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Caterpillar Inc. (CAT): Is a Big Price Move Ahead?

February calls and puts are used to initiate a long straddle on Caterpillar Inc.

by 1/31/2014 10:20 AM
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Option Brief: Caterpillar Inc. (NYSE:CAT) option volume soared to nearly four times its typical daily pace on Thursday. As such, CAT's 30-day, at-the-money implied volatility jumped 11.8% to 21.1%. Diving deeper, it appears one speculator used both calls and puts to bet on a big price swing -- regardless of the direction -- for the construction concern over the next few weeks.

Shortly before lunchtime, a massive block of 15,750 February 95 puts changed hands near the ask price at $3.54 per contract, while a symmetrical block of February 95 calls simultaneously went off just shy of the ask price for $0.85 apiece. Implied volatility rose at each strike, and open interest climbed overnight. In other words, it appears a long straddle was initiated for a net debit of $4.39.

Gains for the spread strategist are theoretically unlimited upon a move north of $99.39 (strike price plus the net debit), and quite substantial -- but limited to the lower breakeven rail of $90.61 -- on a downward trek. Meanwhile, risk for the play is capped at the initial cash outlay.

On the charts, Caterpillar Inc. (NYSE:CAT) has had quite a volatile month -- falling as low as $85.88 last Friday, before rallying to its current perch of $93.30. In fact, the stock is one of just two Dow components trading in the green this morning.


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