Time to Short This Blue Chip?

Caterpillar tends to lag in the November-to-April period, relative to May through October

Nov 9, 2017 at 10:12 AM
facebook X logo linkedin

Caterpillar Inc. (NYSE:CAT) has been running up the charts over the past 10 months -- up 47% year-to-date, and one of the best Dow stocks so far in 2017. However, this upside momentum could soon stall out, if history is any guide. And with short-term options attractively priced at the moment, it may be a good time to buy puts on -- or short -- CAT stock.

Taking a closer look at Caterpillar's technical backdrop, The shares shot to a record high of $140.44 on Oct. 24 after the company's impressive earnings report. More recently, CAT was seen at $136.02 -- down 0.9% in early trading. Considering the equity's 14-day Relative Strength Index (RSI) closed last night at 77, deep into overbought territory, a short-term pullback may have been in the cards.

Echoing expectations a near-term slowdown is the fact that CAT is among the top S&P 500 Index (SPX) stocks to underperform in the six-month November-to-April period versus the May-through-October stretch. Per data from Schaeffer's Senior Quantitative Analyst Rocky White, Caterpillar has averaged a May-to-October return of negative 0.17% since 2010, compared to a much wider loss of 4.88% from November through April.

Given the stock's long-term uptrend, sentiment among options traders is overwhelmingly bullish -- and could create tailwinds for CAT on an unwind situation. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 17,179 calls in the last two weeks, compared to 13,537 puts. The resultant call/put* volume ratio of 1.27 ranks higher than 94% of all comparable readings taken in the past year, meaning calls have been bought to open over puts at a quicker-than-usual clip.

Regardless of whether it's puts or calls, though, it's a prime time to buy premium on short-term CAT options. While the stock's Schaeffer's Volatility Index (SVI) of 18% ranks below 95% of all similar readings taken in the past year -- implying low volatility expectations are being priced into near-term contracts -- Caterpillar's Schaeffer's Volatility Scorecard (SVS) is perched at a lofty 89. In other words, the equity has made outsized moves over the past year, relative to what the options market has expected.

*This sentence originally described the ratio as "put/call." We regret the error.


Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls



Rainmaker Ads CGI