CAT – Caterpillar, Inc. – The machinery manufacturer’s shares are down 1.25% to $61.28 as of 12:15 pm (ET), but one hopeful options trader opted to initiate a contrarian bullish strategy on the stock. The investor enacted a credit put spread in the July contract, which yields maximum benefits as long as Caterpillar’s shares trade above $57.50 through expiration. The trader sold 2,600 puts at the July $57.5 strike for a premium of $1.98 each, and purchased 2,600 puts at the lower July $50 strike for $0.72 apiece. The net credit received on the spread amounts to $1.26 per contract. The investor pockets the net credit in exchange for bearing the risk that shares decline sharply in the next couple of months. Losses start to accumulate on the trade if CAT’s shares fall 8.22% to breach the effective breakeven price of $56.24. The width of the spread, and the amount of premium received, dictate maximum potential losses of $6.24 per contract should shares of the underlying stock plummet 18.40% from the current price of $61.28 to break through the $50.00-level by July expiration. Risk assumed by the investor responsible for the trade outweighs potential benefits by a factor of 4.95-to-1.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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