CAT Stock Owners Can Earn 12% Annualized Income Through Covered Calls

Caterpillar (CAT) stock has been trading about 24% below its 52-week high, despite delivering a strong quarter and raising its full-year growth forecast. For owners of the stock, this presents an opportunity to generate income through selling covered calls.

A covered call involves selling one call option on CAT expiring in September 2027 with a strike price of $940, about 16% above today's price. This would earn a premium of roughly $10,798 up front per contract, which is about 12.5% annualized on the stock's value.

There are two possible outcomes: if CAT finishes below $940, the call expires worthless, and the owner keeps the full premium and all their shares. If it finishes above $940, the 100 shares are called away at $940, but the owner still keeps the premium and counts it as a total gain of about 29% over the holding period.

The decision to sell covered calls depends on how much one thinks they would be leaving on the table by capping their upside. While some analysts believe Caterpillar's momentum will continue due to its massive $72 billion backlog, others question whether the company can sustain growth in all segments.