CAT - Bear Call

I have not done vertical trades for a while. These are more speculative trades. Normally, trade will be placed at 1/4 of position size of a covered call or just stock. It comprises less than 10% of my portfolio.

Many people are afraid of a bear call. They view it as risky as if the call are assigned.

To me, this is the same risk as a bull put except that if the put is assigned, the theoretical maximum loss is when the stock is zero.

But the key is the risk control. If you have a plan, a bull put is the same as a bear call.

In this case, I am ready to adjust the bear call if it goes against me. The risk is if I am not vigilant and failed to follow my plan.

CAT has been stagnant for almost a month. After a good earning results, the shares actually went down. It is taking a rest.

I am betting that it will stay stagnant or slightly bearish for the next 4 weeks. I like the stock very much longer term but believe it is taking a rest.




Trade:



STO Nov 80 Call = 1.52
BTO Nov 75 Call = .32
Credit = 1.2
Maximum Loss for Trade = 3.8

It is a very good return on risk for the trade.

PE: Maximum return of full credit for 1.2 minus commissions

SE: This is somewhat contrarian trade. I am bullish on CAT but short term bearish. If there is any news or drivers that suddenly send the stock up, I will adjust it to a bullish trade by:


- Adding a Long call making it a ratio spread or call calendar
- Take ownership of the stock to create a covered call.

The key point to watch is the BE point at 81.2. If it is getting close to this level fast or exceed this level, I will do the adjustment.

Also, this trade will make money when the stock is stagnant, bearish, slightly bearish, slightly bullish. I will need to adjust only if it is very bullish. It is a good probability trade.