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Dan Nathan's Caterpillar Options Trade

Craig Jones

On CNBC's "Options Action," Dan Nathan suggested a bearish options trade in Caterpillar Inc. (NYSE: CAT). He said the stock is one of the worst-performing stocks in the U.S. stock market and he thinks it should have moved a lot higher than it did on Friday when the market rallied.

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The company is going to report earnings on Oct. 23 and the options market is implying a move of 6.5% between now and then. Nathan believes Caterpillar is going to issue weak guidance, especially if we don't get a trade deal. He doesn't expect the trade deal to happen, especially not a substantive one.

To make a bearish bet, Nathan wants to use a calendar spread. He wants to sell the October 18, $115 strike put and buy the October 25, $115 put. The trading structure would cost him $1.20. For the trade to make money, Caterpillar has to close slightly above $115 at the October 18 expiration and expire worthless. If the shorter-dated put expires worthless, the breakeven for the trade is going to be at $113.80.

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