Shares of heavy equipment maker Caterpillar (NYSE: CAT, Stock Forum) were trading around $31.20, up about 2% in yesterday's trading. This rally comes after CAT announced earnings before the market opened. CAT announced per-share results of 39 cents, easily trumping analysts' consensus expectations of four cents per share. Clearly, that headline number seems very bullish for the shares. But comments from CAT that earnings for the rest of the year would be closer to $1.25 than the $1.77 analysts expect has dampened investor enthusiasm today. We also saw some put activity hit the tape, which could suggest investors are seeking some protection in case of a potential pullback in CAT shares.
Looking at the CAT August 20 puts – out-of-the-money by more than 35% - we see that more than 40,000 traded yesterday – after an earnings release. The puts were trading for around $1 with the stock near $31.20. Current open interest in the puts prior to yesterday's trading action was just 2,184, according to the Sidewinder report at www.onn.tv. So it's apparent that this volume will translate into new open interest. The August 17.5 puts were seeing large volume, with more than 20,000 contracts hitting the tape at a price around 65 cents. Open interest at that strike, however, is much higher, at 10,935.
What is interesting about this activity is that the bulk of the put volume has been dominated by buyers, which has served to push up the implied volatility of the puts. In other words, the bears are out in full force even though earnings have already hit the wires. Monday night, the 20-strike puts closed at 94 cents with the stock at $30.48. That computed to an implied volatility of 73. Now with the options at $1 and the stock at $31.20, that is an implied volatility of 77. Intuitively as well you can tell that implied volatility is higher because the put price has increased despite the stock rising more than 70 cents. The same can be said of the 17.5-strike puts. They have risen from 58 cents to 65 cents despite the stock being higher.
Shares of CAT are up more than 40% from their closing low of $22.17 back on March 2. A run like that could be the reason that investors are purchasing some puts for downside protection in case the stock gives back some of its gains from the last six weeks of positive momentum.