Thursday, March 1, 2012


Caterpillar Call - again

TheMoneyMadam could not resist that title.

Caterpillar (CAT) is not a dividend machine but it has cultivated a lot of income for me.   CAT provides consistent income and continues to increase your income.   In fact, CAT’s history of increasing dividends stretches to 18 years.

CAT‘s stock price is volatile and prone to head line news.  However, this provides an opportunity to sell CAT CALLS.

Here is an idea.  CAT closed at $113.39 today.  Consider buying CAT at about $113.40 then sell a May 125 call and receive $1.45 of call premium income per share.  The call premium income provides a yield of 1.48%.  CAT’s dividend yield is 1.6% so you nearly double your income.  If you are stuck with CAT because the stock price goes down and the call buyer does not take it, you still have an income instrument.  If you get lucky and the call buyer actually takes your stock at the strike price, you also get a capital gain of 10.24%.   Use the call option calculator to help you evaluate this trade.

Using covered calls on solid, income producing stocks is not for the risk averse.  However, it is less risky than a lot of investments  you engage in every day.   Consider this strategy.

Very Truly Yours,