The once-mighty feline is getting its growl back.
Despite a disappointing quarter, Caterpillar Inc. (NYSE:CAT) ripped higher following earnings last week. Indeed, CAT stock hummed a bullish song felt by the entire metal and mining sector.
Take a gander at the SPDR S&P Metals & Mining ETF (NYSEARCA:XME). She’s a beaut I tell ye, a beaut.
With the din of the earnings party now subsiding, profit takers have arrived, ushering in a three-day pullback. But don’t let the drop deter you. It was necessary after such a large run. CAT stock lovers loath to chase now have the opportunity to snatch up shares closer to a support level.
Consider it a lower-risk entry for spectators looking to get in on the game.
Volume patterns add to the allure of Caterpillar. Buyers flocked to the stock following earnings like coupon clippers to a fire sale. Remember, high-volume up days signal institutional accumulation, a positive omen for the near future.
And better yet, the volume during this three-day decline has been low, suggesting sellers lack any type of backbone here.
The CAT Stock Trade
As is customary post-earnings, the implied volatility for Caterpillar stock options has fallen into the basement. And that means calls and puts are cheap. The implied volatility rank sits at a lowly 10%.
If you’re feeling lucky, consider buying the Oct $80 calls for around $4.25. The max loss is capped at the initial debit and will be forfeited if CAT stock sits below $80 at expiration. To minimize the loss, I suggest bailing if the stock breaks the support pivot at $78.
Those looking for a lower-risk trade could buy the Oct $80 calls while selling the Aug $84 calls for a net debit of $3.96 or better.
The premium received from the short August calls helps to reduce the overall cost and risk of the position. You could use the same exit point of $78 mentioned above.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
