Compression Breakout in CAT

[Steven Place]

After a great post-earnings run, CAT has settled down into a range. I’m looking for continuation higher.

The trade I like here is:

Buy Apr 97.50 Call
Sell Apr 100 Call
Net Debit: 0.85 or lower

Place a stop under support at 95, so around 94.74.

If CAT does run to 100 then we will roll into a different spread.

[Steven Place]

CAT is breaking out today so we are going to use that as an opportunity to scale out of risk.

Now because there is no 102.50 strike, this is going to be a little goofy.

I would normally look to sell call spreads on a 1:1 basis, but since we have to widen out the strikes, we go with smaller size.

What that means is, for every 2 of your call spreads, sell this call spread against it:

Sell to open CAT Apr 100/105 call spread.

So if you’ve got 4, you sell 2, if you’ve got 10 sell 5. If you’ve got an even number, round down.

[Steven Place]

I’m going to set some mental stops on this trade… it’s doing well and has the potential for higher theta gains, but any big move means we lose out on profits.

My stop is visual… if the white line crosses back above the red line, it means we have lost our theta gain. That will be the time to exit the trade.

As it stands that puts our stops at 98.50 and 103.50. If either of those levels are hit, close out the trade.

[Author]

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