The Money Tree

Safely Generating Income in Retirement

New Trade – CAT

Posted by mounddweller on June 15, 2013

Fellow Traders,

I executed a new trade today.  As I mentioned in my earlier post on CHRW, I’ve had my eye on CAT for some time now.   In just a moment I’ll explain my line of reasoning for this trade.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.  It was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois.  (courtesy of Yahoo Finance)

Here are the specifics for my trade:

STO 2 JUL $80 puts at $1.00

This is not my first rodeo with CAT.  I’ve successfully traded it twice earlier this year.  I learned about the potential for trading puts in CAT from my investing friend and hero Teddi over at  I’ve kept it on my watch list ever since.

Here’s why I like this trade right now…

(1) It is trading well down in the range its established over the past year ($80 – $90).  It did rally at the beginning of the year to $100 but has since fallen back into the trading range.

(2) Earlier this week it bounced off its lower Bollinger Band at around $83 and now appears to be trending back up.

(3) The slight uptick in volatility has increased option prices such that I could go for a lower strike price and still receive a decent premium

Here’s a 3-month price chart which shows the bounce off of the lower Bollinger Band.

BLOG - CAT 3M v2

So, why didn’t I sell the $82.50 puts?  Well, despite the bounce off the lower Bollinger Band being a good signal for a price reversal, with the current uncertainty in the overall market I decided I wanted a little less risk in this trade.  That coupled with the fact that CAT has strong support at $80.

Here’s a three year chart which shows the strong support at $80.

BLOG - CAT 3 Yr Chart

That’s it for this one.  I’m still keeping an eye on the NUE JUL $42 puts.  However it didn’t fade as much on Friday so I’ve elected to wait a bit longer before I pull the trigger on that one.



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