Subject: Caterpillar (CAT) Drops After an Earnings Beat … And It’s a Bullish Sign

Dear Friend,

Today we bring you a brand new Trade of the Week! Each week we share a new trade idea directly from our trading team. For more on how you can join in on the profits, email Colin@terrystips.com.

Terry

May 2, 2021

Week 650

Caterpillar (CAT) Drops After an Earnings Beat … And It’s a Bullish Sign

On Thursday, CAT did something it’s done for the past three quarters – it easily topped earnings estimates. The company reported $2.87 in adjusted earnings versus the projected $1.95. Sales ($11.9 billion) also soared past estimates ($10.5 billion). The numbers were well received by Wall Street, as a couple of brokerages raised their target prices. But analysts overall are less than enthusiastic toward the stock, with more than half rating the shares a hold or sell. That seems at odds with the stock’s performance, however. CAT has more than doubled off a low from last May and is up 25% for the year. The stock should benefit as more analysts come to their senses and jump on CAT’s bandwagon with upgrades.

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Despite the impressive performance and target price increases, CAT is down 2% since earnings. But this is a good thing. Why? For the fourth straight quarter, CAT declined after blowout earnings. But in each of the previous three quarters, the decline was perfectly supported by the rising 50-day moving average. In fact, the stock has closed below this trendline just two times going all the way back to mid-May of last year. The 50-day is currently sitting just above the $226 level. Given the previous post-earnings pullbacks to this support, we’re looking at a credit spread with the short strike below the 50-day.

If you agree that CAT will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above $225 through expiration in five weeks.

Buy to Open CAT 4Jun21 222.5 Put (Cat210604P222.5)
Sell to Open CAT 4Jun21 225 Put (Cat210604P225) for a credit of $0.85 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when CAT was trading at $228. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread. Each spread would then yield $83.70. This trade reduces your buying power by $250 and makes your net investment $166.30 ($250 – $83.70). If CAT closes above $225 on June 4, both options will expire worthless and your return on the spread would be 50% ($83.70 / $166.30).

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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Subject: Caterpillar (CAT) Drops After an Earnings Beat … And It’s a Bullish Sign

Caterpillar (CAT) Drops After an Earnings Beat … And It’s a Bullish Sign