Kevin Kelly's Caterpillar Trade

Kevin Kelly of Recon Capital Partners spoke on Bloomberg Markets about a bearish options strategy in Caterpillar Inc.CAT.

He explained that the mining companies and the energy producers are not going to buy Caterpillar's machinery because they already have excess capacity and they don't need additional equipment.

Kelly thinks that it makes no sense to buy Caterpillar, which trades at 18 times forward earnings, when Microsoft Corporation MSFT is trading at the same multiple. He also believes that Caterpillar is going to cut its 5 percent dividend yield.

To make a bearish bet, Kelly wants to buy the March 60 put and sell the March 50 put. The put spread would cost him $2.60 and the break even for the trade is at $57.40. If the stock drops to $50 or lower at the March expiration, Kelly is going to make a maximal profit of $7.40.