Caterpillar (CAT) has taken a steep decline in the last two months. The stock has fallen roughly 25.0% after reaching a record high of $116.95 at the end of February. Now investors are looking for an opportunity to invest in the stock after such a steep decline, after all, we are talking about Caterpillar here. Is the stock going to fall farther or is now a good time to get in?
Well recently there were some option players who took different positions. There is a bearish group that believes the stock will drop more in June perhaps to 85 or below. There was a 1,500-lot June $80/$87.5 debit put spread makes money if shares in Caterpillar decline another 3.2%. On the other hand, there are some bullish players who bought June $92.5/$100 call spreads established for a net premium outlay of around $1.55 each look for shares in Caterpillar to rebound sharply come expiration day. So a number of people have different views of the company. But that is short term.
There has been some insider buying as of late where an investment totaling $215.9K invested across 2 purchases was made by Director Eugene V. Fife. So should we take note of this? Not only this, but the company has a very attractive P/E Ratio right now showing (11.5 to an industry high of 15.7) (Statistics from Yahoo Finance)
The company is facing growth challenges this year. Long term I am convinced the company will rebound steadily. Economic conditions may provide heavy headwinds over the following quarters. Europe cannot be counted on at all right now until a lot is figured out. China is slowing down so that can not be counted on. Here in North America we have been doing better but we are now feeling a slow down pinch. So the company may not do much growing until toward the end of the year if at all. Long term growth I expect to continue into next year. But I am sure we will see the stock push up here or there and trade in a certain zone. This provides a great opportunity to put together a short term income trade while waiting for a long term investment opportunity.
The Options Play
The stock is presently trading at 90.36 and we expect it to spike up from here at times. Giving the stock plenty of time to move, we are going to look at a long term bullish debit spread.
- Buy an August 2012 call with a strike of '92.50' (priced at $5.05)
- Sell an August 2012 call with a strike of '95.0' (priced at $3.85)
- Net Debit to Start: $1.20
- Maximum Profit: $1.30
Reasoning behind the Trade
- Caterpillar is just too strong of a stock to stay down.
- It will push up a bit here and there, but I do not expect too large of a move.
- It is at a good foundation and support level now. It could move down a little more but will push back up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.