Trade Update Nov 9th, 2012: CMI has shown bizarre strength in the past 2 weeks, diverging from market weakness. That unfortunately hurt my profits on this short call spread position, but at least the stock has come back down to $94, giving me a chance to take a profit on a position that was close to a full loss only a few days ago.
Action: Bought to Close CMI ($94.50 ) Nov 92.50 / 97.50 call spread for $2.20 for a $0.10 gain
-Bought 1 Nov 92.50 call for $2.25
-Sold 1 Nov 97.5 call at $0.05
Original Post Oct 22, 2012: New Trade CMI: Playing for a Selloff INTO Earnings…Again
I traded a short CMI call spread on Oct. 4th as a way to play a selloff into earnings as I expected traders to be cautious given the poor macro backdrop. This is what I wrote on Oct. 4th:
Analysts have not yet capitulated either, with CMI sporting 12 buys, 10 holds, and 0 sells, for a name that has sold off 30% from its highs earlier this year. Valuation seems cheap at 10 times earnings, but it feels like a classic value trap at this point in the cycle.
More importantly, both CMI and CAT have had a tendency to sell off into earnings reports over the past 2 quarters, as investors have gotten more nervous about the fundamental backdrop. That tendency, and the legitimacy of the fundamental concerns, got me interested in option plays.
Expectations seem likely to be quite low by the time CMI actually reports results. You could get a JOY type scenario (JOY reported in late August, weak results, but guidance wasn’t as bad as expected, and expectations were so low, that the stock rallied by the close). However, until the report actually comes out, I think traders will be nervous to buy this dog. So I wanted a trade that doesn’t take the earnings risk, but plays for a selloff ahead of the report
CMI did in fact pre-announce, and I covered my short call spread on the selloff the following day, on Oct. 10th. Interestingly enough, CAT did sell off into earning as usual, and is rallying today despite the bad news, since the bad news was priced in. But CMI is also rallying hard today, and is up 8% from the lows it made on Oct 11th, two days after the pre-announcement news.