Buy the Dip in Caterpillar Inc (NYSE:CAT)
Buy the Dip in Caterpillar Inc (NYSE:CAT)
Date Published: 2019-06-20
Disclaimer
The results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.Preface
"Buying the dip" (BTFD) only works if a stock in a down trend actually reverses to a rally. Otherwise the strategy has a different name -- "buying a loser."We focused our testing specifically on the trigger that identifies a stock in a down channel and when the selling pressure has eased and the stock may be ready for a bounce. In other words, we focused less on a simplistic mantra of "buy the dip," and more on the empirical view of "when the dip might reverse."
Recently
The last time the trigger we are about to cover fired was on March 29th 2019. The Apr26`19 138 Calls were opened for $3.03.On April 1st, 2019, those same calls closed at $5.45, for a 79.5% return. Here is a screen grab from the Trade Machine software.
Now, let's see it in action not for one backtest, or one year, but five-years.
Learn It
We are holding a webinar on June 27th to go over this model, and several others while posting over 30 actual trade set ups in real time. Please feel free to register for the webinar (it's free):Webinar: The five most powerful triggers, identifying more than 30 trade candidates in real-time.
Logic
It doesn't matter if CAT is in a downtrend right now. What matters is what has happened historically when that time comes, because it will come again.Buy the Dip Trigger: The Option Trade with Technical Analysis and Moving Averages in Caterpillar Inc (NYSE:CAT) .
We will examine the outcome of going long an out-of-the-money (strike price is set to the 40 delta) call option, in options that are the closest to 30-days from expiration (using calendar days). But we follow three rules:* Never Trade Earnings
Let's not worry about earnings. Here it is, first, we enter the long call.
Use a technical trigger to start the trade, if and only if these specific items are met.
Trigger is here: [Trade Machine members only]
To put a picture to the words, here is an example for Apple from February of 2018, below, where the stock was in a down trend, then it crossed above the two trigger requirements, and a stock rally ensued.
You can set an alert in Trade Machine®, which will track all of these moving parts for you. Let Trade Machine do the work for you -- there's no need to stare at the screen.
* Finally, we set a very specific type of limit:
* Use a 50% limit and a 50% stop.
At the end of each day, the back-tester checks to see if the 30-day long call is either up or down 50%. If it is, it closes the position.
Buy the Dip: 5-year Stock Option Backtester Results in Caterpillar Inc
Here are the results of opening a 30-day call option, using the 40 delta as the strike price, over the last five-years once this "buy the dip" trigger has fired:
| CAT: Long 40 Delta Call | |||
| % Wins: | 71% | ||
| Wins: 5 | Losses: 2 | ||
| % Return: | 301.5% | ||
Tap Here to See the Back-test
We're now looking at 301.5% returns, on 5 winning trades and 2 losing trades.
➡ The average percent return over the last year per trade was 48.92%.
RESULTS
Here are the results for the 30-day long call over the last three-years in Caterpillar Inc:The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting Expectations
While this strategy had an overall return of 76.9%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 25.93% for each 30-day period.
Checking the Moving Average
You can check to see the values of all the moving averages discussed above with real-time daily prices, including live after hours prices, for CAT by viewing the Pivot Points tab on www.CMLviz.com.Rigor to the Option Backtester and Backtesting
We compared this technical analysis trigger on the constituents of the Nasdaq 100 versus the results from the baseline. The baseline is simply owning calls and rolling them every 30-days with the same stop and limit as introduced above (50%). Here's what we found:* Over the one-year period ending June 2019, the average trade return was 23% per 30-day period using the "buy the dip" technical trigger compared to just 6% using rolling calls with no technical structure.
* Over the 2-years ending June 2019, the average trade return was 24% per 30-day period using the "buy the dip" technical trigger compared to just 5% using rolling calls with no technical structure.
* Over the 3-years ending June 2019, the average trade return was 16% per 30-day period using the "buy the dip" technical trigger compared to just 7% for the baseline.
Back-testing the "Buy the Dip" Trigger: More Time Periods in Caterpillar Inc
Now we can look at just the last year as well:
We're now looking at 76.9% returns, on 2 winning trades and 1 losing trades.
➡ The average percent return over the last year per trade was 25.93%.
Next Steps
Tap here to try the Buy the Dip Trigger for yourself.Risk Disclosure
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
You should read the Characteristics and Risks of Standardized Options.