Schaeffer's Midday Options Update Features Cisco Systems and Caterpillar.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Caterpillar (NYSE:CAT) and Cisco Systems (NASDAQ:CSCO). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Options Update: Letting the Caterpillar out of the Bag

A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is Caterpillar.

After the market finally removed the worm taste from its mouth (for all of you who wrote in on Opening View's initial headline this morning), the major-market indices are mixed heading into the final half of the trading session. In a speech at the Fed's Jackson Hole retreat, Chairman Ben Bernanke avoided speaking on the Fed's economic outlook and monetary policy, leaving Street interest-rate watchers out in the cold. However, Bernanke chose to focus on the topic at hand, stating that "The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared -- for example, by helping displaced workers get the necessary training to take advantage of new opportunities -- that a consensus for welfare-enhancing changes can be obtained." Furthermore, he said that the effort is not easy, but is well worth making because the benefits of global integration are large.

Most-Active Options Update

At 2:30 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 11,292.9) has dropped 0.10 percent. The S&P 500 Index (SPX - 1,296.23) is up 0.01 percent, and the Nasdaq Composite (COMP - 2,141.9) has gained 0.22 percent. At 2:31 p.m. Eastern Time, 1,796,761 calls have changed hands compared to 1,326,081 puts, equaling a single-day put/call volume ratio of 0.73. The CBOE's equity put/call volume ratio stands at 0.68, while the ISE's ratio comes in at 0.70.

Option Activity Follow-Up

Yesterday, I took a look at some heavy options activity for Cisco Systems (NASDAQ:CSCO) which crossed at the stock's September 30 put. By the end of the session, the more than 4,500 contracts in volume that I reported on had ballooned into more than 15,000 contracts, most of which translated into new open interest. Digging into this activity, most of the blocks were small in stature, numbering about 50 to 100 contracts apiece. However, a couple large blocks of more than 1,000 contracts changed hands, including the one I reported on yesterday. While the aforementioned block of 4,500 contracts appeared to be the initiation of a put-sell position, the two large blocks that crossed at the end of the session were most likely put buys. The difference is that the put seller doesn't expect CSCO to close below the 20 level and is trying to pocket some premium on a stock he believes will underperform over the near term. Meanwhile, the put buyer is looking for CSCO to fall below the 20 strike before September options expire on the 15th.

The reasoning for both trading strategies seems pretty sound; although I believe that buying a put on CSCO right now could be a bit more risky. For more on my reasoning for trading CSCO over the near term, check out yesterday's Options Update.

Click here to see a September open interest configuration and daily change for CSCO: http://www.schaeffersresearch.com/wire?ID=17219

Caterpillar

The laser beam of scrutiny from the options pits has fallen squarely on blue-chip construction equipment concern Caterpillar (NYSE:CAT) today. The speculative options traders have piled into the stock's September 67.50 call by the handful so far, with more than 5,000 contracts crossing the tape on open interest of 1,908. Looking at the trades, I noticed that two blocks of 2,500 contracts crossed at 9:59 a.m. and 10:13 a.m., both at the bid prices of 1.10 and 1.15, respectively. Complicating matters is that these trades appear to be paired with two blocks of 2,500 which crossed at 9:59 a.m. and 10:33 a.m. on the October 67.50 call, which traded at the bid prices of 2.60 and 2.70, respectively. With both sets of seemingly paired trades appearing to be the initiation of long positions on CAT, I am at a bit of a loss as to what type of spread strategy this could be. I'll dig into it a bit further, and see if I can't give you an update on Monday.

Moving right along, let's take a look at CAT's technical outlook before we jump back into sentiment. Normally, caterpillars eventually turn into butterflies, but it seems that CAT is trying to go in reverse. The stock had soared along the stellar support of its 10-week and 20-week moving averages since November 2005. However, since tagging an all-time high of $82.03 in mid-May, the shares have turned sharply lower. Clipping the wings of this former high flier is resistance at its declining intermediate-term trendlines, which have ushered CAT lower since May.

Meanwhile, the security is poised to close its first month below its 10-month moving average since August 2004. The equity's 20-month trendline does lay beneath the stock, but currently rests near the 60 level - a more than 10-percent decline from CAT's current perch. What's more, to test this long-term support level, the shares would have to plow through intermediate-term support at the 65 level. This strike is also home to peak put open interest in the front three months of options, and could provide some options-related support. However, should CAT break this double-barreled level of support, I am left to wonder if the 20-month could stop that much selling pressure.

Sentiment Rundown for CAT:

--Percent of analysts tracked by Zacks who rate the stock with a "buy": 27%

--Number of analysts tracked by Zacks: 11

--Short interest as a percent of float: 1.59%

--Short-interest ratio: 2.0

--Schaeffer's put/call open interest ratio (SOIR): 1.35

--SOIR percent rank: 99%

--Schaeffer's Equity Scorecard: 5.0

Looking at the sentiment indicators, I see a rather mixed picture for CAT. The first thing that jumps out is the lack of short-covering support. Remember that when a stock has a high degree of short interest levied against it, there are many investors out there who could be forced into buying back those positions should the shares move higher. Conversely, a large short position on a security could also pull in money from the sidelines on a pullback, as these bearish investors move in to take profits in the form of buying the shares back. Neither scenario is in the cards for CAT, as it would take just two days for investors to cover their bearish bets.

However, analysts are surprisingly bearish toward this blue chip, with eight of the 11 covering brokerage firms doling out "holds." Normally, Wall Street is very hip to the blue-chip scene, since analysts have been touting them as the way to invest your money this year. Thus, this negativity from the Street is a bit surprising. Finally, prior to today's call activity, traders in the options pits were heavily bearish. In fact, CAT's SOIR of 1.35 ranks above 99 percent of all those taken during the past year.

But, before you contrarians out there take this as a reason to bet bullishly on CAT, keep in mind that the stock earns a Schaeffer's Equity Scorecard ranking of 5.0 out of 10 for a reason. While this is a rather middle-of-the-road reading, I would be hesitant to go long on CAT right now. Look for a breach of or rebound from the 65 level first. Then make your decision accordingly.

Click here to see a Monthly chart of CAT since January 2004 with 10-month and 20-month moving averages, and a Weekly chart of CAT since October 2005 with 10-week and 20-week moving averages: http://www.schaeffersresearch.com/wire?ID=17219

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com, is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method.