tv Options Action CNBC October 5, 2019 6:00am-6:31am EDT
cala place for mom. a place for mom. you know your family we know senior living. together we'll make the right choice. happy friday it's time for options action >> but the question is, should you be too carter worth takes a look at the bumps in the road. then -- >> captain we will have to stop until we can make repairs. >> same can be said of caterpillar stock. a way to stay afloat even when the alarms go off. plus -- if you want to keep surfing this quick pop in the market, matt has a plan to ride without drowning when the wave actually breaks.
it's time to risk less and make more options action starts now. >> let's get right to it it's been a rocky road for the transports one of the worst weeks of the year falling 3%. city and correction territory and take a look at this week's worst performers our chart master says this could be the beginning of a bigger breakdown ahead. carter, take it away >> i mean, just that i mean, imagine a recovery in the market and yet transports down 3%. it says a lot about a lot of things let's look at a few charts a one decade chart doesn't tell you much most everything is up over the past decade but relative performance of the transports to the s&p, we are basically, we've undone the entire thing. we're back to where we were in '09. that is the issue. that is the problem. and it's just this persistent and chronic slide, even as the index itself has advanced.
all right. take a look at one or two thing it is. another way to look at it, more immediate rather than a ratio chart is a comparative chart so over the past five years you see the two colors, the two lines. s&p here and then of course transports so even as the s&p has managed to make incremental new highs, not impressive as discussed by dan and others, what we know is that the transport from this peak have continued to do that and we've got this divergence that is the issue. okay take a look. now, here is the index you can draw the line so many ways but basically at a minimum it shows what a waste of time it's been and yet adjusted for risk and it's been worse than a waste of time. right? is this random of course it's not random. stops to the penny stops to the penny lines matter, levels matter,
nothing good about this. here's the etf just vacillating around and ultimately i think what's going to happen is that we are going to reach the lows and a break here would yet further sink this thing into bad to worse to bad and worse and on and on >> all right so mike, given the charts what's your trade >> yeah, i'm going to actually refer back i have a question about those charts which we'll get to in a second looking at iyt, obviously some of what is happening in the price action we already know so some of the big constituents have been been doing well. we talked about federal express on this show before and we saw what came out of earnings. that looked like sort of classic value trap type of trade and that's a big constituent other big ones include the airlines one of which is going to be reporting next week. delta, of course they also gave some guidance this week so we already know maybe it wasn't going to be that all fantastic
although i might argue it's not going to be that bad despite all of the volatility we've seen in the market and despite considerable volatility in iyt options prices aren't that elevated. right now the december implied volatility of iyt is about 20% we're seeing an average move over the last 60 calendar days, about 43 trading days move about 1.2% that would correspond to an implied volatility about 23.5. the other thing i would point out like many situations etfs are probably at some floor here. so i think the way to play here looking out to december. i was looking at the 175 spread. that's a net debit of $2.40 as we often point out that's less than a quarter of a distance between the strikes and really is issue is it going to break through that lower level and this brings me to my question.
that also looks like a channel to me. one of the reasonsives looking at this is because it does seem to be some potential risk to me it could catch a bounce off of that and that is a question for carter >> and a very real concern for someone making the case that something is wrong, the one i just made. this is why options of course are the way to play it the thing that bothers me, not to mention the names that we said is that remember, the two biggest names by weight are railroads, three of top five are railroads. the railroads have outperformed the market and outperformed industrials and transports iffer years and years and they are all starting to roll >> what do you think of the trade? >> didn't i have some choice words for this -- the transports >> like the worst chart in the world kind of words? >> yeah, it was one of the worst looking charts in the markets. mike has a great point though. it's hard to press things on those really big support levels which i do like his put spread
he's paying about a quarter of the width of the spread. and if you start seeing some of those names in there you're seeing the rails, you're seeing the airlines i think that delta chart breaking that uptrend from the december low i think thauz with a decisive break think there's a lot of bad charts in that index does it bounce off that support near term? maybe, i don't know. but does it look like it's going to break it sometime soon? yeah >> for those of you who like to follow delta does that hold true anymore? well, i had to ask >> yeah. and i'm not answering it quickly to imply that -- meaning it seems like too simple to be true, but the concept is very real if it's moving around on a truck or a rail or an boat or a plane it speaks to the level of business activity and output in the country and while that's maybe a little passe, there's something about a major index, the one that has more prices than anyone else not confirming the other and that's what we've got.
>> all right mike, a last word? >> no, i mean, i'm kind of with that and look, we take a look at what the results we were seeing out of fed ex and others they speak to the new economy or the old. the new economy isn't better in transports even if some of the other areas of the industrials are not. >> all right well, from the transports to the industrials, take a look at caterpillar seeing a bit of a boost today, but still the the second worst performer in the dow this week. dan is betting today's move higher is nothing but a dead cat bounce >> yeah, so kind of a little cat scratch fever i got over here. listen, this rally today was urns gaited by the prospects of some sort of china trade deal. this is one of the worst acting stocks in the entire u.s. stock markets. it's one of the worst looking charts it's down 30% from its 2018 highs. it has just been in a series of lower highs here and if it can't
rally on a day like today i don't know when it's going to rally. so i just want to focus on two charts here. one since the start of january, 2018 from that heeg you can see that. it just gets rejected there all the time and it's obviously got a little support at 112. it's a double bottom dating back to late last year but let's go to the six-year chart just to kind of show what's going on right here and why the 112 level is such an important support level. that was the high back in 2014 the net stocks saw almost 50% peaked the trough declined when we had a similar kind of growth fear i look at this name and i say there's expectations for 2% earnings growth next year 1% sales decline now, if we got a trade deal and global economy reaccelerated would that change? of course it would change. trading about ten times earnings but i don't see it i think when they report on october 23rd, the options market is implying about a 6.5% move between now and then i think you're going the see
some weak guidance especially if we don't have a trade deal and i don't think we'll have a substantive one. i would use a calendar, i try to isolate that earnings event. i'd try to sell premium that's going to capture that earnings trade. so this morning when the stock was trading at 1.20, you could buy the october 18th, that's two fridays from now you're selling one of the october 18th, 115 puts at 1.15 and you're buying one of the october 25th 1.15 puts for $2.35. it cost you 1.20 that is your max risk. what you want this to do is move towards 1.50 between now and then the short dated one, the october 18th expires worthless, then you end up owning october 25th 1% of the stock price. this is an options trade, trying to isolate that earnings event
here and i like the risk reward. i don't knowant my entry point i have no idea where the stock is going to be in a week or two weeks or three weeks but i like this trade looking into that earnings event and looking to the prospect that we are not going to have a substantive trade deal any time soon >> your thoughts on the structure of this trade? >> yeah, i really like the structure. i think there's something we ought to take a look at. this is a short cal an dar she's only looking at a one week calendar maybe the way to think about this is how much does caterpillar move typically before they announce earnings and how much does the stock move after they announce urnearnings it's about 3.5% that week. the average move coming out about 5.5% so using that shorted dated put to help finance the one that actually captures earnings makes a great deal of sense. and the fact he was talking about it being a cheap stock, that's typically the case for
cyclical stocks. they're always going to look most expensive when they're trading at their lows. why is that? they're going to be coming off their best earnings before the cycle declines and coming off some of their worst. as you reverse that bottom and come up. so it's easy to get cornered into what we call value traps. when you see something like a 10 pe and you think this must be cheap. that's not necessarily the case. market might be telling you something else and i'm inclined to agree that's exactly what's going on >> you've just heard why cheap is a dangerous word. this stock has traded six times and four times earnings, so there is no sort of safety net in that notion technically it's busted. it's been trading straight down on an absolute end relative basis and it's highly cyclical tied to a lot of the problems that are in the news what is the thesis for being wrong? maybe you it's hopeless as they
say? >> i love carter's rhetorical finishes >> i love it check out our website, options action, you can check out our super cool newsletter. what are you waiting for here's what's coming up next >> stocks staging a big come back to end the week with the dow surging triple digits and if you're betting this rally has legs, mike is laying out a way to play it for less. plus, calling all options action fans reach into your pocket, grab your phone and tweet us your question@options action. if it's nice we'll answer it on air. turn on my tv and boom, it's got all my favorite shows right there. i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in. now this is what i'm talking about.
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we'll give you 300 dollars for your time. call now to get your comcast business 10 minute advantage and take your business beyond. comcast business. beyond fast. what do you look for i want free access to research. yep, td ameritrade's got that. free access to every platform. yeah, that too. i don't want any trade minimums. yeah, i totally agree, they don't have any of those. i want to know what i'm paying upfront. yes, absolutely. do you just say yes to everything? hm. well i say no to kale. mm.
yeah, they say if you blanch it it's better, but that seems like a lot of work. no hidden fees. no platform fees. no trade minimums. and yes, it's all at one low price. td ameritrade. ♪ welcome back stocks staging a rebound on top of a solid september report. and mike is laying out how to play it with his call to action. mike >> yeah, so for the call to action, we're just simply going to use calls in this particular case why would we do that given what we saw this week well, the first reason is the reason we would ever look to just trade long options and that is to define our risk, define it to the premium that we're spending the second thing is that despite the volatility that we saw this week, options premiums to me remain relatively low and the final reason would be this could be a head fake so while it might
be tempting to believe that the bounce that we saw off of yesterday's lows in the morning by which point i had covered some of my hedges at that point because it did feel like we were going to catch a bounce, i'm not sure how long that's going to last you can actually spend less than 1% of the current price of spy to buy a call option specifically i was looking at the 295 calls. 2.70 is what you would spend to buy those. the upside break even on that trade is about 1.4% higher than where spy closed today so consider this they're going to expire in two weeks, some things could happen between now and then the market could rise, it could fall it doesn't need to rise very much for you to see profits. it also doesn't need to fall very much for you to be glad that you decided to buy calls rather than to buy additional stocks here which i think would be an exceptionally risky thing to do. i think it's giving us an opportunity whether you want to play on the long side or the
short side to do so by buying options and using simple structures to do it and being quick on your feet >> questions or comments for mike >> i'll just -- i'll let you talk about -- i'll talk about the trade. i think it's a simple way to do this i think with an etf that covers an index as broad as the s&p a hundred, when you see implied volatility, the price of options tick up like you did this woke it's not that meaningful if mike is buying here after it's come in a bit but the index has rallied you know, he doesn't really need a whole heck of a lot just to break even and have the opportunity to spread those long calls i think it's a great way to do it and i think they're relatively cheap considering what the downside vol could be if you get things wrong. >> so let's opinions aside i'll read you some statistics for those who want to go with history. q 4 just to get this right, mean and median performance 1928 to
2019 is mean performance is 2.5. the median 4.4 up 72% of the time if you have the market up that's all years if the market is up at the end of q 3 the numbers go up further. so statistically it's a very robust period of equities. that's just data but it is what it is. >> so mike's trade is literally for a couple weeks until the end of october if you look at the last two highs in april and then in july, they came literally like the 25th or the 26th of the month here and what do those months also have in common? they're earnings month which is very similar to october so you may have an opportunity to ride this thing into earnings but this is a trade i think you want to exit. >> mike, final word? >> yeah, i mean, one of the things i would point out is that with all of these trades we have the show once a week we get to talk once every friday about these things
when you take a look at how much the market is moving around, bear in mind that a lot of these things could be quite forecaproe one minute and 15 minutes later you're looking at a different picture. be prepared to roll. this is a short data trade and it may even require shorter dated adjustments. if you see a move through 300 you shouldn't sit on this waiting for it to go up another 100 handles in the s&p what you should be doing is taking your profits or rolling up and out next week another case of chip whiplash as u.s./china tariffs. and it's friday, you know what that means tweet us your burning questions and you might get an options action we're back right after this. ♪
i'm not really a, i thought wall street guy.ns. ♪ what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade well kcome back. just last week dan said there could be a chip wreck on the horizon. >> you can see that uptrend from the december low it's come a
long way we haven't made a new high but what's most important is that the guidance that we got from mike last night should have set you know, alarm bells off on a lot of investors who thought we were much closer to a bottom in the cycle. you can look to november expiration by the put spread paying $3 for that >> well, as trade talks loom next week, dan, how are you managing this trade? >> listen, this is going to be a very volatile group. i think it closed at 120 and a quarter right here, so the stock, you know, is up i guess 1.4% week over week and this trade is down maybe 25% in premium terms. so you're risking what you're willing to lose but you've got to be careful you don't let something like this get away from you and you have to have a premium stock. i'm willing to risk 1.50 for that because once i know it goes below that the closer to
expiration the probability of success is very low. that being said this has been very volatile over the last year when it has made incremental highs it's had significant declines so i think you want to trade it and you want to stick with it but keep a premium stop. >> it's the darling sort of emotions they're going to break up and then they don't. okay, maybe one day, but for now the burden of proof remains on the bull it points to the fact that this thing is not breaking out. >> all right well, meantime, mike said it might be curtains for costco's big run higher >> ho dough yw do you like this trailing six month earnings, that is a history of that valuation over the course of the last ten years so this is essentially right now a peak valuation over the course of the last decade. i was just looking at the october 4th weekly november 280
put spread >> costco swung around on the back of its earnings report thursday but ended up 2% higher on the week so as the first leg of this trade expires, what do you do >> yeah, well, it will be, you know, for those of you who got into this trade and some of you have and some of you may have exited because as of this morning that trade which we spent less than $4 for was $9 so it was more than a clean double this morning, but of course now those shorter dated options have rolled off and the stock actually finished the day higher so that other put is now left essentially what we left for the trade to be with that's not a bad spot to be. if we failed to act i think what you do next week is roll into another calendar year. so you could sell the regular puts now against these and continue to finance premium and this is a trade that will in fact pay off if the stock drifts from about 291 down to that 280 level and i would be surprised if we see the kind of follow through in the market that we had finished this one with
so i think we're in good position here if you're still in it >> how do the charts look, carter >> costco has been best in class. the issue is, is it full is it rich i think it's all of those things it's full, it's rich, it looks a bit stalled. why stay >> all right up next, your tweets and the final call ♪ ♪♪ ♪♪ ♪♪
i've even built my own historic trading model. and you're still not sure if you want to make the trade? exactly. sounds like a case of analysis paralysis. is there a cure? td ameritrade's trade desk. they can help gut check your strategies and answer all your toughest questions. sounds perfect. see, your stress level was here and i got you down to here, i've done my job. call for a strategy gut check with td ameritrade. ♪ welcome back to options action time to take some of your tweets would you rather aapl calls or aapl puts? >> i think you have to pair that with what your view of is of this earning cycle the at the money or pull is at the expiration >> you know, think there could be a reward if the market goes higher but the risk is too great
to buy the stock >> transports. they're dodgy. i'd be short iyt >> yeah, cat, i like put cal p n dars >> mad money starts right now. - [narrator] the following program is a paid advertisement for the nuwave bravo xl sponsored by nuwave, live well for less. is all the clutter in your kitchen starting to look like an old junkyard? sick of spending hours cooking, only to serve mediocre meals lacking in flavor? wish your family would spend less time whining and more time dining? well, now they can! with the new bravo xl, the world's first digital smart oven with flavor infusion technology. it's a breakthrough in culinary creations! coming up next, you'll see how bravo's compact design cooks large family meals in record time! how, with just a touch it can bake, roast, grill,