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Options: Put-Buying in Heavy Machinery

At least one investor in both Caterpillar and Bucyrus is buying downside protection after the rallies the heavy machinery stocks have experienced.
Author:

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

CHICAGO (

TheStreet

) -- Looking at

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Caterpillar

(CAT) - Get Report

, the 45-strike of January 2011 LEAP puts have traded more than 14,000 times so far today. The puts are currently trading for $9.60 with the stock trading around $46.70 a share. Open interest on these options prior to today's activity was 1,481 contracts, according to the

Sidewinder

report at ONN.tv.

What is interesting about these puts is that they have traded mostly on the buy side, meaning there are more buyers than sellers. One possible reason that investors are buying downside protection is because of the recent rally these shares have enjoyed. In the last four weeks alone, these shares have rallied more than 35% from below $35 thanks to better-than-expected earnings results announced on July 21.

Caterpillar is not the only heavy machinery manufacturer that is seeing put-buying today in the LEAPS series. In

Bucyrus

(BUCY)

, more than 5,000 of the January 2011 25 puts have been purchased versus open interest of just 72.

These puts traded for around $5.65, higher after closing at $5.25 last night. That 40-cent rally comes as the stock is currently only down 20 cents. That the puts climbed more than the amount by which the stock declined demonstrates how implied volatility has spiked amid demand for these options.

The spike in implied volatility for the Caterpillar puts is even more dramatic. Those puts are up more than 50 cents on the day despite a rise in the stock price.

The presence of put-buyers such as this does not mean people should run out and sell their shares. But it is noteworthy that at least one investor in both Caterpillar and Bucyrus is buying downside protection after the rallies the heavy machinery stocks have experienced. It is also noteworthy that the investor is buying the longer-dated options and pushing up implied volatilities in the process.

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

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."