Wednesday, May 2, 2012

$CAT trade setup

UPDATE 5/7: Since my last write up about cat, markets have since dropped. Now i am more convinced to make it a June position (read below for thoughts). I see that below the 200line, cat has support around the 90 level. IF I BELIEVE THAT THE WORLD WILL NOT HAVE ANOTHER CRISIS THAT IS NOT YET ON THE HORIZON (something new like ash in the sky for example) I am ok putting on the trade today. It will all depend on what other trades I have in my saved orders that look better. I will post when/if order is open.
ORIGINAL WRITE UP:
I am struggling with this one. I feel like I am in no-man's-land as May premiums are low and June is further out than my usual time period for selling spreads.
THESIS: CAT is a LT proven performer. It is very well managed globally! Only knocks on it will come from macro economics beyond its own control.
THOUGHTS: I have successfully shorted it before when EVERYONE was long it and tooting it (mainly Jim Cramer). Even though I won the trade, it was a difficult trade to manage so I don't think I want to do it here. So, going long is the strategy and selling credit put spread is the method.
STRIKES: I like the $100 level as it has defended it well. But I usually like a good distance between current price and strike price so I won't be selling the 100.
For May, the only choice for me to sell is the 97.5put (which is close enough to the 200 day moving average). With the 97.5 put I would also buy the 95 put to limit my dollars at risk. Or instead of the 95put I can buy the 92.5 and fewer lots to achieve same dollars at risk and premium balance.
As of today, this only gives me 3.5% distance from current price to short strike. This is closer than my usual preference. So, this makes me look at a June position instead of May.
There I can go to the 95/92.5 or 95/90 or even 90/85 and double my distance to short strike from today's price. This is a much more comfortable position for me.

CHOICE: I chose to wait out today and continue to watch it since this week we have jobs and eurozone news that are potential market movers. But I am tending to the Jun options position given today (5/2) prices.
I WILL POST UPDATE ONCE ORDER IS OPEN.

CAT CHART:

Open interest in CAT options is much heavier puts than calls. This may tell me that more are worried or expecting downside than upside which is just fine with me. When everyone is on one side of a trade I am more comfortable taking the other side.























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As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.

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