Caterpillar has pulled back in recent weeks and has so far found support at the 200-day moving average.
According to the IBD Stock Checkup, CAT stock is ranked No. 3 in its industry group and has a Composite Rating of 92, an EPS Rating of 87 and a Relative Strength Rating of 77.
What I'm thinking in this scenario is an unbalanced iron condor, with a slightly bullish bias. This can be achieved by using a wider put spread than the call spread.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the April 21 expiry, we could sell the 195 put and buy the 185 put. That spread could be sold on Monday for around $0.80.
Then the bear call spread, which could be placed by selling the 240 call and buying the 245 call. This spread could be sold for around $0.75.
CAT Stock Trade Has Slight Bullish Bias
Notice that the put spread is 10 points wide and the call spread is only five points wide. This gives the trade a slight bullish bias, but also more risk on the downside.
In total, the iron condor will generate around $1.55, or $155, of premium.
The profit zone ranges between 193.45 and 241.55. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The maximum risk is $845 on the put side and $345 on the call side.
If we take the premium ($155) divided by the maximum risk ($845), this iron condor trade has the potential to return 18.3%.
Set Stop Loss On CAT Stock Trade
A stop loss in this case might be calculated based on 25% of capital at risk. That would be a loss of around $211.
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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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
