Poor Price Action Doesn't Deter Caterpillar Bulls

Schaeffer's Investment Research
  MAR 14, 2013 3:05 PM

CAT's May series of options attracts call players.

 


Optimistic speculators are targeting Caterpillar Inc. (NYSE:CAT) today, as roughly 12,000 calls have crossed the tape as of 11:27 a.m. EDT, which more than double the norm. By comparison, fewer than 5,700 puts have been exchanged. The May 90 call has received the most attention, with close to 3,000 contracts traded at a volume-weighted average price (VWAP) of $2.26.

The bulk of these out-of-the-money calls changed hands at the ask price, and implied volatility has edged slightly higher during the course of the session -- signs of buy-to-open activity. In the scenario, the traders need CAT to surmount the $92.26 level (strike price plus the VWAP) by May expiration in order to secure a profit from their call purchases. The delta for these options is currently docked at 0.42, giving them a 42% chance of moving into the money ahead of the close on May 17.

However, traders had been placing bullish bets on Caterpillar prior to today. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 1.20, signaling calls bought to open have outnumbered puts during past two weeks. This ratio ranks in the 56th percentile of its annual range, meaning speculators have been scooping up calls over puts at an accelerated clip. Moving forward, this heavy accumulation of calls could end up translating into options-related resistance over the next few months.

Meanwhile, the sentiment scales among the brokerage bunch remain bullishly tipped. The construction equipment manufacturer boasts 10 "strong buys" and one "buy" endorsement, compared to nine "holds," and zero "sell" suggestions. Even more telling, CAT's average 12-month price target of $111.05 reflects expected upside of about 24.4% from yesterday's closing price of $89.28. This leaves plenty of room for future downgrades and/or price-target cuts, which could pressure the shares lower.

The prevailing upbeat attitude toward Caterpillar is rather surprising, given the stock's year-over-year decline of more than 20%, as well as it's year-to-date drop of around 1%. In fact, the equity has surrendered 11.2% since tagging a 2013 high of $99.70 on February 1. A continuation of this sluggish price action could cause today's call players to rethink their bullish positions.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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