Last week was another positive one for the markets, but not all stocks have been partaking in this bullish run. Here is a trade idea on a stock whose fortunes might be reversing at a time when the market might be getting weak.
Caterpillar (NYSE:CAT – $88.83): Long Calls
The trade: Buy the April 87.5 calls for $2.65 or less.
The strategy: The long call is an option strategy generally used for a bullish outlook on a stock. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because CAT can continue to rise, and the maximum loss is $2.65 or whatever was paid if CAT finishes below $87.50 at April expiration. Breakeven is $90.15 at expiration based on a cost of $2.65.
The rationale: CAT and other construction and mining equipment producers have struggled partly because of slow sales in China. Nearly 30% of their dealers are located in the Asia-Pacific region. However, China has shown some signs of improvement recently with the Chinese government stepping in and trying to accelerate growth and spending.
Click to Enlarge There is no denying that CAT stock has struggled since the beginning of February. But just like the economy, there might be a turn ahead.
CAT has come down to a major area of support. The stock closed just above previous price levels that have been support and resistance for the stock, and more importantly, right above the 200-day simple moving average around $88. The 200-day SMA has provided major support and resistance for the stock for a couple of years now, and if history repeats itself, there could be a nice reversal bounce coming.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.