Carter Worth And Mike Khouw's Caterpillar Trade

On CNBC's Options Action, Carter Worth spoke about Caterpillar Inc. CAT, the best performing Dow Jones stock year-to-date.

He compared its performance with the performance of copper and he concluded that Caterpillar outperformed copper in the last six months, although their price movement was very correlated before that period. He believes this isn't a sign of a potential recovery in copper and it should be considered as a weakness for Caterpillar.

Worth also said that Caterpillar's earnings are decreasing, while its price is going higher. He added that the company has been paying around 25 percent of its earnings as a dividend and now it pays almost 90 percent of its earnings. Worth believes that these signs are bearish and he wants to sell the stock.

Mike Khouw suggested that the best way to take a short position in Caterpillar is by selling the December 87.5/92.5 call spread for a $2.10 credit. He wants to sell the December 87.5 call for $3.85 and he wants to buy the December 92.5 call for $1.75. The trade starts to lose money above $89.60 and it can maximally lose $2.90. If the stock drops to $87.5 or lower at the December expiration, the trade is going to make its maximal profit of $2.10.