Will is a father of two who has quit betting on horses after moving his family to a boat and living on the water. One day, while staying with his wife's relatives in Westernville, he and his family attended church. On the way there, he suddenly stops their horse wagon and races to the side of the road, scooping up a caterpillar in his handkerchief. At home again, he contemplates how to train the little red caterpillar, allowing his driver, Ned, to take a look at the insect. Ned is more experienced with caterpillar racing than Will. As competition dictates, he pokes the caterpillar in the rear with a needle. He sends him running across the table, suddenly coming to a screeching halt at the butter on its surface. Will surmises that the caterpillar, Red Peril, does not like yellow and decides he will handle him alone. As Will trains Red Peril, he and his family begin noticing how intelligent the caterpillar is, immediately running at the sight of the father's needle. Will's son also hypothesizes that Red Peril is so fast because of the wart on its rear; the caterpillar likely flees quickly due to the pain from the stab there.

During Red Peril's first race, he acts a bit nervous at the crowd but manages to win and garner attention from the spectators. One racer even comments that Red Peril seems descended from Paul Bunyan's caterpillars. After the next few races, Will has won around $100 and a large amount of fame. However, his opponent is wily Henry Buscerck at the Number One competition. He uses Red Peril's fear of yellow by drawing the racing ring in yellow chalk. Just as Red Peril is about to win, it sees the yellow line and panics, running across the racing ring and cowering. Will is furious at his opponent's strategy and squashes the opponent's caterpillar, refusing to pay for the bet. Buscerck tries to hold him back but Will punches him in the eye, disregarding Buscerck's threat to arrest him. The next day, this threat comes true as a sheriff takes the father to court. Though the two have a pleasant conversation at first, their dynamic turns sour when the sheriff proudly shows Will his yellow racing caterpillar and is met with disgust. In court, the judge asks for evidence of Will's crime, and Buscerck reveals his new black eye, forcing Will to pay a $40 fine.

After the incident with Buscerck, Will races Red Peril nine more times, getting rich off of the caterpillar's success. Then, he hears of a new caterpillar making a significant profit at another competition. However, Will still basks in the fame Red Peril has won him and steps into the shanty where the race will be held. One of Will's challengers is Martin Henry, who wields a plain bug. The other opponent has not appeared, but he handles the aforementioned rising star caterpillar Horned Devil. At the start of the competition, before the caterpillars can run, Horned Devil gores Red Peril with its sharp horn, sending Red Peril leaping into the air and landing hard on the racing ring. Will is horrified and cries foul, but Horned Devil is allowed to walk towards the finish line. Ned, recognizing the direness of the situation, leans close to Red Peril and tells him he has dropped the butter. Hearing "butter," Red Peril summons the last of his strength and sprints for the edge of the racing ring, dying at the finish line. Afterward, Will collects Red Peril and his money, then steps out of the shanty to find the judge, sheriff, and Buscerck standing before him. Buscerck smugly tells Will he owns Horned Devil, and Will knocks him into the water. Though a sheriff is present, the judge lets the father walk away and mourn.