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Bad News On Caterpillar Going Into a Friday.

Here is how the stock traded on a Thursday.There was nothing unusual about the day. I am suprised they would dump this news on the market going into a Friday trading session. It messes up option traders. Doing this type of an announcement on a Tuesday prior to the markets opening would be a less disruptive day to do this. Here is the news. In a way this wasn't totally unexpected news. As they said, there were several other recent updates on this issue. Auto companies in their recent quarterly reports were harping on this issue. Look at how it dropped in price in the after market trading. Now here is how one series of Puts closed the day. Look at how this news totally caught the markets by suprise. The secrecy of this news is a credit to Caterpillar. If Caterpillar had this news are Deere Call holders going to get worried? Here is what happened on Friday morning. Now Deere which is now also trying to shake off this bad news. These two stocks tend to trade in similiar ways. He...
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The Relationship Between "In The Money" Call Options and "Out Of The Money" Call Options

Which are better to speculate in? Well lets pick a stock at at the close on Monday February 10th and look at how the options on it that expire on Friday in four days time have traded on the day. The stock that we will pick will have closed the day on the upside. Let's pick a stock which has options trading on it in one dollar increments. The stock we will be watching is Walmart and the option series we will be watching have striking prices of $101.00, $102.00, $103.00, $104.00 and $105.00 dollars. What is the purpose of this exercise? Well I want to point out the leverage that different series of Call options have. I also want to mention that the higher "out-of-the-money" options have a higher probability of expiring worthless than "in-the-money" or near to being "in-the-money" Calls. Catch the right directional move on the stock and watch the value of your "out-of-the money" options explode. In contrast, a Call option already "in-the-money" will also see an incease in it's value, but an increase not of the same magnitude. Now a one week and a one day look at the tradings of Walmart.
Now look at how the following four Call series on it traded on the day. The first series of Call options I will be showing are "in-the-money" followed by three series which are progressively "out-of-the-money".
What stands out to me with these numbers? The volume of trading in the Call options with a striking price of $103.00 good until this Friday. The logic is that Call options positions just above the previous day's closing have the most to gain from any upside pop. One of the problems for the existing option holders at this level is that there could be some upside resistance going into tomorow's trading session. This resistance could wipe out some of today's gains. Let's just watch and see what happens next. Now Tuesdays action. Much of Mondays gains were lost.
Are you able to see how the "out-of-the-money" Call options with the higher striking prices took more of a hit that the ones with a lower striking price. The 105 series of Calls now look somewhat vulnerable as they are getting closer to expiring. Maybe its time to say thank you and move on. Now a look at the end of the day readings on Wednesday. Call option holders should be happy.
Pick whatever series you were watching and see how much they have increased. I have blogged about these options all month. Now a five day look at Walmart. Notice the dip on late Thursday.
Any stock with a nice run up from Monday to Thursday morning is prone to a dip and buying Calls on a Thursday morning that expire the next day is most often a trap. The end.

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