Well the markets have started to waffle a bit which is good for those of us looking to acquire stocks. Recently Caterpillar has sold off again to the low $80's thanks to concerns of slowing growth in China. The forecast was downgraded to a "meager" 7.50% from 7.75%. So in other words a rounding error as far as I'm concerned. There's too much that goes into predicting the growth of a company or a country for that matter to be all that accurate. With the weakness in Caterpillar, I took the opportunity to sell a put option to either added income or to get a very solid entry price.
I sold an $80 strike put option that expires November 16, 2013 for $4.15. After commission and fees I received $406.26 in option premium right now to do with as I see fit. The put option can work out one of three ways.
(1) If CAT is trading above $80 on expiration, I'll get to keep the full option premium as profit. This would be a $406.26 / $8,000 = 5.08% return, good for a 11.73% annualized rate through expiration.
(2) If CAT is trading below $80 on expiration, I'll be forced to purchase 100 shares of CAT for $80 each. Since I received the option premium I get to back that out from my cost basis which would become $80 - $406.26 / 100 + $7.95 / 100 = $76.02. Based on the current annual dividend of $2.40, these shares would carry a 3.16% YOC and would provide $240 in annual dividends before further increases or reinvestment.
(3) If CAT shares climb higher between now and expiration I can close out the position for a profit less than in case 1.
I sold this option on margin so my cash outlay isn't the full $8,000 but instead only $2,136. Selling puts on margin allows for less capital to be required to maintain the position in order to avoid the dreaded margin call. Although it's very easy to put yourself in a position where you're over-leveraged at exactly the wrong time. I currently have 6 open put options and if they were all executed today I would be short around $7,600 although there's only 2 that are currently in-the-money and therefore able to be executed which would cost $13k. My cash on hand is over $20k currently so I'd be just fine. Most options aren't executed early and 4 of my puts won't expire until September or later.
Overall I feel this is a great put option. I'll get a solid return if it expires worthless or get a great entry price if it's executed. The average analyst 1 year price target is $96.90 per Yahoo! Finance, so this implies nearly over 25% of upside. Earlier this morning, Caterpillar's board of directors announced a 15.4% increase in the quarterly dividend from $0.52 to $0.60. I'm taking this as a sign that management believes all is still right with the company and the global economy as a whole. If you expect results to lag you're not going to increase the dividend 15%, it would have been closer to 7-8%. At least that's how I see it.
With the dividend increase this will add an extra $13.29 in annual dividends from my current position in CAT and brings the YOC up to 2.89% with a YOP of 2.93%.
I've updated my Option Summary and Portfolio pages to reflect this change.