First of all, I like writing blogs that have in their heading the words "Cat Puts". That causes the number of hits to this site to go ballistic. I try however not to abuse this privilege. When Caterpillar releases its quarterly profit reports retail investors are allowed to capitalize on this glee. The release of its most recent second-quarter profit report saw a one-day surge of over $20.00 in its price. Earnings were expected to be good as Caterpillar was on a role. I wrote about this activity back on July 30th. What a dream for option traders. Following the release of this good news, retail investors also got to enjoy playing the downside as its precious spike upward started to crumble, taking the stock back down from its new nosebleeding level. Opportunist option players have trained themselves to look for this kind of action with the mentality of catching the excess exuberance in the air. It's not only Caterpillar that offers these tradable moments. Look at how FedEx responded to earning reports this morning.
Caterpillar for the most part is not a stock bothered by incennent chatter. It's a stock studied and held by pension funds and major institutions who pride themselves on having access to "best-in-class" research. So the little opportunititic option players at the retail level have to refrain for the most part from trying to play the daily or weekly price swings on Caterpillar during the "off earnings-report season". Once again the company is not big on releasing market chatter. Yesterday Caterpillar jumped for no apparent reason. Who would have expected that? Look at how it jumped six dollars on the opening only then later to give it all back.
Was this upside action payable? Not really. This movement was out of the norm. If you were witnessing it happen your attempts to source what was causing this action would most likely be futile. But wait, wouldn't at some point in time a reversal in this action be a probable situation? What a reversal waiting to be called out. Now look at this. Yes, the open interest in this series is next to nothing and only a few traders got in and out. (the lower priced option series actually had more dramatic price gains). Let's now follow the same series of Puts the day after.
Unexpected action? That's what options traders should learn to expect. Tomorrow is Friday. Will more trading opportunities emerge? Not many option players want to play a stock in decline. Now consider this. In option trading, there is a rule that retail traders must be out of their Call positions that expire that day by 3:00 p.m. That's just the way it works. Now look at this chart. Look at how Cat jumped to $275.00 just after 3:00 p.m.
The 272.50 Calls would have zoomed up. Anyone buying the $272.50 Calls around 3:00 p.m. that expire the following week and got out 20 minutes later would have doubled their money. Did I catch it? No. The point is when a stock is really beaten up after a three-day slide expect to see a little bit of trickery come into the market. Trickery that allows the floor traders to have a good weekend.
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