Get Paid 11% to Wait for CAT Stock to Go on Sale

Trefis proposes a put-selling strategy on Caterpillar (CAT) that generates an upfront 11% yield, with the potential to buy the stock at a lower price if it declines.

Strategy Details

The strategy involves selling a put option on CAT with a strike price below the current market price. The investor receives an upfront premium that they keep regardless of the stock's movement. If the stock falls below the strike, the investor buys the stock at the strike price, effectively lowering their cost basis by the premium received.

Potential Yield

The premium represents an annualized yield of approximately 11% relative to the strike price. This yield is realized even if the option is not exercised.

Context

This strategy comes as CAT trades near all-time highs, making it a candidate for a potential pullback. The approach offers a way to generate income while preparing to buy on a dip.

What It Means for Investors

This strategy suits long-term holders of CAT who want additional income or a better entry point. However, it carries risks: if the stock rallies sharply, the investor misses out on upside gains. Also, the premium does not compensate for large losses if the stock collapses.