Event: CAT reports its Q3 earnings tomorrow before the open. The options market is implying about a 3.25% one day move, which is above the 4 qtr avg of about 2.25% and the 8 qtr avg of about 2.75%.
Sentiment: Wall Street analysts are relatively neutral on the stock, with 14 Buys, 13 Holds and 1 Sell, with an average 12 month price target of around $92. CAT is one of the worst performing mega-cap stocks in the U.S. over the last 2 years, a period in which it’s essentially flat. Short Interest is 4% of float. Fund manager Jim Chanos has stated that he is short CAT.
Options Open Interest: Open interest is skewed to puts by a ratio of about 1.1 to 1, though recent activity has been much more skewed to calls, with the 20 day average call to put ratio around 1.8, and the 10 day around 2.3. The Nov 90 calls and Nov 85 puts have the highest near-term open interest. The Jan14 80 puts have nearly 20k of open interest as well.
On Friday there was an interesting trade where someone bought 15k of the Dec 90 calls for 1.54 when the stock was around $87.50, this trade was outright and breaks even on Dec expiration at $91.55
Price Action / Technicals: CAT has been a relative underperformer since 2011, but it has continued to hold the all-important $80 support level over the last 2 years:
The stock is climbing above its 200 day moving average this week, the fourth time int he past 6 months that the stock has made that move above, only to be rejected each time. The broad market optimism has buyers more optimistic that the stock holds above this time around.
Volatility: All things considered, CAT vol is pretty low going into the event. Nov IV sits at about 21, up a little from recent lows in the high teens but lower from highs it’s seen over the past year.
Nov and Dec vol should fall into the high teens following the event.
Our View: CAT has been basing in the low 80’s for much of the year, with every time it looked like the stock would breakdown at the 82 level seeing a quick bounce back up to the high 80’s. The stock now sits at the level it’s had a hard time breaking above. If it is to stay range-bound the stock would likely come under pressure following the report. However, a breakout above this level would be technically significant.