Near-term call volume spikes before Caterpillar (CAT) earnings
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 expiration.
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 unlimited losses.
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.