very high call volume relative to puts; in other words, buyers are preferring calls in options trading so far today. Find out which 15 call and put options traders are talking about today.

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