Caterpillar Stock Put Selling Strategy For Hurricane Recovery

My fourth and final Put Selling trade to complete my hurricane recovery strategy was Caterpillar Stock. On Wednesday Oct 31, the day after the hurricane struck I sold 5 naked puts for December 22 expiry in Caterpillar Stock at the $77.50 strike for $1.29.

Hurricane Damage Takes Years Not Weeks To Recover From

It is hard for people to understand the full extent that a storm like Sandy brings. I can recall Hurricane Hazel in 1954 which was the only Hurricane before Sandy to reach Toronto Canada and I still can recall the damage. Today cities are bigger with more people, vehicles and technology. Therefore I know that Hurricane Sandy will take many months and probably a few years for all the damage to be repaired, not weeks.

Caterpillar Stock and Put Selling The $77.50 Put

In my article on my Put Selling strategy for 4 stocks that I felt would benefit from the hurricane recovery period, I explained why I thought Caterpillar Stock was an exceptional Put Selling trade and I picked the $77.50 put strike.

Let’s take another look at the 1 year chart and quickly review why I picked the $77.50 put strike for Put Selling Caterpillar Stock.

Caterpillar Stock 1 Year Chart

Below is the past year in Caterpillar Stock. It has had a low of $78.25 and a high of $116.95.

Mark The Daily Average Volume

In the one year chart I have drawn a red arrow in the volume timing indicator. The red arrow is at 7.4 million shares which is the daily average for Caterpillar Stock.

Spot The Valuations For Support

I then look for periods when the volume is above that average daily volume. Those periods I have drawn a red arrow from the stock to the above average volume. I then look to see what average prices are investors most interested in. You can see how often investors are buying Caterpillar Stock below $90 and above $80.

Look For Declining Support

The wider light blue arrows show periods of declining volume. Notice how often the declining volume lines up with highs in the stock. Let’s review what this 1 year chart is telling us about Caterpillar Stock.

Caterpillar Stock Chart Interpretation To Find Support

Points marked 1, 2, 3, 4, 5 are all suspects for high valuations as value traps for investors. Volume is rarely above average during any of those periods. At point 1 and 2 there should have been higher volume to indicate that investors have confidence and are continuing to buy the stock. Instead volume is drying up. For those investors who love buying options, that would have been a great time to buy 6 month slightly out of the money puts. For example in March, buy the July $100 put options. They would have mushroomed in value.

All the points that followed, 3, 4 and 5 were all suspect for those of us who sell puts. This is because the volume is just not there to support a move higher in Caterpillar Stock. Aside from the volume indicator, look at point 3 and compare it to point 5. Point 5 is a lower low than point 3. As well after point 2 all the highs that followed are lower highs. If you recall from a variety of articles I have written, these are all signs of a stock that is falling in value.

In May after the first pull back to just below $90 look at how the volume is back above average. Investors are once more buying the stock. Volume continues to pick up as the stock falls below $80 by mid-July.

Then look at the next light blue arrow just before point 7. The stock gets pushed up to just above $90 by the 21st of August but volume is poor. There isn’t anything above average which is a sure sign the stock is going to pull back.

Note at point 9 though how many red volume indicators there are. This indicates that while there are buyers, there is still a lot of selling pressure. But shortly after point 9 the stock failed to break $80 despite the heavier selling pressure. This is why I picked $77.50. On October 31 I sold 5 $77.50 naked puts for Dec 22 expiry at $1.29.

At $80 there may very well be enough support from investors that Caterpillar Stock can hold on and not fall much below which could mean my $77.50 naked puts will erode in value and I can close for a profit.

Caterpillar Stock Put Selling – Roll Down and Out

If Caterpillar Stock should fall and reach $77.50 I will buy back the puts and either roll down or re-assess and if needed buy and close the trade for a loss. I don’t like losses but if the stock shows definite signs of stress I may have to consider the possibility that Caterpillar Stock will fall a lot lower than I expected.

Caterpillar Stock on November 2 2012

Caterpillar stock was disappointing today. In the stock market pull back it fell hard giving back much of the previous day’s gains. But if you look at the chart below you can see in the volume indicator that yesterday despite the big jump in the stock, volume was only slightly above average with 8.6 million shares trading. Today volume was almost double the daily average with 3.8 million shares traded and the stock closed on the low for the day.

It should be interesting to see if my Put Selling of Caterpillar Stock works out. This trade is not meant to be held until options expiry. This is a trade which will be closed prior to Dec 22 2012. This Put Selling strategy is designed for Put Selling out of the money put strikes and then buying them back for at least 50% of the premium earned, so this Caterpillar Stock  trade will take a few weeks to work itself through.

To view this Caterpillar Stock trade in the USA Portfolio Index go to the date Oct 31 in the table.

Select this link to view all stock and option trades in my USA Portfolio for 2012.