Trade Update $CAT – Cleaning Up A Potential Mess on Expiration

by Enis September 20, 2013 3:40 pm • Commentary

Expiration is bearing down on this CAT put spread that was pretty much worthless until CAT mad a serious down move today. Unfortunately it’s close to the long put strike without being worth much. So it actually has rick of closing below the strike and being automatically exercised. The best course of action is to sell out the long put for whatever one can get for it here:

ACTION – Sold to close CAT ($85.10) Sept 85 put for 6c

Rationale – this is protection against automatic expiration if CAT stock was to dive below 85 before the close. If one doesn’t sell the put and CAT does close below strike, one could just buy the shares equal to the short after hours or ask not to exercise. Trading out of it is easiest though.



Original Post Aug 9th, 2013:  New Trade $CAT – No Butterfly for this Caterpillar

CAT has been a favorite short of ours for the past year.  We’ve rattled off all of the negatives in our past 3 trade posts (here, here, and here), so I won’t rehash that here.

Yesterday, I discussed the bounce in Chinese-related assets in my Macro Wrap.  I mentioned that GS Research put out a constructive note, with this takeaway:

However, judging by our client conversations, slower activity momentum in China seems to be the consensus view. Therefore, it would likely be a positive surprise if activity were to stabilise or indeed pick up in the second half of the year, as we forecast.

So they’re taking a bit of a contrarian view on China.  Amid all of this week’s headlines about better than expected Chinese data though, the Citigroup Economic Surprise Index is still firmly negative:

Citigroup Economic Surprise Index For China, red line at 0, Courtesy of Bloomberg
Citigroup Economic Surprise Index For China, red line at 0, Courtesy of Bloomberg

In fact, Chinese data has consistently missed for most of the past year.  Might be a little early to be calling for green shoots.

More importantly for CAT, the technical picture looks interesting here:  

[caption id="attachment_29071" align="alignnone" width="636"]Daily chart of CAT, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg Daily chart of CAT, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

The 79-80 level has served as support for a couple years now.  The stock has bounced a bit after a weak earnings report, but has failed to break above the declining 50 day moving average.  The consolidation since earnings has resulted in a weak bounce that’s a nice setup for another short entry, looking to play for a move down to the 79-80 area in the near term.

TRADE: CAT ($83.90) Bought the Sept 85 / 77.5 Put Spread for $2.30

-Bought 1 Sept 85 Put for 2.74

-Sold 1 Sept 77.5 Put at 0.44

Break-Even on Sept Expiration:

Profits:  Profits up to 5.20 when stock between 82.70 and 77.5, max profit of at 77.5 or below

Losses:  Up to 2.30 between 82.70 and 85, max loss of 2.30 at 85 or above

Trade Rationale: We thought about structuring this trade as a put fly, but September expiry is still 6 weeks away, so if CAT does move lower in the next couple weeks, we wouldn’t make much money on a fly.  As a result, we chose the put spread, which also reflects our view that 85 will be stout resistance in CAT going forward.  We will likely take this trade off on a move to the important 79-80 support area.