EOT Trade Alert – October 15, 2015

| October 15, 2015

Trade Alert:

Buy CAT November 20th 2015 $67.50 puts at $1.75 or better


Company Background:

Caterpillar $CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.


Short-Term Catalyst:

Industrial stocks are having a rough year… and CAT is no exception.

In fact, CAT is performing much worse than the industrial sector.  The stock is down 20% year-to-date while the entire industrial sector is down about 6%.

There are many reasons for CAT’s falling stock price.

The drop in oil prices forced oil and gas companies to slash capital spending.  So, they’re just not spending much money on shiny new CAT equipment.  A strong US Dollar has hurt commodity prices and emerging markets.  As a result, mining companies aren’t shelling out money to buy CAT equipment either.

In particular, slowing economic growth in China has been a major thorn in CAT’s side.  The company has made significant investments there in recent years.  But China is shifting away from an export led economy to one that is fueled by consumers.

Needless to say, the current market environment has dramatically reduced the amount of money CAT’s customers are willing to spend on new equipment.

Against that backdrop, CAT’s price action is downright bearish.   The stock is down 32% from the 52-week high.  It has set a series of lower highs and lower lows in a downward trending price channel.

Right now CAT is sitting just underneath resistance from the downward trending price channel.   I believe the combination of poor fundamentals and bearish price action will combine to send shares of CAT lower from this level.

CAT will report quarterly earnings on October 22nd before the markets open.  These earnings are a bit of a wild card… there are plenty of reasons I’ve outlined here for CAT to deliver a weaker than expected quarter.  And even slash forward guidance based on further weakening in China.

However, low expectations and cost saving measures give CAT a chance to clear this very low bar.

Let’s grab put options on CAT as it moves lower from this strong level of technical resistance ahead of their quarterly earnings announcement next week.


Trade Details:

Underlying Stock Symbol: CAT
Current Bid-Ask Price: $1.62 – $1.65
Option “Buy Up To” Price: $1.75
Break-Even On Stock At Expiration: $65.75
Maximum Risk Per Contract: $175.00


Exit Strategy:

CAT is trading at $70.40 per share.  Resistance levels will be at $72.25 and again at $75.00.  Remember, we want this stock to move lower.  Support levels will be at $65.00 and $62.50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.





Category: EOT Trade Alert

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