This Trade Targets a 70%-Plus Return in About 6 Weeks

Option Trade of the Day: Caterpillar (NYSE: CAT)

Yesterday was interesting day in that it was the least volatile session the market has seen in over a month. I am basing this on the spread between the intraday high and intraday low for the S&P 500.

The spread yesterday was only 20.82 points and that is the smallest spread between the high and low on the index since January 30, but that is a little misleading because the S&P gapped lower that day and just remained lower.

[hana-code-insert name=’adsense-article’ /]On January 29, the spread from high to low was only 19.14 and that wasn’t a case of a gap down and then remaining confined to a small range.

Despite the ho-hum day in the market, my scans produced far more bullish signals than bearish signals for the third straight day.

There were 68 bullish signals and only two bearish signals generated last night.

One of the stocks on the bullish list was Caterpillar (NYSE: CAT) and it is my trade idea for today.

The company has excellent fundamentals and the sentiment is just coming out of an overly pessimistic reading. In fact, the reading from last Friday was the third lowest reading of the past year.

The chart looks similar to the one on Continental Resources yesterday with a potential double-bottom pattern being formed in the $144 area. For the pattern to be confirmed, the stock would need to exceed the $165 that was hit between the two lows, but that is only a 7.3% move to the upside from yesterday’s closing price.

Buy to open the April18 150 strike calls on CAT at $8.75 or better. These options expire on April 20. If we get the move up to $165, these options would be worth $15 based on intrinsic value alone. I am hoping there will still be some time premium in the price at the time so that we can get a double on the trade. Even if we only get $15, that would be a 71% gain and that isn’t too hateful.

— Rick Pendergraft

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.