Options Brief: Caterpillar (CAT)

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.

About Andrew Wilkinson 1023 Articles

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.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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