Taking Profits on Caterpillar
So, I?m sitting here in my Turkish redoubt, fighting off unusually aggressive flies and going over my charts. It?s further proof that no matter where in the world you travel, work follows you.
There is truly no rest for the wicked.
As a respite, I have the Best of the Guess Who playing on iTunes.
I noticed that the market priced our Caterpillar (CAT) July, 2014 $97.50-$100 in-the-money bull call spread at $2.50 at last night?s close. This is despite the options still having ten days left to the July 18 expiration. This means that the market is effectively pricing the inverse, the Caterpillar (CAT) July, 2014 $97.50-$100 in-the-money bear put spread at zero.
It?s not just Caterpillar that is doing this. I see this happening across the market, where downside protection is being thrown away for nothing. I see anomalies like this happening from time to time, but not very often. Think of it as complacency in the extreme, on adrenaline and with a turbocharger.
It always ends in tears, but who knows when? I priced the alert at $2.48 just to allow two cents for you to get an execution done. This should add 1.04% to your total return for 2014. If some high frequency dummy is willing to work for pennies, that?s fine with me. Nobody works for free.
If you don?t get done today, then re-enter the order on Monday. You will almost certainly get taken out after they remove the long weekend time decay.
Taking profits here does give you some black swan protection. We could have a flash crash at any time, if not in the main market, then certainly in single names. It also removes a 9/11 type risk. Sure, you say, this is all very improbable. But then, 9/11 was viewed as an impossibility on 9/10.
This has been a bang up trade for us in an otherwise detestable trading environment. We caught a nearly 10% rise in the shares in a market that was otherwise quiescent. I managed to do this with a half dozen other names as well.
It?s not that I have suddenly fallen out of love with the maker of heavy construction and mining equipment. I think (CAT) will continue to appreciate for the rest of 2014, possibly rising to $120-$130/share.
I have been following this company for 40 years and it is one of the most solid, best-managed companies out there. And I love their cool, yellow baseball caps.
(CAT) has finally crossed the wide desert and will continue from strength to strength (there goes those Middle East metaphors again!). And if China manages to engineer a recovery, then it will be really off to the races. So will the rest of the entire industrials sector for that matter.
The other problem with taking off a trade here is that there is nothing to replace it. Zero premiums mean there is not another risk-controlled position to replace the outgoing (CAT) position.
So don?t expect a lot of joy from me on the Trade Alert front until August.
I always take this as an invitation to say, ?Thank you very much, Mr. Market? and take a profit. It is also a sign of how far volatility has fallen, and by implication, option premiums.
