Options Traders Expect Another Earnings Win for Caterpillar

CAT stock is set to snap a nine-week winning streak

Managing Editor
Jan 24, 2018 at 1:13 PM
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Adding to the highly anticipated slate of earnings reports due this week is construction and mining equipment concern Caterpillar Inc. (NYSE:CAT), with the Dow name expected to report fourth-quarter earnings ahead of the bell tomorrow. Below, we will take a look at how CAT stock has been faring on the charts, and how options traders are speculating ahead of tomorrow's report.

Looking closer, Caterpillar stock has had an exceptional year, gaining more than 76% over the past 12 months, and recently touching an all-time high of $173.24 on Jan. 16. CAT stock was up 0.1% to trade at $169.73, at last check, but is set to snap a nine-week winning streak -- its longest in at least a decade. However, the blue chip's 14-day Relative Strength Index (RSI) was at a lofty 75 at yesterday's close, indicating the shares are overbought, and this week's breather may have been in the short-term cards. 

Moving towards earnings reactions, CAT has been notably higher the day after its last three earnings reports, and enjoyed upside one-day moves after five of the past eight earnings releases. The shares have averaged a post-earnings swing of 3.8% in either direction in the session after reporting, looking back two years. This time around, the options market is pricing in a larger-than-usual 4.9% move for Thursday's trading, per at-the-money implied volatility (IV) data.

As far as direction, options buyers are speculating on even higher highs for Caterpillar stock. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the blue chip's 10-day call/put volume ratio of1.76 is at the top of its annual range. This indicates that traders have bought to open CAT calls over puts at a much faster-than-usual pace during the past couple of weeks.

Echoing that, just over 160,000 puts are open for CAT, ranking in just the 1st percentile of its annual range. The deep out-of-the-money February 155 and 150 puts are the most popular, with more than 5,000 contracts apiece outstanding. Plus, Caterpillar's 30-day IV skew checks in at 2.6%, in the 1st percentile of its annual range. This suggests that short-term puts have rarely been cheaper relative to calls on the Dow stock.


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