Tuesday, September 1, 2009

Shooting the CAT

I would never shoot a cat. When I was a kid I did shoot our dog with my BB gun. Don't worry, it was one of those weak air-pistol types. Heck, I could shoot it into my hand and it barely stung.

The funniest thing I ever saw a cat do was take a swim in the neighbor's pool. Hmmm... I better explain (cat lovers this is your fair warning not to read the next two paragraphs). You see a funny thing happened once when the neighbors were on vacation and we were watching over their yard. We came up with this great idea. We wondered what would happen if we brought my dog (a beautiful, lightning fast Australian Shepherd) into the neighbors' back yard, closed the gate and then put the cat in the pool for a little swim. Cats do love to swim don't they?

We really didn't know what to expect, but we sensed it would be a good show. Our expectations were exceeded beyond all measure. The dog immediately charged toward the cat (which was now in the pool) and abruptly put the skids on and stopped at the pool's edge. The cat seeing (and hearing) the dog did a wide, slightly banked 180 turn in a full cat-paddle
swim to the opposite side of the pool to make its escape from both the dog and pool.

However, the dog seeing the cat advance to the far side of the pool, ran around to the other side at full tilt to meet the cat. You know what's next don't you? Right! The cat did a 180 slow turn in the pool and headed back to the other side, and the dog? Yep. It ran around the pool to meet the cat on the other side.

This cat-and-mouse dog game, was a sight to behold for us kids and put us all on our knees, our sides aching with laughter. We finally got the dog back out through the gate, which allowed the cat to climb out of the pool. No harm in the end, just some well-exercised pets and a unforgettable childhood memory made.

Today I did however, pull a trigger on CAT
(Caterpillar) and purchased (sold) a minor position on the $42 Put option (CATUC). The steep $1.47 pullback to $43.84 in CAT today sent the Williams %R indicator above 80 (oversold) signaling a green light to place a trade. The premium for the $42 option was 95 cents for a 2.26% return (0.95/42=2.26%) which was above our 2% profit target. At the time of the trade I ran the probability calculator and it came in a little above 70% success rate, so all indicators flashed the green light!

The big price swing today raised CAT's implied volatility, so at the close of the day with the higher volatility % my probability is now a little lower at 65.2%. That's okay it's normal for the volatility % to go up when the underlying stock price swings more than usual.

I'll wait and see if the market will drop some more before committing more capital. Both the S&P500 and DOW Williams %R are only at 68 and 62 which is just slightly oversold. I would prefer above 80 on the overall market as well, if we can get it.

Go CAT! Swim, baby, swim!

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