CAT – Caterpillar, Inc. – Put action on the machinery maker today suggests shares could take a turn for the worse by October expiration. CAT’s shares inched up 1.7% earlier in the session to touch an intraday high of $65.85, but are currently higher on the day by a lesser 0.70% to stand at $64.94 as of 3:35 pm ET. The pessimistic options player prepared to face potential bumps in the pavement by initiated a debit put spread, buying about 2,000 now in-the-money contracts at the October $65 strike for an average premium of $3.09 each, and selling roughly the same number of puts at the lower October $55 strike at an average premium of $0.62 a-pop. The net cost of putting on the trading amounts to $2.47 per contract. Thus, the trader makes money – or realizes downside protection – if CAT’s shares fall 3.7% to slip beneath the average breakeven price of $62.53 by October expiration. Maximum potential profits of $7.53 per contract are available to the options strategist should shares tumble 15.3% in the next couple of months to trade below $55.00. Options implied volatility on Caterpillar is net up 3.5% at 35.77% with 20 minutes remaining in the trading day.
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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