Digging Up Earnings Trade Ideas for Caterpillar

• Posted by Greg Harmon
• on January 27th, 2016

Caterpillar, $CAT, report earnings Thursday morning before the market opens. The stock has had a rough time sine the middle of 2015. It has bee falling in a channel for 7 months and even had one failed breakdown at the end of September. Now it sits at the bottom of the channel trying to level as it heads into earnings.

The RSI is running flat in bearish territory just above oversold levels and trying to lift higher, as the MACD slows its drop, trying to level. These support consolidation and a possible reversal but beware the trend in the price remains lower. There is support lower at 57.75 and then you need to look back to 55.65 from 2010, with 51.95 and 50 as possible support after that. There is resistance above at 60.40 and 62.75 followed by 64.35 and 66.50 before 68.50. Short interest is elevated at 8.2%.

The reaction to the last 6 earnings reports has been a move of about 3.15% on average or $1.90 making for an expected range of 57 to 61.25. The at-the money January 29 Expiry Straddles suggest a larger $3 move by Expiry Friday with Implied Volatility at 69% above the February at 39%. Open interest is largest at the 63 Strike this week, with most of it on the Put side. Call open interest is much lighter but all above the current price.

Trade Idea 1: Buy the January 29 Expiry 59/60.5 1×2 Call Spread for free.

Trade Idea 2: Buy the January 29 Expiry 59/61/63 Call Butterfly for $0.50.

Trade Idea 3: Buy the January 29 Expiry 59/61/63 Call Butterfly and sell the January 29 Expiry 55 Put for 10 cents.

Trade Idea 4: Buy the January 29 Expiry 58/56 1×2 Put Spread for free.

Trade Idea 5: Sell the January 29 Expiry 55/61 Strangle for a $0.85 credit.

#1, #2 and #3 look for a move higher but not to exceed about 62, following options projections. #1 is profitable from 59 to 62, while #2 makes money between 59.50 and 62.50. #3 adds leverage to the butterfly increasing the profitable range to 59.40 to 62.90. #4 follows the chart lower with leverage and is profitable between 58 and 54 Friday. #5 looks both ways and uses the big open interest at 240 as well as the historical range to 285 as bounds. It is profitable between 54.15 and 61.85 Friday.

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