Weekend Review – 5/12/2013

Options Action –

The traders started to talk about Caterpillar (CAT – 88.62) and how this stock’s performance may relate to the overall market.  CAT only gets35% of sales from the US with the rest is international and the stock is underperforming due to the dollar and foreign sales exposure.   In addition to exposure to international companies, CAT also has exposure to the mining industry which may be feeling the pinch after the recent drop in the price of gold.

The first trade is based on a continued bearish outlook for CAT.  Looking out to July the trade idea involves buying a CAT Jul 87.50 Put for 3.05 and then selling a CAT Jul 80.00 Put at 0.90 for a net cost of 2.15.  This trade is profitable if the stock is under 85.35.  Profits max out at 5.35 if the stock is at or below 80.00 at expiration in July.

CAT Payoff

The second trade is on the Internet marketing company, Groupon (GRPN – 6.25) which appears to have bottomed out and may start to recover to higher levels.  The target here is 8.00 a share and with that target the trade recommendation is to sell a put spread that expires in July.  This trade sells a GRPN Jul 6.00 Put at 0.48 and buys a GRPN Jul 5.50 Put at 0.28 for a net credit of 0.20.  The maximum loss in this case is 0.30 if GRPN takes a turn to the downside and lands below 5.50 at July expiration.  As long as GRPN is over 6.00 on the third Friday of July a profit equal to the credit of 0.20 is the resulting profit.

GRPN po

Barron’s –

The Striking Price column discusses the third animal not often associated with Wall Street.  We all know about Bulls and Bears, but there is a saying that the guys making the money these days are the Pigs.  Pigs are the greedy guys and have been buying the dips and doing pretty well.  The saying goes, “Bulls make money, bears make money, pigs get slaughtered” and addresses excessive greed eventually catching up with traders.  Stated often by Jim Bittman as the Options Institute, “Things work until they don’t work”.  Right now buying the dips has worked and will continue to do so until buying dips does not work the pigs will keep buying the dips.

To be a little bit less piggish, consider buying call options as a proxy for buying stocks.  Implied volatilities are low so options are fairly cheap.   If the market turns and buying the dip doesn’t work, your losses may be a little more palatable.