A Short-Term Caterpillar Stock Options Trade Doesn't Make Sense

CAT would be a better target for long-term call traders

Nov 28, 2017 at 2:21 PM
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Our Weekly Options Countdown trading service targets six trades with a lifespan of just one week, and such a short shelf life forces our traders to take a much different approach compared to longer-term strategies. For example, Schaeffer's Senior Trading Analyst Bryan Sapp noted that he gave strong consideration to a bullish options play on Dow stock Caterpillar Inc. (NYSE:CAT), but such a near-term trade on CAT did not make sense for him, given reasons laid out below.

First of all, Sapp was initially attracted to Caterpillar stock because of its impressive showing on the charts during the past year, up nearly 50% in 2017 alone. In fact, the shares touched a record high of $140.44 about one month ago. Moreover, this technical performance has been supported by three consecutive quarters of positive earnings reactions.

Sapp also pointed out that near-term options on the blue chip are attractively priced right now. For example, CAT has a Schaeffer's Volatility Index (SVI) of 16%, which ranks just 7 percentage points from a 12-month low. Said differently, volatility expectations for short-term options are unusually muted right now.

Still, that wasn't enough for the security to make our list of six. Sapp pointed out that the shares have recently been bouncing in a rather large range for an equity like Caterpillar, namely between $134 and $140. With no major events on the horizon, there was nothing suggesting a breakout was near.

In fact, Sapp felt that in order to do such a trade on CAT, one had to be ready to ride it down to the site of its recent bull gap, near $132, using a stop below that. He also notes that in order for him to risk $5 in a trade, he has to see at least the potential to triple his money, and he simply could not see such a scenario over one week with the blue chip.

On the other hand, Sapp feels that Caterpillar stock could be a good play for in-the-money call options over a longer time frame. If the shares fell down to somewhere between $132 and $135, he could see the potential for a short-term play, but not here and now at these levels. For reference, the security closed last week at $137.39.

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