Traders Shouldn't Sleep On Caterpillar Stock Options

Caterpillar Inc.'s (CAT) flirtation with its 50-day and 80-day trendlines could suggest future stock gains

Feb 9, 2017 at 11:33 AM
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Machinery stocks like Dow component Caterpillar Inc. (NYSE:CAT) -- and these 3-D printing stocks -- have been quietly outperforming the market. Of the 13 names we follow within the sector, 100% are above their 80-day moving average. Not to mention, the average year-to-date gain for these shares is nearly 8%, and year-over-year, it's an even more impressive 45.5%.

From a technical perspective, CAT looks particularly compelling. Shares of the heavy machinery maker just crossed over their 50-day moving average, which has historically been a reliable buy signal for stocks in general. Not to mention, CAT recently touched its 80-day trendline for the fourth time in the past three years. In prior instances, the stock has gone on to post positive 21-day returns 75% of the time, with an average gain of 4.6%.

caterpillar stock chart 50 and 80 day trendlines

Plus, as you can see above, CAT's been a world-beater over the past 12 months. Up 1% today at $93.84, the stock's year-over-year advance stands at a brow-raising 51%, besting even this sector peer. Not to mention, in late January, the shares hit a two-year high of $99.46.

It looks like there's fuel left in the tank, too. Over 34 million CAT shares are sold short, yielding a short-interest ratio (SIR) of 9.00. In other words, it would take short sellers almost two weeks to cover their bearish positions, at the stock's average daily trading levels. What's more, the shares could benefit from upgrades, as 11 of 16 analysts rate them a "hold" or "strong sell."

It's more of the same on the options front, with puts outweighing calls. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CAT's 20-day put/call volume ratio stands at a top-heavy 1.89. Moreover, CAT's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 2.03 indicates puts roughly double calls among near-the-money strikes in the February series of options. While shareholders could've picked up puts to hedge against downside risk, an unwinding among "vanilla" bears could bolster the stock.

On top of that, it looks like an attractive time to purchase premium on Caterpillar Inc. (NYSE:CAT). The stock's Schaeffer's Volatility Index (SVI) of 19% rests below 98% of all readings from the past year, hinting at muted near-term volatility expectations. Not to mention, the options market has tended to underprice CAT's ability to make outsized moves in the past year, based on its Schaeffer's Volatility Scorecard (SVS) of 83.

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