There is no earnings report prior to the options expiration date. The 4th quarter 2017 earnings were reported last week and they exceeded analysts' expectaions for the 7th consecutive quarter.
Prior to this investment, consideration was given to CAT's ratings from five different services. Schwab, Credit Suisse, Argus, and CFRA now give CAT their highest rating available. Morningstar is on the polar opposite extreme, giving CAT their lowest possible rating, but I disregarded their analysis since they have had this rating for CAT in place for the entire past year and CAT's stock price has increased by over 150% for that time period.
As detailed below, a potential return-on-investment result is +2.2% absolute return in 19 days (equivalent to a +41.4% annualized return-on-investment). This attractive return is a direct result of the relatively high 31.4 implied volatility when this Call option was sold.
Today's transactions and a potential result are detailed below:
1. Caterpillar Inc. (CAT) -- New Covered Call Position
01/29/2018 Bought 100 shares of Caterpillar stock @ $160.12 per share
01/29/2018 Sold 1 Caterpillar February 16th, 2018 $157.50 Call option @ $5.99 per share
Note: this was a simultaneous Buy/Write transaction
A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $15,418.62
= ($160.12 - $5.99)* 100 shares + $5.62 commission
Net Profit Components:
(a) Options Income: +$599.00
= ($5.99* 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CAT stock is above $157.50 strike price at Feb 16th expiration): -$266.95
= ($157.50 -$160.12)* 100 shares - $4.95 commission
Total Net Profit: +$332.05
= (+$599.00 options income +$0.00 dividend income -$266.95 capital appreciation)
Absolute Return: +2.2%
= +$332.05/$15,418.62
Equivalent Annualized Return: +41.4%
= (+$332.05/$15,418.62)*(365/19 days)
The downside 'breakeven price' at expiration is at $154.13 ($160.12 - $5.99), which is 3.7% below the current market price of $160.12.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the February 16th, 2018 options expiration) for this Caterpillar Inc. Covered Call position is 60.6%, so the expected value annualized ROI of this investment (if held until expiration) is +25.1% (+41.4% * 60.6%), a very nice result for this moderately in-the-money Covered Call position.
The 'crossover price' at expiration is $163.49 = $160.12 + [$5.99 - ($160.12 - $157.50)].
This is the price above which it would have been more profitable to simply buy-and-hold Caterpillar stock until the February 16th, 2018 options expiration date rather than establishing this Covered Call position.
