Caterpillar Inc. (CAT) is scheduled to report third quarter before the markets open Wednesday. Shares are down just over six percent YTD in 2013, trading in a 52-week range of $79.49-$99.70. CAT closed $99.49 on February prior to bottoming out in late April. Since then, shares have traded in an increasingly tight range.
BIG EARNINGS MOVES
Historically, CAT has been a strong performer on earnings, having rallied on three of the past four quarters and seven of the past eight, moving an average of 2.8 percent.
The CAT Oct (weekly) 88 straddle is price around $3, implying a move of about 3.4 percent. Monday’s session also saw an apparent bullish bias from option traders: the CAT put:call ratio was 0.65, showing a very high volume of calls being traded relative to puts.
Consensus analyst estimate shows an EPS of $1.67 on $14.32 billion in revenue. With its business more heavily tied to mining than competitor John Deere (DE), Caterpillar has been hard hit by slowed economic growth. Following Q2’s dismal report and guidance cut, I believe even reporting earnings numbers in line with expectations will cause the stock to rise. The near-term straddle is implying an upside measured move target of around $90 per share, so I like the Oct Weekly 89-90 Bull Call Spread. I can put this trade on for around $0.32, so I can get a fairly good return on my money.
THE TRADE
Buy the CAT Oct Weekly 89-90 Bull Call Spread for around $0.32
Risk: $32 per 1 Lot
Reward: $68 per 1 Lot
Break-Even: $89.32
THE GREEKS
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
