The best-performing Dow stock this year is about to fall, says one trader.
According to Keene, there's trouble brewing in the charts. On a daily chart of Caterpillar, he noted the stock is starting to make "lower lows, and lower highs," pointing to a level of resistance at $90.
"We will most likely get support here at the 100-day moving average, which is around $82.50; the next level of support is the 150-day moving average, which is around $79.50," he noted.
Keene sees Caterpillar headed to $80, or nearly 4 percent from current levels. Adding to his bear thesis, he mentioned unusual activity in the options market; an institutional buyer purchased 8,000 shares of Caterpillar December $80 puts for $1.30 per contract.
But rather than play for a straight drop, Keene used a hedge in case Caterpillar does take a leg higher in the next few weeks. Keene recommended selling the December 85/87.5 call spread for $1.00.
In this trade, Keene profits as long as Caterpillar stays below $86 by December expiration.
"I am risking $150 to make $100, but I can make money if the stock is flat, lower or goes up by less than $2.50," Keene said. "So I like this spread."
Trader takeaway: Andrew Keene is bearish on Caterpillar and is selling the December 85/87.5 call spread for $1.00 in order to play for a move down to $80 per share.