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tv   Options Action  CNBC  January 29, 2012 6:00am-6:30am EST

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this is "options action." your front row seat to the smart money. tonight amazing short on amazon. we've got an option screen on amazon that can make you five times your money in just one month. it's a trade you will want to add to cart. we'll show you how. plus how would you like to turn your time into money? you don't need to be this guy. you just need to listen to our options trade on green mountain money. and you make the call. our phone lines are burning up. we're taking your calls tonight. the action begins right now. live from the nasdaq market site, the world's largest equity options exchange, i'm melissa lee. tonight it is all about the stocks you love to trade. we're talking about the momentum names. they worked today. they've been working all year. many are reporting next week. how can you make money off of
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that? let's find out. let's go down the list here. green mountain, netflix all up on the day and week when the market was down. so are these just too dangerous? >> they are dangerous. we were just talking about it before the show. the way the earnings season started out, we started with things people were more fearful about last year. which were the banks. we kind of got out of the woods with that one. then we moved into big tech. microsoft, apple, ibm all better than expected stocks acting well. but here we headed into netflix this week. this one is very stock specific story. unlike the other ones, it had a massive move. it had high short interest. it sets up similarly like the others. you mentioned lulu and green mountain. these left market stocks more of a beta chase. netflix is already up some 50% this year alone. >> is it part of the phenomenon in the beginning of the year where people were trying to make up for performance?
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they're throwing money at them because they have 11 months to make up if it doesn't work out. >> that's a great point. the fact people are trading these high beta stocks point out. we've also seen diverging returns. we go back to the last earnings season, it was oracle. it was disappointing on a lot of fronts. fast forward to this and what are we seeing? a couple positive results. very positive results from apple and caterpillar which is a broader industrial story. that allows people to say, okay. i'm going to take risk here and try to do it in ways that are going to pay me very quickly if i'm right. >> but google got crushed. if you look at the s&p this week, it unmuched. today so the vix is at 18.5. vix measures volatility of the s&p, not the individual stocks. we see this huge volatility. some of the big names in the s&p not going any place. s&p not going any place. this is one of those situations where you can't look at the vix
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and say vol is cheap or expensive. because it depends on what you'll do in a particular name. >> that's good news though. that does mean it is a stock pickers market. >> and that was a problem last year. last year no matter what you couldn't -- it was hard to make money because everything moved in the same direction. >> it was the market that was going to carry you up or down. >> you say that but in july, some of the stocks here, these were all all time highs when the market was melting down. in some ways everything else moved together. other than the high valuation kind of consumer discretionary gains. >> we're talking about these names because they've had big gains. and a lot are reporting next week. take a look at what the next week looks like in terms of the earnings for those in the pretty girl index, that's coined by an investor out there. green mountain having big gains after the bell last night. that's the one you're looking at.
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>> this is one that is down 65% or something from last year's highs. there's a lot of controversy about certain accounting practices and that stuff. i'm not going to wade my toe in that water here. i don't have an edge. but one thing i can do is look at some of the price action we saw for instance in netflix this week. had a massive week on strong earnings that were kind of unexpected. green mountain can set up similarly. it had strength today. as i look out, the options market next week is pricing about a 14.5% move for green mountain. it's moved a lot. >> 22% is the average move in the past eight quarters? >> the thing has moved like crazy. so here's the thing. if you want to look, there's weekly options in this i think the. i want to make a vol trade heading into the earnings. i am going to look at the feb weekly that expires next friday. march 60 cost spread. >> hold on. before we go deep into this, let's go into the explanation.
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it's a structure that puts time on your side effective low pressure. let's open our playbook and see how it is structured. it's a bullish strategy where you use that money to buy a longer dated one in the same. you want the stock to rise. by the first expiration. so now walk us through. >> sure. i'm going to sell with the stock around 5260. it's not something i'm going to rush in and do the first thing monday morning. but i look to sell the feb third weekly 60 call. it was at about $1.35. i'm going to use the proceeds to buy the march 60 call for about $3.05. next week why did i choose the 60 strike? that's 14% high r than the current stock price. that's higher than the implied stock here. if the stock moves to that price, at some point next week with a couple weeks after the expiration, you're going to see that feb call that i'm short, decay very quickly. then hopefully you're going to
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make the difference between what you made on the feb that you're short and what you're long in march. >> basically using the implied move for the quarter, that's how you chose the 60 strike. at the same time how do you factor in the fact that green mountain has moved so much? did that educate you in how to choose? >> i'm a bit stubborn. i do the same trade two days ago in netflix and it worked brilliantly. i have more than a double. i did it exactly -- >> if you do say so yourself. >> yeah. but i chose the exact implied move. i used the weeklies that i sold and bought the march and it worked like a charm. that's what i'm playing for. >> we've said it before. options traders tend to like these strategies because this decay is really working for you. i have to say with green mountain coffee, this is not a name i'm that enthusiastic about. much like netflix decided we're not going to talk about turn, when you see companies saying we're going to report less information, that's not something i like. just because starbucks is
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hitting on all cylinders doesn't mean green mountain is. they don't have the exact same business. >> i think there are several things interesting about this. dan says he doesn't have an edge with the fundamental story here. he's not making the trade for that reason. that's fantastic. if you don't have an edge, don't try to trade on something that fundamentally driven. that makes all the sense in the world. one piece of information. huge short interest in this name. i think that's interesting. dan's doing a calendar. we like this. both of those expirations have to catch all of the big catalysts. otherwise it doesn't really work. in this situation it does work. one thing, this does not speak to how math efficient call calendars are. it screams to how efficient call calendars are. so even if you don't have an opinion about green mountain coffee, this probably makes a lot of sense. >> what i'm looking to do is take advantage of the 30 day at the implied vol is in the high 80s oregon mid 70s.
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that will come down after the event. that's what i'm trying to play. >> if you're attempting to buy green mountain stock, stop, relax. perhaps grab a cup of coffee. stocks versus options. 199 shares clier one share will set you back about $5,000. let's move to the next trade here. will be reporting next week. it does move around a lot on earnings. 8% on average. so how will it move when reports on tuesday? let's call to the charts with the original pretty boy of how will it move on tuesday. let go to the original pretty boy of technicals. carter, what do you see in the chart? >> >> i've got three charts of amazon all in the same time frame. two year time it shows the topping out or turning down flattening of the smoothing mechanism. the average is now no longer rising for the first time in two years. same chart, next one, same time frame.
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another way to depict the situation which is to really illustrate the topping out action. we hit a high of 2:45. we drop to about 170. you fade this throwback. last chart. it depicts the same time frame. and it shows you with we have now broken below a trend in two years. not good. sell. >> all right. so bad news for amazon it looks like. fundamentally do you see the same? >> fundamentally and we've touched on this over the course of the last two years. i'm not sure when i'm going to get right about this, but fundamentally the valuation just seems tremendously rich. i thought that when the stock was 165. i thought it when it was 240. at least two times in the course of the last year or so i tried to put bearish bets on amazon and lost the game. it's a sentiment issue. this is a company willing to compress to run their business.
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eventually, someday, valuation has toss catch up with real aerngs. i don't know when we're going to see it. i think they're a great business. >> so mike is still bearish and sticking to that. so he's using a put spread this week. it's a basic way to make a bearish. you buy one put and you sell at the lower strike. you want that stock to go to the short put strike. walk us through. >> i'm looking at the 165 put spread. 4.70 for the puts. i'm going to sell the 165s against it for 80 cents. net debit of $3.90. the whole idea here is to minimize the amount of the total between the strikes. less than 20% of the distance between these strikes. obviously you have a short amount of time for this to play out. about 20 days before february expiration. i think this is a way to minimize the amount of risk you're taking. less than 2% of the current stock price to make a bearish bet.
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stock is applying a 7.5% move. and it has had some fairly sharp moves off earnings. especially in the two weeks following earnings. we've seen moves 15%, 16% to the downside. even up to 40%. >> mike has been bearish for a long time. a lot of people out there are bearish on a valuation basis. they've been proven wrong before. dan, where do you stand on that front? >> i think that's a tough way to short a stock like this. to me in october when they were reporting their q3 the stock was trading at an all time high. we know the margins are basically nothing. we know they're losing $20 on every kindle fire they sell and they've probably sold a lot of them. to me the stock is well off those highs last october. it's dangerous. let me tell you what i've learned. you have to think about it wholistically and find out what other things you have going on here and risk what you're willing to lose. if you are wrong, you will lose every dime of that premium. listen. i think it's probably a decent bet, but at the end of the day, i think the risk on trade could
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favor this at some point. especially i don't think it gets -- >> those are terrific points. that's a reason you want to do these trades by committing little premium to them. i considered calendars or diagonals. to minimize the decay i have. saying okay, listen. less than 2% of the stock price, if i'm wrong i'm wrong. it's an amount i can lose. it may move against me. >> it's only 2% of the stock price, but still 5% out of the money. the math you have to figure in. i like the name because they're compressing margins but that's because they're investing in the company. let's bottom line this. >> shorting amazon is the financial equivalent to drinking poison. it could kill you and offer limited upside. mike's offers five to one payout costs $390. 390 or death. the choice is yours. carter will stick around for us. meantime, got a question? send an e-mail. we'll answer it in our one on
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one show after the show on our website. and by the way, we've got a lot of questions about how to figure out the applied earnings. especially during earnings season. scott breaks it down in our web extra segment using amazon, as example. check it out. here's what's coming up next. maybe they aren't loving it. last month they had a bearish bet on mcdonald's. trades now in trouble. but with plenty of money left in it, what do they order next? find out when "options action" returns. time for pump up the volume. the names heating up the sizzle index this week. this company can analyze your genes to tell you about your genetic makeup. no need to inspect dna to find out what people think about a takeover bid. because options traders magnify the call volume this week. hypothesizing the stock is headed high above the bidding price. so who is it? the answer when "options action" returns.
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where were options traders pumping the up volume this week? illumina. at one point call volume was 38 times. average daily volume. welcome back to "options action." time for total recall where we teach you how to manage trades that are neither winning or losing. a couple weeks back. khouw and carter made a bet on mcdonald's. they haven't lost money yet.
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here's why. on "options action," it's a top item on our menu. risk less so you can make more. that's exactly what they have done with their bearish bet on mcdonald's. carter thought mcdonald's shares were looking a little bloated. >> we think it's a crowded trade. people scared of the market. hiding in a defensive name. >> better get short some mcdonald's. but there was problem. shorting mcdonald's is about as safe as eating 20 of these. to define his risk. mike instead bought the march 97.5 strike put for $2.50. now to make money, he needs shares to fall below that price by more than the cost of the trade or below $95 by march expiration. but 2.50? do you know what we could buy with that type of deal? ♪ a hamburger a cheeseburger >> and that's just for starters.
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show us how to do this for less. to spend less than sold, the put for $1.20 and completed his put spread. but he did something else. he made profits sooner and here's how. between the $2.50 he spent with one call and the buck 20 selling the other, he cut his cost to a buck 30. now instead of needing it to fall below $95. mike can profit if mcdonald's fault by more than the $1.30 he spent or below $96.20 by march expiration. there's a trade-off. by selling that put he cap the gain. good thing he did cut his costs. because since the trade, it has been flat. making this trade neither a winner nor a loser.
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now the men known to kick back a big mac or two need to make a trade. or cut their losses now. "options action" fans only have one question. what will these two do now? before we answer that, let's play a little options versus options. we drill down why we use these strategies and how it works. mike bought the put he would have paid $250 and lost 75 bucks as mcdonald's shares have barely budged. but his put spread cost 130 can be sold for the same amount. why? because the value of the lower strike put offset the decline over the other. so the question is will the shares break down? let's check in with carter. what do you say? >> it is unchanged. but the action in the stock is important. it's a massive underperformer. relative to almost all of the dow stock. so the s&p and the dow are up. year to date as well.
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and mcdonald's is starting to flag. the stock is too steep. and we think the trade stands. get out, sell your mcdonald's, sell short. >> all right. so what do you do now? >> we've got a nice opportunity here. we essentially got a free look. then the market's done pretty well. the stock has underperformed. i'm going to stick with this trade. we had a good price on the put spread. this is kind of unusual. even though when you do a put spread, the lower strike decay, usually doesn't work out this well. but i'm happy it did. >> our thanks to carter worth of oppenheimer. another item up for review is apple. defensive play against the stock last week. specifically sold the feb 440 strike call. used that money to buy a 400 strike put for no money. here's where it gets interesting. he's sold that call, dan could be forced to sell apple stock for $440. well below where it is right now. so he buys that back today, the call that is, he's out $900.
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if apple can settle in that level by next month, he's off the hook. so there are a lot of choices what do you do? >> this was an interesting one. i took a look at this because of google's action earlier. it was a big stock and it was down 10% and kept on going down for a few days afterwards. heading into earnings, everybody knew it was going to be a good report. it makes sense. especially when you remember the stock was trading at an all-time high. or 1.5% off the high. when they went into this report. so to me now you're short this 440 call. you're low on the stock. you don't do anything with the put because it's basically worthless. to me you have to make a decision. i think the stock is going to continue to possibly fill in the gap in a sideways market to a down market. i think you want to stay put. >> all right. if you want updates on our trades like the one we just got, follow us on twitter. dan of course posts regular updates of his trades on twitter @riskreversal. check us all out.
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after the break, you make the call. we are taking your calls. we're taking them them. if you want to participate, e-mail us at back after this.
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welcome back to "options action." time for you make the call. tonight celebrity caller, you could call him a real macho man. we're talking about randy jones of the village people. when not at the ymca or on the walk of fame or filming his new movie, he is of course watching "options action." great to have you on the show. what's your question for us? >> did you know that you can get it at the ymca. how you doing there? >> that's awesome, randy. i was just telling these guys i remember when i was little doing the whole ymca thing with the hands in the air and everything. >> yeah. and i bet you got nieces and nephews who probably do it as well, right? >> absolutely. always good to speak with you. what's your question? >> well, since i'm actually the
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inspiration for the character woody from toy story, i am interested in buying disney. what's a good way to play it using options? >> good question. scott, take the question. >> disney's a great company. it's up about 30% since october. so you can buy the april at the money call for about a buck and a half. 3% of the stock price you're defining your risk getting outside potential. >> i'm just curious. what was your favorite song as a village person? >> well, you know, i got to go with ymca because that -- so far we've done a total in excess of 100 million units. i'm loving ymca. >> i remember when i was kid and when you came to visit. >> you know what? do you know how to make the letters correctly? >> of course we do. we'll do that next. randy, it's good to speak with you. randy calling from the ymca. that does it for us.
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money in motion is up after this.
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