Covered Call Trade Idea with Weekly Options - Generate $315/week from this Fortune 500 Dividend Stock

This is not a trade recommendation, this is a trade idea. I'm not a financial advisor, anything written here should be taken with a grain of salt. I take no responsibility If you will decide to invest

Here at OptionsBrew.com, we like the idea of selling options on a "good" dividend stocks, preferably from the Dow Jones, SP 500 or Fortune 500 list. In todays article, we are going to talk about a stock, which is listed on all three lists.

Today while browsing other financial bloggers income reports, we stumbled upon at Engineering Dividends dividend income update, for the month of May, and here we decided to take a closer look at Caterpillar Inc. (CAT) stock for a possible canditate to sell weekly / monthly options.

Caterpillar Inc.is an American Fortune 500 corporation which designs, develops, engineers, manufactures, markets and sells machinery, engines, financial products and insurance to customers via a worldwide dealer network. It is the world's largest construction equipment manufacturer. Caterpillar stock is a component of the Dow Jones Industrial Average. 

Generate weekly income selling covered calls on CAT stock

On June 18, 2020, you could buy 100 shares of CAT stock spending $127.50 per share or $12,750 and simultaneously sell out of the money June 26 expiry covered call at the strike price of $128 for about $3.15. That gets you $315 and makes about a 2.47% return in 8 days. About 112.68% annualized. Break-even: $124.35

CAT Options Chain
CAT Options Chain

here is what could happen next:

If CAT stock closes below $128 on June 26, you keep the premium and start over.

If the stock closes above $128, your stock gets called away, but you keep premium $3.15 + realize value gain $0.5 ($128-127.50) from selling stock higher than you bought. Total $365 or about 2.86% potential income return in 8 days.

There are several options you could use not to get shares called away, like a roll-up or roll forward. Or you could sell the stock, and start over by writing cash-secured put to take this stock back.

Remember, you are selling one contract, 100 shares of CAT stock, make sure you have 100 shares to sell if called away.

The biggest risk  - involving in covered call strategy - the stock price could fall below our buy price and stay there for months/years. 

As CAT is a dividend-paying stock,paying about $4.12 per share anually (3.23% yield), you could enjoy about a dollar per share (befote tax) every quarter, while holding this stock.

CAT is paying dividends in following months: February, May, August, November