Published On: Tue, Mar 14th, 2017

Trade view: Digging into CAT — #SaxoStrats



The ongoing accounting investigation by the US government could prove to be a showstopper for heavy machinery manufacturer CAT. The news came out on March 2 and the stock suffered a 4.5% drop on 21 million shares volume. It was a sell now, ask questions later type of scenario. You cannot blame nervous investors looking to protect profits and avoid the next Enron. 

Source: Saxo Bank

Under the current administration and their commitment to invest in improving America’s sagging infrastructure, this is a big blow to the Caterpillar. If something does come out of this investigation it would be big. Therefore, investors should approach the stock very cautiously, to put it mildly. 

Scenario 1.You would like to own the shares but you feel the stock could be under further pressure.

You could consider selling a cash-secured put below last night’s closing price of $ 92.64. Selling a 90 put (21 April) could be sold at $ 2 or $ 200 coming into your account. This will give you a breakeven of $ 88 into the stock or 5% discount.

Scenario 2. Trade the weakness with a short put spread for a credit. Here’s how we would do it:

Management and risk description
Using a put spread limits our downside risk as we are selling an option while simultaneously buying another. 
Underlying price: $ 91

Status: opening trade

Trade: sell -1 Vertical CAT 21 APR 17 90/87.5 PUT @ 0.92

Maximum gain: $ 0.92  (58% ROR)

Maximum loss: $ 1.58

Breakeven: $ 89.08

today, with the ticket
no stop 
shares to trade above $ 90
Time horizon:
30 days

— Edited by Jack Davies

Non-independent investment research disclaimer applies. Read more
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