Call Buying Peaks on Caterpillar Stock Ahead of Earnings

Options traders are bullish on Caterpillar stock, which has a history of positive earnings reactions

Jul 24, 2017 at 2:16 PM
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Options data suggests traders have high expectations for Caterpillar Inc. (NYSE:CAT) earnings, which will be released before the market opens tomorrow. The Dow stock's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at a 52-week peak of 1.71. This means call buying has been unusually popular relative to put buying, suggesting options traders are betting bullishly on CAT ahead of the company's quarterly event. 

Digging deeper, the weekly 7/28 110 and 115 strikes saw the largest increases in call open interest during the past two weeks, due mostly to a long call spread that was initiated last Thursday. In this case, the trader is hoping Caterpillar stock rallies up to $115 by expiration at Friday's close -- territory not seen since March 2012. However, by selling to open the higher-strike calls, they have sacrificed some of the reward of buying the lower-strike calls outright in order to trim the price of entry.  

Today, calls are trading at four times the amount expected for this point in the day, with possible buy-to-open activity detected at the weekly 8/4 110-strike and September 115 calls. This bullish positioning makes sense given the stock's post-earnings history. Last quarter, for instance, CAT shares rose 7.9% in the session after the company reported earnings -- hitting a two-year high in the process. And following the company's July release last year, the Dow component picked up 5.2%. 

It'd certainly be hard to bet against Caterpillar right now. The shares are up more than 37% year-over-year, grinding out a series of higher lows since January 2016, and notching a three-year peak of $110 on July 12. This includes a 1.3% gain today to trade at $107.94, following an upgrade to "outperform" from "market perform" and price-target hike to $125 from $110 at BMO. The brokerage firm said despite a "difficult road" for mining and energy stocks, CAT seems "relatively resilient." On top of this, the company reported a 7% rise in world machines retail sales in the second quarter. 

Still, most analysts are actually bearish on Caterpillar. Specifically, eight of the 12 providing coverage give CAT shares a "hold" or "strong sell" rating. Moreover, the stock is trading in line with its average 12-month price target of $107.87. Considering this, a positive earnings surprise could spark a round of upgrades and/or price-target hikes, which would likely result in additional tailwinds. 
 

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