Caterpillar Inc. (NYSE: CAT )
options action out of the gate on Tuesday suggests at least one
investor expects limited upside during the near term. With earnings
results on the horizon, shares of the construction machinery
company are edging up on the day.
At 10:54 a.m. EST, a block of 5,000 out-of-the-money (OTM)
September 72.5 calls changed hands for $1.67 per contract, which
was lower than the bid price when the volume hit the tape. Current
open interest in this line is 184 contracts. This options action
suggests an investor opened 5,000 short call positions and
collected a total premium of $835,000 up front. This credit is also
the most the call seller can make on this trade in the event that
CAT shares are trading lower than the strike price at
This trade breaks even, meaning the investor gives back 100% of
the premium collected, when CAT shares are trading at $74.17. If
CAT shares soar higher than this level, the investor begins to lose
money and will continue to do so as the stock moves to the upside.
A continued rally means the investor could theoretically suffer
The investor tied a stock position to this short call trade, and
sold roughly 155,000 shares of stock for $67.30 per share. While
the options action suggests the investor expects limited upside
during the near term, a closer look at the trade could indicate the
investor is more interested in betting that volatility to subside
prior to September options expiration.
CAT climbed $1.11 during morning trading to $67.54 ahead of the
company's earnings announcement. Analysts estimate earnings of 85
cents per share.