Trade Alert: Adjust Open Order on Caterpillar

Today, I have one action for you to take on an existing position: Caterpillar (NYSE: CAT).

I also want to answer a few questions that you’ve sent in recently.

The last possible trade for this earnings season reported on Wednesday, and it fell short of triggering a new trade for us. So we’ll have a quiet couple of weeks ahead. The next possible trade doesn’t come up until June 19, which kicks off our next earnings season.

We still have two open positions — Autodesk (Nasdaq: ADSK) and Caterpillar. Autodesk is down about 20% at the moment, and we have a relatively short leash on this trade. Our planned exit date is next Friday, June 9, but I’m willing to give it until the following Monday, assuming it’s holding up some value, before we take action on it.

Another position we’ve been patient with is Caterpillar, which was down more than 50% at one point. Our patience paid off — this position is now up about 5%. We’ve been increasing our stop on Caterpillar to preserve capital, but now, it’s tilting in our favor. I anticipate a 50% gain in the near future.

So let’s cancel our existing stop orders, and we’ll go back to our strategy of selling half at 50%. Based on our official entry price of $3.30, I’ll place my order at $4.95 — but be sure to place yours at whatever nets you a 50% gain.

Here’s your action to take:

Action to Take
Sell Action to Take
Stock: Caterpillar Inc. (CAT)
Option Type: Call Option
Expiration: Jul-21-2017
Strike Price: $105
Option Symbol: CAT170721C00105000
Action: Sell to Close Half
Order Type: Limit Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: Whatever nets you a 50% gain.
Trade Deadline: Keep this order open until it is filled or canceled.

Now, I want to answer a couple of great questions.

From the Mailbag

Lawrence S. writes:

I am a bit confused when it comes to trades like Autodesk, which has an expiration date of June 16. I have always been taught you want to be out of a call option position by three weeks until expiration. This, as you know, is when the time value depreciates the fastest, leaving little or no intrinsic value. The June 16, 2017 expiration date only affords one week to be successful before the time loss accelerates against your recommended position. So why not sell a put on short-duration option trades or buy a call with more time until expiration?

My response:

That’s a good point, Lawrence, and you are correct: As we approach the expiration date, time value will be sucked away from the option. But it’s also the closer option expirations that will see the largest moves on the upside if the shares move. For every month we go farther out — such as July or August — we’ll be accepting a smaller and smaller gain for the same move in the stock. So it’s a balance that I think works itself out over time with our service. Some of our options will expire just a week or so after our planned exit date, while others will have a month or maybe even two based on the monthly options available for a particular trade.

Bill B. writes:

Why didn’t we buy the Autodesk options the day before at $0.20 to $0.40? Would it make sense to use straddles before earnings are released?

My response:

Thanks for the email, Bill. You’re referring to getting into a stock prior to earnings being released — but that’s a pure gamble. While countless hours have been spent researching how to predict earnings, no one has done so with consistency. See, it all ends up being a gamble, and the odds are not in your favor. That’s why we focus on the earnings drift. The company reports, it says whatever it wants to say — and the stock will react. We’re using that information, based on historical analysis, to determine the likely path ahead — and now the odds are in your favor. So while it looks tempting to bet on earnings before they’re released, it’s simply too much of a risk.

That’s all for today.

I want to let you know that I’ll be on vacation for most of next week, so I won’t send a weekly update. But I’ll still have an eye on our two open positions, and if they begin to move, I’ll send you an alert immediately so that you can take action.

Regards,

Chad Shoop, CMT
Editor, Earnings Drift Alert