Today with the Dow down 90 points and CAT down to $82.20 I entered into the following transaction:
09/04/12 STO 2 CAT Sep22 2012 77.5 Puts @.57 102.46
Caterpillar is a blue chip, rising dividend stock with high volume and high volatility. CAT has been raising it's dividend for 19 years and the last rise was very healthy which I take as a vote of confidence from management. I've been watching Caterpillar for signs of weakness to enter a position and today provided that. There appears to be strong support for CAT at $80/share.
This is an 18 day trade with only 13 days of active trading included in those 18 days. If these puts expire worthless we will earn 5.38% on $1905 of margin maintenance or 109% annual. If put to us our yield on cost will be 2.7% which is high for CAT. If the stock drops we should have ample opportunity to roll down and/or out for a net credit. As such, we have an exit strategy in place.
Chester - I just recently have been learning about options and came across your blog. It looks great and I'm learning a lot from your older posts and I started poking around the other sites you've mentioned. Its a huge help for me getting started. Couple of questions for ya...what did you mean by "yield on cost" of 2.7%?....and on the exit strategy if it goes against you, would you keep rolling out and down or do you have a price where you'll stop and buy the stock - or would you take a loss and move on?
ReplyDeleteHi gbarbs - Thank you for your kind comments.
ReplyDeleteYield on cost is simply the dividend yield of the stock at the price I would buy the stock if it were put to me. Since I write out of the money puts that yield will be higher than the present yield because my cost basis is lower.
If you see my recent GDX trade, that ETF went against me but I was able to continuously roll down and out for a net credit. The last time I was able to roll down and out for a net credit and lower the number of contracts as well...importantly: all for a net credit. I always check to see the possibility of rolling out and down before I enter a trade. I'm probably in the minority but I don't take a loss if I can help it.
I hope I answered your questions and wish you luck in your trading. I hope to hear from you again! Chester
I was wondering if long term leaps are a good way to invest in large cap stocks like cat that way you do not have to put up much money to get the same future gains that may occur in the stock itself.
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