Brief pause expected in iconic industrial name
02/28/17

One iconic industrial company has been running like a gazelle but now one big trader is looking for the stock to take a breather.

Deere (NYSE: DE) broke through $100 for the first time ever in November after results beat estimates and management also provided a better-than-expected outlook. That followed a similarly positive reaction by investors to numbers reported in August.

DE continued higher since the breakout and closed up 0.82 percent to $109.51 yesterday. The stock, however, pulled back quickly after testing $112 on February 13 and February 17. Some technicians may view that as a double-top, potentially indicating a pause.

The options activity also reflected that sentiment, with a block of 5,613 March 114 calls sold for $0.29. Calls are options to buy a security, but the fact they were sold reflects a willingness to unload stock in the maker of agricultural equipment.

The activity trade was probably the work of a large investor taking profits after the rally. He or she keeps the $0.29 credit but must also deliver 561,300 DE shares for $114 if they’re above that level on expiration. Should DE remain below it, they keep both the $0.29 and their stock.

Known as a covered call, the strategy is commonly used by investors managing longer-term positions. (Without owning shares, there are significant risks to selling calls.) The short-term nature of the calls, expiring in just three weeks, also suggests the trader expects DE to pause only briefly.

The last six months’ surge is also noteworthy because the company failed to participate in the post-2009 bull market. It’s followed similar strength in Caterpillar (NYSE: CAT) and comes as industry experts predict a recovery in the market for heavy machinery following years of contraction.