Caterpillar is in a sweet spot with the world being in a mess. Floods, wars and the digging for minerals. The world is now being exploited at full speed. Caterpillar is there to assist. Here is what happened with Caterpillar's stock price on the day of it's release of it's last earning report on April 27th 2023.
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Why did this happen? Well look at this year to date chart and look at where Caterpillar was at three months into the year.
It was a prelude to a sixty dollar bounce. Why did it shiver on the initial announcement of the news? To be blunt, it was pretty stupid for this stock to be struggling on good news. Let's now go back to the earning reports on Caterpillar at the start of the year, released January 31st for the end of the previous 4th quarter of 2022. Look at the wildly optimistic guidance. The range of expected sales was somewhat irresponsible. The stock ended up struggling for the next three months based partly on this strong but vague guidance.
Are you now totally confused by all of this information? In my last blog I showed why both Boeing and General Dynamics popped last week on good earning reports, even in a market where the DJI dropped 709 points on the week and the Nasdaq dropped 2.6% on the week. I think Caterpillar is going to pop on the opening on Tuesday on the release of their earnings report. Will the pop last? Well here is where I want to explain how option traders are in two different camps. Most tend to be in the "let's-take-a-one-day profit" camp. Where goes that take us? It takes us this week's upcoming Call options. The ones that are just slightly "out-of-the money". Look at how the 240 Call Options are set up to trade.
Two observations. They are crazy expensive and no one is wanting to hold them. The fact that they are crazy expensive means that the street knows that these options are volatile. What about the Puts? Are they also crazy expensive? Let's see.
Notice the open interest is also at a total volume of 12. Someone is looking for a bounce of more than 12 dollars either up or down direction to make money. It's mind boogling that there is little volume in these two series of options when some series of Telsa Calls and Puts trade a couple of tens of thousand of contracts a day! Yet these low numbers are a warning sign meaning the street doesn't have any confidence in Caterpillar jumping. Lets check back on Tuesday to see what happens. Now a comment on trading extremely dangerous "out-of-the-money" options on Caterpillar which expire next week on November 3rd. Look at this.
These contracts are like twelve dollars "out-of-the-money". Who would be crazy enough to purchase them? Here is the answer. People experienced in option trading who are willing to go out on a limb. These traders are not necessarily be expecting Caterpillar to jump that high next week. So why then are they buying them? The answer is they are hoping to get like a six dollar bounce in Caterpillar on Tuesday's opening bell. If they do, these "out-of-the-money" Calls could double in price in the first hour of trading. That's what they are betting on. Call it a game if you wish but it a game only a very tiny munber of option players are willing to engage in. Let's now wait to see how all of this plays out. This is real live stuff!. One more thought. Look at this. These are Caterpillar Calls three weeks out. Remember how Caterpillar bounced up a few weeks after it's previous earning release? It could again this time. Yes there are many different ways to play Caterpillar Calls.
Now the Tuesday morning action we are waiting for. CATERPILLAR CRASHED ON THE OPENING!
What did the earnings report say? Read this!
So now what? It said the earnings were good. The stock tanked. Look at the volume of Call options now pouring into the 230 series of Calls which might benefit from the nervousness of this freefall.
What about the orginal 240 Calls for the end of the week we were watching? Here is what they are trading at now.
Lessons to be learned. This is how Caterpillar reacts to it's earning reports. The street has a habit of reading to much into negative news. This was a classic trading trap. Now a 10:28 a.m. regurgitation of all of this activity. With he passing of time things start to look different.
Here is how Caterpillar closed out the week.
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