History Says Bet on This Dow Stock's Next Leg Lower

Call open interest heavily outweighs put open interest on near-term options

Managing Editor
Aug 30, 2018 at 2:35 PM
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Shares of Caterpillar Inc. (NYSE:CAT) are down 1.2% at $140.23 in afternoon trading, continuing the stock's multi-month downtrend. Recent breakout attempts have been capped by a ceiling of resistance near $145 and the 80-day moving average. With this backdrop, below we will dive into why now may be a good time to bet on the Dow stock's next leg lower, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

Daily Chart of CAT with 80 MA

More specifically, Caterpillar shares are now within one standard deviation of their 80-day moving average, after a lengthy stretch below this trendline. There have been six similar signals of this kind in the past three years, after which CAT went on to average a one-week loss of 4.3%, with just 17% of those returns positive, per White. A similar pullback from current levels would place CAT back around $134.21.

Digging into options data, Caterpillar stock's short-term traders are more call-skewed than usual, with its Schaeffer's put/call open interest ratio (SOIR) of 0.76 ranking in the 4th percentile of its annual range. This indicates that near-term call open interest outweighs put open interest by a wider-than-usual margin right now.

Regardless, now is an attractive time to buy premium on short-term CAT options, given they are currently pricing in low volatility expectations. This is based on Schaeffer's Volatility Index (SVI) of 21% ranks in the 15th annual percentile.

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