Let's look at a bearish play on Dow Jones Industrial Average component Caterpillar with a bear call spread trade in the options of Caterpillar stock.
The stock market rally on Friday provided investors with some relief, but that may be short-lived as stocks remain under serious selling pressure. So today, I'm looking for bearish candidates that are trading below key moving averages.
When a stock trades below a declining moving average, the moving average can provide potential resistance on any bounce attempt.
Caterpillar Stock Today
Caterpillar stock, with a weak 41 Relative Strength Rating, has treaded below the 21-day exponential moving average as well as the 50- and 200-day moving averages. The 50- and 200-day moving averages are sitting around 360, which could provide some short term resistance on the upside.
Caterpillar is a leading manufacturer of construction and mining equipment, engines, and industrial products. In its recent earnings report, Caterpillar experienced a 5% decline in fourth-quarter sales, leading to a cautious outlook for 2025.
In the bear call spread, we assume CAT will struggle to get back above 360 between now and mid-April.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call. The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as Caterpillar stock stays below the short call at expiry.
The Trade Setup
An April 17 expiry bear call spread on Caterpillar stock using the 360-370 strike prices can be sold for around $1.90, based on recent trading. Traders selling the spread would receive $190 in option premium, also the maximum possible gain. The maximum loss would be $810 (the width of the two option strikes, $10, minus $1.90), or $810 per set of calls. That represents a potential return of 23% between now and April 17.
The spread will achieve the maximum profit if Caterpillar stock closes below 360 on April 17, in which case the entire spread would expire worthless, allowing the trader to keep the $190 option premium. The maximum loss will occur if CAT closes above 370 on April 17, which would see the premium seller lose $810 on the trade.
Risk Control Tip
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance. You could set a stop loss if Caterpillar stock trades above 360, or if the spread value rises from $1.90 to $3.80.
According to IBD Stock Checkup, Caterpillar stock ranked 3rd in its group. It holds a Composite Rating of 61, an EPS Rating of 74 and a Relative Strength Rating of 41.
Our last bear call spread on Caterpillar has done well and will most likely expire for a full profit.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options and is very conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
