tv Options Action CNBC August 31, 2014 6:00am-6:31am EDT
money, then things. now you stay safe. this is "options action." tonight, feel like you're the only one missing the rally? >> it's a story about a man slowly succumbing to a kind of nightmarish loebllyness. >> we've got three ways for you to play catchup. plus -- >> everyone is freaking out about september, but we've got the surprising reason why you shouldn't be afraid. and, are you looking for a bargain? >> if the answer is yes, don't wait a minute. >> we'll reveal the single best
trade in the market. the action starts now. live from the nasdaq market site, i'm melissa lee. these are the traders in times square and san francisco. as the s&p closes at another record, growth stocks are continuing to lead the way. are they your best bet for the last four months of the year. carter, we've got to start off with you because growth is where it's been at. >> that's right. in many ways it's a week where it's more of the same. unrelenting, uninterrupted bull but growth stocks really are important here in the sense that there's not a lot of growth in the market. people go to any multiple for certain growth stocks, tesla, netflix, but biotech in particular is an area where if you look at certain names, they have the growth that's quite exceptional and that you don't pay very high multiples, something like gilead. we have a table with the four multiples that will be available in the market rate and you get the same growth rate out of
gilead as the others. >> you can see the reach for the growth. for the month you can take a look at the russell as well as tech as well as carter mentioned biotech outperforming the broader indices. other names like gopro, mobile eye, these names are having monster runs. >> yeah, they certainly are. as soon as the market turned all the growth names are kicking in. we manage a couple billion in our gross sector stock picking area and those names, too, all growth names. growth at a valuable price here is what you want. that's what's going. sometimes have you to do a little research. you don't always have to pick the most known names like tesla that have the high pes. tesla, they're sort of suppressed. other names in technology are also doing well, names like net app, other names in biopharmaceutical, jazz pharmaceutical. growth there with the pe multiple is somewhat suppressed
when you look outgoing a couple of months. >> mike, how do you look at the reach for growth where we are in the context of the market run? >> you know what's interesting to me, people are willing to pay for growth in the areas that are not proven. names like gilead, they are companies that have a long track record of earnings and revenue growth. you compare that to something like go pro or you compare it to something like tesla, tesla has yet to prove itself. this is a situation where obviously they're going to sell a respectable number of cars, but if you take a look at those multiples, saying you need a million dollars of enterprise value per car sold, that's a lot compared it other businesses in the space. biotech, that's not true. these companies, growth companies, versus old state health care companies like johnson & johnson, these are actually cheaper. >> right. mike, we're focusing on gilead tonight. i want to back up. we're taking a look at biotech. what's interesting, there's not
only growth but there's potential for consolidation which has moved these names as well. >> certainly for the single name, single story biotech conditions, a lot of those are getting snapped up as the larger biotech companies are looking to make sure they have a broad portfolio. gilead has a pretty decently broad portfolio. the blockbuster is their hepatitis treatment. obviously their hiv and cancer treatments show a great deal of promise. hepatitis, the holy grail is an all oral solution. that's essentially what they're working on. that drug alone, savaldi had over $1 billion in growth. >> a lot of people really, really want to know because they feel like they completely missed out on this. >> that's the hard part. this company is up 400 fold in the past 20 years. that's a pretty astonishing
number if you think you could go back and buy this thing for a quarter if you look back in time. right now it's actually looking like it's gone straight up. it's very hard to get in at a stage like this. i'm going to use options to make a bullish bet. look out to january, look at 19.10, 1.30 call spread, you can spend $5. options have been quite cheap and a lot of names here it's not quite as cheap as it is in some others, although the stock is. i think this is a way where you can get some nice up side exposure looking out over the cures of the next four months or so if it continues to rally and you're only risking about 5% of the stock price if it doesn't. >> what do you think about this trade? >> i like this trade. you use a call spread to do the stock replacement. even when you look at this trade, other growth names out there, i think you can apply the same sort of structure, the same sort of call spread that's
slightly out of the money call spread and got some value and apply them to other growth names. those names that have the same kind of value and the same kind of well-roundedness that gilead has. >> does the chart back up high moves for gilead? >> the stock is a steep move but not so matur suggest that it's exhausted. >> so there is some up side? >> we think so. >> despite all the worries around the world, the emerging markets have held up surprisingly well. susan lee is back at cnbc making her debut. >> that's right. the etf, eem is up 8% so far this queer. some options traders think it's going to go even higher. in some of the day's biggest trades we saw, bullish bets on eem and etf called the ewz. one trader making a pretty big wager that the brazilian market
is heading up 20%. we saw a major trade in the eem. this trader is using options to effectively getting a long position going long. 1 million shares on this etf. talk about a bullish bet. some big money betting on big moves in the emerging markets space in the future. >> susan, thank you so much. will the bulls be right? carter has made his way to the smart board. >> there's a lot to look at. let's try to figure it out together. the first thing is the setup. emerging markets have not participated to the extent that the u.s. market has participated over the last five years. this is essentially a five year part juxtaposing s&p 500 with eem and obviously it's the spread that is quite incredible meaning we haven't had the lift that we've seen here in north america. so is the strength of the past couple months a foreshadowing of a bit of a catchup here?
we think it is. let's look at some charts. standard one year chart. nice steady up trend. tracking its line and no problems, if you will. yeah? nice channel, if you will. so here's the issue. we're right back to the top. do you break out here or not? this 45 level, keep that in mind. look at here's our line again. look at the weekly chart. well-defined top at 45. well-defined top at 45. the presumption is after you go past a top you exceed the top. the setup is right not only in the daily setup, on the weekly. now keep this in mind because we think we're going to hit 50, 52. nice 10% move here. look at the two long-term patterns i want to show you. now here's our line. here are our tops. here's the presumptive breakout. take it to this level. now this level if and as we get there, it means a very important thing has happened.
same long-term chart with no lines. if an s, we break out above our circles here, we're going to exceed the upper band of this well-defined wedge. important development. we like eem absolute and we like it relative to the s&p. >> carter, what is that level that you're point to go? >> you're talking about the trend line here? >> yeah. >> this is right where we are now. >> okay. >> 45. >> exactly where we are. >> not only is it the key level for the -- well, i've lost my chart. it's the key level for the here and now. it's the long-term key level and that gives you a double setup. >> carter says it looks like there's up side. brian, what's the trade? is it a simple trade tonight for eem? >> yes. the fundamentals are there trading toward looking at eem. simple trade. you don't have to cry about it. you don't have to worry, well, is it going to get past this resistance? i don't know. buy a call.
volatility is very suppressed. calls on a relative basis being at 50% discount to what they were in their 52 week high in terms of volatility. go out and look at the october 45 call. what i simply want to do is pay a dollar. my break even is $46. you can almost use leverage here. that way you get all the unlimited up side potential that carter is talking about. volatility will rice. calls will hold up value. people are looking at the charts. that's why i like this right now. if it sells off, i still like going to these calls. i think you get the up side with buy a call for a buck. >> mike coe, would you spend a buck on this? >> i would. the options are cheap as brian pointed out. a lot of people look to emerging markets and they think there are a lot of materials in there. it might surprise people that the industries that have the waiting in the eem include taiwan, a lot of financials.
in fact, that valuation which you might attribute to caterpillar and other things that won't be good in the commodities space applies a lot less. i really like this trade. >> carter, the first shot that you showed us showed the s&p 500 and eem and you implied that there's going to be a catchup there. what's the probability this it will be the s&p 500 that will go down to meet the eem? >> it's about relative and absolute. there is that possibility that the convergence is both entities, one moving up, one moving down or the rate of change meaning the s&p continuing. but either way we'd say convergence. >> all right. >> one more point to that, too. i think the reason why eem actually catches up is the strength in the u.s. dollar is weakening those other currencies. we get a weaker currency globally. i think that helps the emerging markets, too, push higher. i think you're in good zblap got a question out there send us a tweet at cnbc options and
everything "options action." we have the hottest news and videos throughout the week as well as exclusive trades. you want to check it out. here's what's coming up next. >> be afraid. be very afraid. >> traders are getting worried about september, but we'll tell you why it may not be as bad as you think. plus, did you know cars and canishes make you money. >> say what? >> a surprising and delicious trade when "options action" returns. >> announcer: "options action" is presented by t.d. ameritrade. think or swim. options floor,close te you'll bust your brain-box. all on thinkorswim, from td ameritrade.
after a nice august, is a september swoon ahead? that's something a lot of traders are starting to worry about, but brian has found some surprising statistics that show otherwise. we want to hear it. that's all that we've heard about going into labor day. >> in september the markets are typically down. the question is does it always happen in the viks. historically it's about a 50-50 chance when you go back to 1991 that the vix is up. one thing that's interesting in the last decade, that's a lot less. you had two major spikes in the vix and volatility in september. the rest of the year you can see in this market that we actually saw the vix go down. it's kind of aiko none drum whether you want to start owning volatility. i think the key point here when you look at this and when you look at any of these sort of
spikes, they are hard, they are sharp when they happen so that's why traders like buying volatility headed into these fall months because when it does happen, it gets very difficult. >> so walk us through just here what we're seeing in terms of what we're seeing here in the s&p 500 and then also what you saw on the vix. >> right. typically when you look at the vix and the s&p, they're negatively correlated. when the market sells off it sells off faster than it does when it's rising. when you look at the finanphfii crises, these spikes in volatility happen. the market deteriorates very quickly. when you get into the fall months when there's pent up nervousness, you can find the spikes in the vix happen sharp and hard. you're seeing in the s&p a market that sold off very hard. >> i think there would be some people out there who will say, brian, i trade in volatility but what you're seeing is that the
vix has been dampend. here they're sort of settled down. >> when you look at the central banks and the federal reserve bank and ecb, all of that liquidity has played a part in the dampening of the down side. when you get liquidity and monetary policy, the market is not moving. you are looking at an s&p that's moving half a percent. there's no reason to buy a put option. if it doesn't pay off, you spent the money and it didn't finish in the money. obviously we have seen sharp spikes in september before that can happen if we have a selloff. we're coming off of all-time highs in the s&p. very, very low levels in the vix. you have to be careful of a quick spike. >> the roles are dammening volatility. mike coe, what does this mean
for you? >> all of the central banks have been giving puts to the financial market for free so therefore it's the price of going out and purchasing them in the open market has declined significantly. it's a huge cushion, but i do want to point out one thing, and that is when options prices are low, and they are low right now, even if you think the probability of success is less than 50-50, the amount that you can make if a volatility spike occurs is going to vastly outweigh that. so your expected p and l. is going to be profitable. that's something to remember. when options are cheap the up side makes it beneficial to own them overtime. this is a situation where i would absolutely not be short volatility in general. not in index and single stock. >> carter, i want to go to you and talk about seasonality. november isn't going to be a good month for going to be
seasonally strong. obviously this next six to eight weeks is where some of the great market collapses have occurred. the month of september being the worst of the 12 months. in fact, it's the only one since 1896 that is down more than half the time and on average september is down about 1.1%, around that is an outlier, but another data point that's very important, and it affects the statistics a lot, is what kind of august did you have? that's important. meaning, the worst september is typically occurring when you have had a pretty bad summer. we've had a fairly decent august, as you know, a nice ricochet in response to the very bad july. in some cases it's not the setup for a cataclysmic september if you look for data as it relates to the preceding month of august. >> okay. so, brian, i want to go back to you. no reason to own volatility. on the flip side, options bets are even cheaper to make going to the last quarter. how do you use this information?
>> i want to go back to mike's point, too. i think he makes a great point about buying options when they are cheap, when you do see volatility cheap. right now full disclosure, i am long volatility married against a long equity. whether you buy a call or a put against long stock or you just own volatility at some point, i think it makes sense. i'd rather marry stocks with volatility than stocks and bonds. you buy stocks, buy a put. they're very cheap right now. they do pay off big. if not, i see the market significantly higher. you'll win that way, too. coming up next, how can one of new york's classic foods make you money? find out when "options action" returns.
a knish is a yiddish word for dumpling. it was invented by yonah's family. this is a spin fish knish. this is my favorite knish. potato, spinach, onions, spices, wrapped in a very thin dough and baked. this knish is $3.50. do you have any options cheaper? >> very question and a very delicious looking knish, by the way. >> carter, have you ever had one? >> i like potato pancakes but that looked good. >> the question to you, mike, do you have an option cheaper than $3.50. >> yes, i think i do, on a stock that i happen to like, ford motor company. lower gas prices will help sales of f-150s which is even great. even if the gas prices go up, they started rolling out the
mustan mustangs. one of the things you can do is go out in time. we talked about the fact that options are cheap. look at the january 17 calls with the stock over 17 bucks. 17.5. you can buy those for $1. that is obviously a lot less than three and a half bucks. in fairness, that represents one dollar per share. there are 100 shares per contract. if you go out and buy that option, you're going to spend 100 bucks. the question becomes now would you rather own this call or 1/3 of a yonah shimmel knish? >> i think i would go with the knish. the stock in ford is a value play. you look at the pes that ford has done, with the value on ford, i would look other places. airline industry over the car industry is better. something like southwest
airlines or something like that. i think there are some other better plays out there than owning ford motor company. >> this is cheaper than southwest. >> i don't love it. >> sorry. >> this is cheaper than southwest air on a multiple basis. we have a very old car fleet in this country. we have seen what can happen to the airlines when things go pear shaped. the extrinsic premium is about 50 cents on a stand still basis. >> carter, quickly the charts. >> not a great value. >> knish charts by the way always look good. coming up next, the final call from the options pits. [bell rings] ♪ time and sales data. split-second stats.
to express your longs, you don't need to. >> brian. >> i like eem. 1 value play. >> carter? >> like eem and i like it relative to the s&p. >> our time has expired. see you next friday at 5:30. meantime, don't go anywhere, "mad money" starts now. "mad money" starts now. have a great weekend. >> announcer: the following is a paid presentation for the nutribullet brought to you by nutribullet llc. special tv offer. stay tuned to find out how you can get the nutribullet superfood nutrition extractor free! that's right. get the complete nutribullet system free! details just ahead. >> my muscle aches, my back aches really started to decrease significantly in one week. >> first night that i actually used the nutribullet, i actually slept really well. that was exciting. that was phenomenal. >> the bad cholesterol which was 290 went dto