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Options: Bulls in Caterpillar

Bullish investors are boosting options volume in Caterpillar after a Goldman Sachs upgrade to sell.

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Bullish investors are boosting options volume in


(CAT) - Get Caterpillar Inc. Report

today on the news that Goldman Sachs upgraded the industrial goods manufacturer to "sell" from "conviction sell."

While a brokerage upgrade is typically good news, today's words might have served to remind people that CAT is still considered a "sell" at GS. Intraday declines in CAT shares today caused puts to rise 13 cents so far, but one bullish investor is using that bounce to call a downside limit by selling puts instead of buying stock. During the first hour of trading, an investor sold 11,000 CAT Jan. 2010 35 puts for $4.65 per contract with the stock at $37.40. These out-of-the-money puts are home to current open interest of 15,200 contracts.

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CAT shares have rallied about 70% since reaching a 52-week low of $22.17 on March 2, and today's active investor is betting the stock won't be retreating anytime soon. In order to keep the premium collected from today's put sales, the investor needs CAT shares to expire higher than $30.35 (the strike price minus the premium). Investors selling puts should be prepared to buy the underlying stock if puts are assigned.

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Normal daily options volume for CAT is around 10,000 contracts. Today, approximately 16,000 CAT options have changed hands across all strikes less than halfway through the trading day. More than 12,000 Jan. 2010 35 puts have traded so far today, according to PEAK6's OptionsHouse platform.

On Monday, I wrote about bullish options activity in both


(MCD) - Get McDonald's Corporation (MCD) Report

and CAT with a put seller in the Aug. 30 puts. An investor sold 20,000 CAT Aug. 30 puts at $1 during that session, with stock around $37.80. CAT shares rallied as the Aug. 30 puts dropped 16 cents on the day, which pushed implied volatility of these puts down to 56 from 60 at Friday's close.

It's interesting that CAT shares are down 30 cents so far today to $37.31, but at least one investor is bullish on the name even farther out than the Aug. 30 put customers. Heavy put selling such as this does not mean investors should buy up CAT shares. It could suggest that the investors in question are not absolutely bullish on the name, but they might see a limit to how low the shares will go in the intermediate term. The investor does not need the shares to rally to make money on these put sales; they just need the stock to not close below the strike price at expiration by more than the premium they collected.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."