Text size

If you want to invest with hedge-fund heavy David Einhorn without investing in his fund, you can tag along on his latest top trade in the options market.

Einhorn warned attendees at the Ira Sohn investment conference that Caterpillar (ticker: CAT ) was headed for a fall. Even though the stock is up 20% from its February low, tracing the strong gains in the commodity sector, Caterpillar’s advance seems to be losing steam.

Einhorn said the industrial-machinery maker was too dependent on the struggling coal and iron industries. He told attendees Wednesday that he expected the company’s earnings per share to fall to $2 or less by 2018 from $3.50 in 2015.

The stock is down 1.5% to $73, and its downside puts are more active than usual. TradeAlert, which tracks unusual trading patterns, notified clients that Caterpillar’s puts were roughly twice as active as normal. About 11,000 puts have traded, largely focused in the May $72.50 and May $67.50 strikes.

The expirations indicate investors are positioning for the stock to swoon from the “Einhorn Effect” more so than from some fundamental news that might affect earnings. If Einhorn says something to drive the stock down, building upon his recent presentation, those May puts will increase in value.

To our thinking, however, the May puts leave little room for Einhorn’s bearish thesis to evolve. We’d rather buy August puts that capture Caterpillar’s Wednesday presentation at Wells Fargo’s industrial and construction conference. The August expiration also captures a critical stock event – the company’s second-quarter earnings report on July 26. Analysts expect Caterpillar to report earnings of 98 cents a share on revenue of about $10 billion. The consensus estimate has declined over the past 30 days from $1.06, indicating that analysts are growing more conservative. In March, Caterpillar warned that first-quarter earnings would fall below expectations.

When the stock was around $73.58, investors could buy Caterpillar’s August $72.50 put for $4.28. If the stock were to fall to $65, the puts would be worth $7.50. Of course, if the stock rises, and never falls below the put strike price, the money spent on the put is lost.

In total, market positioning indicates options investors are betting against Caterpillar. Open interest totals 206,000 calls, compared with 341,000 puts. Short interest on the common shares is also unusually high, suggesting the bearish sentiment is widespread.

Comments? E-mail us at editors@barrons.com