Trade Update: CAT Managing Apr Put Spread

by Dan March 6, 2012 2:46 pm • Commentary

Update March 6th, 2012: Since putting this trade on 2 weeks ago, the stock has dropped about 8% and is testing the the lower strike of my Apr 110/105 Put Spread that I bought for $1.00.  With the stock down on growth concerns in China this week, I want to take my cost off of the table and let the other half ride.  With the stock trading at $105.70, I sold half of my position at 2.65 for a 1.65 gain, now I can’t lose on the position.

Original Post Feb 24th, 2012: CAT vs Crude 

Here’s a preview of what I’ll be discussing on Options Action tonight at 5pm.

Cat has basically traded in lock step with crude over the last 2 years but last summer, while CAT was making new all time highs, it separated a bit from the commodity and saw a decline of almost 39% peak to trough.
  • Since bottoming in Oct the stock is up almost 70%, crude is up 44%.
  • Cat is making new 52 week highs almost every day but on relatively light volume….
  • It’s not an expensive stock, trading at 12.25x this year’s expected earnings (28% yoy on sales that are expected to grow 18%.)

BUT, the attached chart could be suggesting the stock is getting a bit ahead of itself.
Vols look fairly reasonable, but verticals still make sense.
  • 30 day realized vol at bout 18 is the lowest it has been since Jan 2011.
  • 60 day implied vol is about 25.5 which is cheap to the 60 day realized at about 30.


New Trade:

CAT $116.50   Bought Apr 110/105 Put Spread for ~1.00
  • Buy 1 Apr 110 Put for 2.40
  • Sell 1 Apr 105 Put at 1.40
Break-Even on Apr.  expiration:
Profits btwn 109  and 105 make up to4.00, max gain of 4.00 105 or lower make full 4.00
Losses of up to 1.00 btwn 109 and 110 with max loss of 1.00 above 110
TRADE RATIONALE:  Ok, as many of you know I have been a bit early on the short trade this year, but I am going to stick to my guns and look to push out a bit on duration.  I chose 110 & 105 strikes, even though the spread is a bit tight, because as the chart below shows it is a pretty important technical level and I like the risk reward, risking 1 to make 4 is the stock is down 9.5%  in 2 months, basically a 30% re-tracement of this years almost 29% rally ytd.  Also any whiff of a hard landing in China, this stock will be back down at $100 with crude below $100.  IN 2011, CAT got about 35% of its sales from North America, while a good bit of the expected growth in 2012 is expected from outside of our fine continent, given the uncertainty about the health of the Euro-zone and the debate over the rate at which China is slowing, this is a nice little defined risk way to play for what could be the first stage of a sustained move lower.
1 yr CAT chart from Bloomberg LP