CAT – Caterpillar, Inc. – Shares of the machinery maker are up 0.75% to $56.25 perhaps after Caterpillar reaffirmed its target of $8.00 to $10.00 profit per share for 2012. CAT popped onto our ‘most active by options volume’ market scanner in the first half of the trading session due to put activity in the August contract. It appears one options player booked profits on the sale of a previously established long put stance in order to double the size of the put position at a more bearish strike price. The trader likely purchased 18,000 put options at the August $65 strike for a premium of $4.05 to $4.40 per contract back on April 22, 2010, when shares of the underlying stock were trading at a volume-weighted average price of $66.72. The August $65 strike puts are now deep in-the-money due to the decline in Caterpillar’s share price since the initial purchase. It looks like the investor sold all 18,000 puts today for a premium of $10.60 apiece to take in net profits of $6.20 to $6.55 per contract. Next, the put player, who is likely hedging a long underlying stock position, doubled the size of the protective stance by purchasing 36,000 puts at the lower August $50 strike for a premium of $2.65 per contract. The new position yields downside protection if Caterpillar’s shares plunge 15.8% from the current price of $56.25 to breach the effective breakeven point to the downside at $47.35 by August expiration.
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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