CAT - Caterpillar, Inc. – Shares in the machinery maker joined in on the broad market decline today after Standard & Poor’s Rating Service cut the U.S.’s long-term credit outlook to negative on rising budget deficits and debt. Fears at home add to global concern that economic growth may slow in the event that Greece winds up in default. Caterpillar’s shares fell as much as 4.7% during the first half of the session to touch an intraday low of $102.16. Trading patterns in the weekly options suggest some investors are speculating on an immediate rebound in the price of the underlying, while near-term trading in the May contract reveals mixed sentiment on the stock. Options players positioning for Caterpillar’s shares to reverse course this week picked up roughly 1,700 calls at the April $105 strike for an average premium of $0.62 apiece. Call buyers at this strike make money if CAT’s shares rally 3.4% over today’s low of $102.16 to surpass the average breakeven price of $105.62 by expiration at the conclusion of the trading week. Two-way trading traffic drove up volume in the April $100 strike put options, which are the most actively traded of the weekly contracts as of 12:00pm in New York. More put selling took place, with bulls selling roughly 2,500 puts at the April $100 strike to pocket an average premium of $0.48 per contract. Investors short the puts keep the full premium pocketed on the transaction as long as CAT’s shares exceed $100.00 through expiration day. Options traders populating the May contract are sending mixed signals today. Investors are buying and selling both call and put options in the face of global growth concerns, and with Caterpillar’s first-quarter earnings report scheduled for release ahead of the opening bell on April 29, 2011. Options implied volatility on CAT is up 10.2% to stand at 30.20% in early-afternoon trade.
AMD - Advanced Micro Devices, Inc. – A three-legged options combination play on Advanced Micro Devices this morning suggests one strategist is positioning for the price of the underlying stock to pull back over the next six months. Shares in the semiconductor company are down 1.6% to arrive at $8.14 just before 1:30pm in New York trade. The trader sold 7,500 calls at the October $10 strike for a premium of $0.40 each, purchased the same number of puts at the October $8.0 strike at a premium of $0.99 per contract, and sold 7,500 puts at the lower October $6.0 strike for a premium of $0.28 apiece. Net premium paid to initiate the three-way transaction amounts to $0.31 per contract. The sizable bearish options play was tied to the purchase of 350,000 shares of the underlying at a price of $8.08 a share. The long stock is perhaps a way for the trader to protect himself to the upside if shares rally rather than decline. For example, if the stock is trading above $8.08, let’s say $9.00 at expiration, all three legs of the options trade expire worthless, and the investor has made $322,000 on the rise in shares ($0.92 * 350,000 shares), less the price of the options at $232,500, yields net profits of approximately $89,500. But, the real profit potential lies to the downside. The investor starts making money on the bearish put spread if shares in AMD fall 5.5% from the current price of $8.14 to breach the effective breakeven price on the spread at $7.69 by expiration. Maximum potential profits of $1.69 per contract are available to the trader should the stock plunge 26.3% in the next six months to trade below $6.00 at expiration in October. The loss in value on the 350,000-long share position is relatively small compared to the gains realized on the far larger-sized options stance in the event of a sharp pullback in the price of the underlying.
GM - General Motors Co. – One options strategist is positioning for shares in General Motors to pullback substantially ahead of May expiration. The automaker’s shares slipped 1.1% to an intraday low of $29.91 this morning, dropping below $30.00 for the first time since the November IPO. It looks like the bearish player initiated a debit put spread, buying 5,000 puts at the May $30 strike for a premium of $1.20 each, and selling the same number of puts at the lower May $28 strike at a premium of $0.46 apiece. Net premium paid for the spread amounts to $0.74 per contract. The trader profits if shares in GM decline 2.5% off the current price of $30.00 to breach the effective breakeven price of $29.26 by expiration day next month. Maximum potential profits of $1.26 per contract are available to the put-spreader in the event that shares in General Motors drop 6.7% to trade below $28.00 at expiration. The auto manufacturer reports first-quarter earnings before the market opens on May 17, 2011, three days before the May contract options expire.
