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Caterpillar (CAT) stock was a bearish candidate that came up on one of my Barchart Stock Screeners having broken below the 200-day moving average.
Here are the full parameters for the screener and the results.
Today, we’re going to look at a Bear Call spread trade that assumes CAT will struggle to get back above the 50-day moving average in the next few weeks.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
CAT BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the March 21 call with a strike price of $380 and buying the $390 call would create a Bear Call spread.
This spread was trading for around $1.25 yesterday. That means a trader selling this spread would receive $125 in option premium and would have a maximum risk of $875.
That represents a 33% return on risk between now and March 21 if CAT stock remains below $380.
If CAT stock closes above $390 on the expiration date the trade loses the full $875.
The breakeven point for the Bear Call spread is $381.25 which is calculated as $380 plus the $1.25 option premium per contract.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 24% Sell with a Average short term outlook on maintaining the current direction.
The market is in highly oversold territory. Beware of a trend reversal.
Caterpillar Inc. is the world's leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
For nearly 100 years, they've been helping customers build a better, more sustainable world and are committed and contributing to a reduced-carbon future.
Their innovative products and services, backed by their global dealer network, provide exceptional value that helps customers succeed.
Caterpillar does business on every continent, principally operating through three primary segments: Construction Industries, Resource Industries and Energy & Transportation.
They provide financing and related services through their Financial Products segment.
Caterpillar is showing implied volatility of 24.63% and an IV Percentile of 42%.
Caterpillar had already reported Q4 earnings, so this trade should have no earnings risk if held to expiration.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $125, so we could set a stop loss equal to the premium received, or a loss of around $125.
Another stop loss level could be if the stock broke above $370.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
