Options Trading News

November 1, 2013  Fri 4:14 AM CT

A huge put spread is looking for a sizable drop in Caterpillar.

optionMONSTER's Depth Charge system shows that more than 20,000 each of the May 70 and 60 puts traded yesterday in volume far above previous open interest in each strike, indicating new positioning. The big blocks of 16,409 in each contract saw the 70s bought for $1.31 and the 60s sold for their bid price of $0.36.

The trader paid $0.95 to establish this vertical spread, which is its maximum potential loss. The maximum possible gain is $9.05, which would be realized if CAT is below $60 by mid-May 2014.

The delta of those 60 puts suggests just a 5 percent probability that CAT will be at those levels. This could be an outright bearish play or a hedge against long shares. (See our Education section)

CAT was down fractionally yesterday to close $83.36. The construction and mining equipment giant traded above $89 last week before earnings. The stock, which has support around $82, was last below $70 in 2010 and below $60 in the middle of that year.

More than 64,000 CAT options traded on the day, 3 times the daily average over the last month.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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