CAT Analysis

The construction, mining and industrial equipment manufacturer Caterpillar Inc. (CAT), headquartered in Peoria, Illinois, publishes earnings on Thursday before the opening bell.

[CAT in Wikipedia]

CAT

I shall use the DEC series of options, which trades for the last time 58 days hence, on Dec. 18.

Ranges

Implied volatility stands at 37%, which is 2.5 times the VIX, a measure of volatility of the S&P 500 index. CAT’s volatility stands in the 74th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	81.78	92.29	77.45
Lower	60.76	50.25	65.09
Gain/loss	14.7%	29.5%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I'm direction-neutral in my assessment of CAT.

Iron condor, short the $77.50 calls and long the $80 calls,
short the $62.50 puts and long the $60 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
Upper	77.5	82.7%
Lower	62.5	80.3%

The premium is $0.69, which is 27% of the width of the position’s wings. The stock at the time of analysis was priced at $71.33.
The risk/reward ratio is 2.7:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $6.18, and the average was $3.46.

Decision for My Account

I've placed an order on CAT as described above. However, I was unable to get a fill at a price I could accept. The trade was never concluded.

-- Tim Bovee, Portland, Oregon, Oct. 21, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.