Thursday, May 19, 2011

Caterpillar, symbol CAT adding income

          Income investors, CAT provides another example of how to use covered calls for additional income.

          Last week I bought several large cap, dividend producing stocks, See Original Post on May 10, 2011, including Caterpillar, symbol CAT.   At that time, I paid $112 for each share of CAT.   I wrote (sold) covered calls against this position for income.

          On May 17, CAT's stock price softened to $102 which is quite a correction.  If I like a company, I will often buy on a 10% correction and wait for my next chance to write a call.

          I did not exactly catch the low, but I did buy more CAT at $103.  Today I wrote calls on that lot.  The calls expire on August, 2011; the strike price is $115.  With the income from my call premium of $2.48 plus the dividend of $.44 which I expect to be paid in August, my income yield alone is 2.8% in three months.  If I could do that 3 times in one year my income yield is 8.4%.

          If CAT's stock price is equal to or greater than $115 on the date of expiration and the call buyer then buys my CAT at $115 my percent gain is 14.49 percent.

          I yearn for this type of volatility.  This is how we income investors make money. Our risk of course is we are stuck with CAT and we might have to wait through a period where the stock price is below our basis.  For me, I have been through that with CAT several times and it has always been worth the wait; plus I continue to reinvest dividends and pretty soon I have enough reinvested dividends to write even more covered calls.

Very Truly Yours,

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