tv Options Action CNBC December 6, 2014 6:00am-6:31am EST
now, you stay safe. bye-bye. this is "options action." tonight -- >> usa! >> you said it, homer. today's jobs report shows america is back, but if you missed the rally, relax because we have the ultimate catchup trade. how would you like to make money? >> smurly you can't be serious? >> we are. we'll show you how to do it. we'll show you how to make money in oil. >> impossible. it can't be done. >> we have a way, and it can be
done. the action begins right now. >> live from the nasdaq market site, i'm melissa lee, and today's theme is simple, america's back with avengeance. this number shows economic growth is strong. the number now, if you're missing the rally, what's the best way to catch up? dan, you have an old one, but a good one. that is the dog of dow theory. december 5, looking at the back end of the year, the very end of the year, and, you know, i've been in the camp of stick with what's been working up until this point. when you think about the calendar shift, portfolio managers and what they are looking to do, they are trying to find the things that have not been appreciated the way they should. the dogs of the dow strategy works when you have something under appreciated. look at the dow 30, you know, ge one of the worst performing stock. >> theory, back up, take the worst performing stocks of the
dow, buy them for the next year. >> yeah. two of the worst acting, a lot of stock specific stuff here. ge faces some risk. you know, think about the strong dollar, their emerging market exposure, these are hot spots, but this caught my eye because it's down 7%, yields 3.5% or so. maybe it's a setup for the new year. >> payroll data was positive. a take away could be, look at the stocks doing exceptionally well this year, everybody's trying to focus on growth stocks because you couldn't bet on the broader economy. if that economy is strong, some of the more conventional plays are appropriate. i think the names strong so far will remain so until the enof the year, but it makes sense people rotate into things that have not been extending their gains for so long and where the valuations might be getting stretched. this, to me, it's a strategy
that makes some sense. >> you noticed increased activity in the xli. >> thee of the top names this that, ge makes up 9.5% of it, up 11% on the year, xli. without the top gainer performing, if you see the names, united technologies, boeing, down on the year, and if you see them join the party, industrials could be the next leg. with ge, simply, you know what i mean, look at to the new year changing, look out to the first quarter, their q4 earnings report on january 23 rd, and look at volatility, that's cheap in ge. really, you know, the trade is simple. i looked at february when the stock was 26 today. you could buy the february 26 calls for 65 cents, 2.5% of the underlying stock price. you have two months, a catalyst, the change of the new year, this is a pretty, i think, simple strategy, but that makes sense
when you think about where i think the u.s. market could be going early in the new year. >> this is a short term bet, and dog of the kou theory usually plays out over a longer period of time. >> this is an inexpensive option. take the bet without a lot of risk. the vix below 12, where it closed today. a situation where you think maybe i'll do relatively simple trades, premiums are low. that allows leverage without significant risk. generally speaking into the end of the year, though, calendar spreads set up attractively because you don't have activity with the holidays going on. maybe it's not the place to play because the premiums are not high, but in general, that's a strategy to look to and can look to extending the call out further, maybe. >> context, though, with which you view the trade. this is january, capture the specific event, longer term, though, cautious on the markets overall. a longer term, do you believe this could be a winner next
year? >> funny. i looked at february, but to me, really, i think it's a one and a half month trade. get a pop at 28 and get out. i don't like u.s. multinationals here. the guys buy back a lot of stock, have a lot of dollar expo sure scene exposure to em. like this year, i think we'll have a little global growth scare in q1. >> on a day where we hit 18,000 on the dow, at records every single day, for a one month trade, would you rather -- not to play that -- would you prefer to bet directionally a winner of the dow so far this year is going to be a loser in january opposed to betting on the dog for a month? >> from now until the end of the year, i think you're fullish to fight momentum. if i day made highs, why would they be the day to pick something not working. in xli, a lot of things i do not
touch, i say that's why you want to pick a single stock and the other stocks like boeing is another thing. >> here's an interesting question for you at home. what do you do when gas is cheap, money is plentiful? go to red lobster, right? that's why casual dinings doing so well other than a few names. carter, what are you looking at? >> starbucks. it's just that. group moves are powerful. find a stock in a powerful group yet to play out, it's a good opportunity in principle. quickly, moving through, texas roadhouse. range bound, and look what happened, a break out, up 15% in the last month. deny's, range mount, clearly, and a break out, up 20%, out of the range, another one, nathan's famous hot dog, range bound, and then a break out. all a break out, ihop,
applebees, range mound, up and out. here we go, dominos, again, range mound, up and out. can you make an inference, popeyes, one more, yes, go to the trade, we think cheesecake is the last to go. we like it a lot, buyer, for a break out. the stock for this particular same, starbucks. big name, just today put the head above the top of the line, closing at 83, and implications are here that just to catch up, if you will, talking about a 10 to 15% move. like it a lot, a big, liquid name, aggressively long here. >> mike, where would you go? >> i'll go with starbucks. it is understandable to see why cheesecake factory with falling gas prices is attractive there. that's not much money left for discretionary spending in the consumers' wall et cetera. starbucks talked about
specifically addressing the fact when you go to starbucks with a line a mile long, talking about the mobile order and pay system. to me, anything that can resolve and actually get better productivity from the stores, that's a good thing. surprising surprisingly, starbucks is trading below the historical multiple, 26 times for something that's. growing at a 30% rate that's reasonable. for me, i think, if i look another the space, that's the one i would move to. >> what's your trade? >> simply, looking at february, 85-90 call spread, spend a dollar and a half for that. the call spread, looking at the relationship between the distance between the strikes, distance of $5, and when it's more than 40%, i don't like it because we need the stock to move above the lower strike by the amount you're paying. make sure the payoff justifies the fact that it's less than a 50/50 shot.
>> we talk about the breakout here, and there's nice charts in starbucks. it was down on the year three weeks ago, think about what we talked about in ge, down 7%, but it's also down a couple dollars now from the 52-week highs. i think in a month from now, we can think about the trades, and starbucks made its move, hold above the highs, i was disappointed in the stock months ago because it had not kept pace with the market. when you see a move like this, i mean, to me, obviously, there's news. >> you sound skeptical. >> i am. here's a company expected to grow high teens next few years, trades at 27 times earnings. to me, obviously, a lot of future growth is from overseas. it's not a fortress america trade either. >> the stock bounced off 70, but that's a good deal down from 83 bucks and change today where it closed. it's a bullish bet. >> 70 as well, carter?
>> the bottom of the range. this is not about support by my work, but a fallow asset likely to come to life. >> a fallow asset. good way to put it. interesting because today we had a note as well, montgomery said by 2025, starbucks exceeds mcdonald's market catch. that's a big move. >> i put it in a long for life. >> buy it, set it, and forget it? >> don't chase it here, but if you're smart enough to buy at 70 because you didn't care what was going to happen in the next few weeks and thinking in years, this is a way to do it. >> choices between a name like st starbucks and mcdonalds, go with starbucks. >> you're skeptical of the fundamental thesis. if you go with what carter said, do you like it? >> the call spread makes sense. to define a range over a period of time that you think it gets to, that makes a lot of sense.
>> got a question? tweet us @optionsaction, for everything else, check out our website at optionsactio optionsaction .cnbc.com. we have cutting edge tutorials, state of the art videos breaking down the basis of options if you're fuzzy on put and call, watch the videos, they will change your life. no word yet on whether mike will receive an oscar nomination. we'll keep you post it. check it out in the meantime. this is coming up next. up, down, or sideways, we know how to make money in apple. >> oh, no, i cannot do that. >> yes, you can, siri, we'll show you how. the question on every traders' mind. it's how can anyone make money in oil? we have a way, and we'll explain it when we return.
not so slick. last month, mike and carter made a bullish bet on oil, and let's say they were early on the trade. take a look. ♪ on "options action", it's how we trade like oil tycoons, risk less to make more. that's what they tried to do with the bullish bet in oil. >> play for a bounce in crude here. >> mike thought, i'm in. just trying to buy into the oil
etf, the uso -- >> now, don't make it hard on yourself. >> mike, jr is right. after all, 100 shares of the uso sets you back $3,000. to spend less, mike bought the january 32 strike call for 60 cents. to make money, he needs shares to rise above the strike price by more than the cost of the call or above 32.60 by january expiration, but 60 citizen? >> well, it's just not good enough. >> to spend less, mike sold the january 28 strike put for 70 cents and created a risk reversal. between the 60 cents he paid and 70 cents he elected, he collected 10 cents on the trade. he makes money if they go up, stay flat, or decline slightly. >> i don't believe it. >> don't get gidy yet. there's a tradeoff. if shares are below the 2 28
level in january, mike is forced to buy them for $28 a piece, even if they try well below that level, and, in fact, with uso down sharply, that could wind up happening. and now the entire oil community has just one burning question, what will they do with their trades now? now, this is an interesting problem. call up the tratd here. if it expires today, mike buys uso for $28, a $3 loss. if it rallies above. they are off the hook. two questions at this point. where is oil going? what are we going to do with the trade? carter, start with you in terms of the direction of oil. >> well, generous saying we were a little early. this is bad stuff. the question is, of course, what to do now. in principle, there's a certain certitude in the market that crude is going to 60, hearing 40. that smacks to me the reciprocal
at 7. 40 a barrel, people talked about 200. we are getting extreme now. we would think as bad as this is, looking forward to three to six months crude will not be lower, and if one has the fortitude to stick in. we characterize it so bad it's good if you will and work through the bad situation. >> are you willing, mike? what do you do? >> i'm willing to do it because i suspect if there's a floor to it, it's at the $6 o level. remember everybody figured opec and saudis said 70 was the floor. they, obviously, did not do that. when you try to catch the falling knife, what happens is you get stuck. that happened to us here. one of the things you can do, though, because there's a lot of volatility in oil, you can look to try to reduce the cost basis if you have the put to you, so what's going to happen? when january expiration rolls around, we're forced to own it if it remains below the 28
level. what do we do then? look at opportunities to write calls against it. floundering around here, reduce the cost basis over time. i was looking just for an example, you know, the 28 calls in february are 40 cents. if you continue to do that over time, you reduce your cost basis, and, you know, this is aed kmo a aed a commodity. we reached out and got hurt on this one. >> we had a barrage of wall street firms get bear ir on oil, not saying 40 necessarily, but 60 to 70, another story, you see the longer oil scenario just for a longer amount of time. >> actually, i agree with that. i think, really, think about the u.s. data today, it's not -- we might have thought that oil might rally off it, but oil's not trading on that. i don't believe it's a supply thing either, especially given the news on opec. it's focused on global growth. we don't have the answers from the u.s. here today about what's going on overseas. to me, i think it probably stays
down here, you know, if you think these guys are losers, i'm a bigger loser. in august, put it similar trade on uso with the stock up 43. moral of the story, careful about picking up a falling knife. we did it naked short a put. sometimes it makes sense to define the risk. what we think now is short the naked put, think just like you're long the stock right here, and that's how you make decisions because there's not a whole heck of a lot of options to the corollary. >> is the oil higher in three months a higher trade on the xle? hit bottom on monday? >> that's -- the energy stocks are not continuing lower with the continued plunging crude, so that's a tell. we think that's hopeful for this very bad trade. up next, something rare happened this week. apple fell. a simple options strategy could have saved you money vm we'll explain right after this. we needed 30 new hires for our call center.
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ipho iphone6? a trade that goes up, down, or nowhere at all? i'm excited about this strategy. i'm over at the plasma so you can break it down. >> calls against long start. this is the starter drug strategy for options traders when you think about it. intention is to add yield to who you already own. the market we're in now, the holiday market, a lot of slow trading, days off, that sort of thing, and stocks will not move a lot. this could be a really good opportunity to kind of sell premiums, sell calls dependence the stock you own and add yield to the position, and when you think about it, there's rules to live by. if your strategy is to add yield, do it on a shorter dated basis here, so your stock is not called away. if you're long stock and short a call and the call, the stock goes through the call strike on expiration, stock's going away. the idea here is to add yield. think about that. you want to do something where you have the opportunity to kind of capture some of the premiums
so you look at 3 to 5% on the one to two month basis. don't sell a call less than 1% of the stock price. it's not worth it. you know, to me, i think you have to think about volatility levels. don't sell cheap options either, and, you know, this is a good opportunity, i think, to look at your portfolio over the next few weeks and add yield. >> apple mentioned specifically because this week it fell. >> look at the chart here. people were calling this is flash crash. in two minutes it lost $40 billion of market value. >> this is a 6% drop. >> that was a 6% drop in two minutes right here. look at this. the next four trading days. that was on monday. flat lined, recovered half the losses, but closed 3.5% down on the week. it jacked them. apple was a lowball name headed in, and raising the price of options. they have come in because the stock has gone sideways here,
but this is the one month chart. that's why i think about an over write. long apple, have gains year to date, and looking over the weeks here, to me, we have a range, basically over the last month, of 109 to 119.5. here's the mid point. there's a scenario where apple stays within the range of 110 to 120ish or so. >> mike, i hear of a stock doing well like apple all year, i think not an overriding strategy, but a stock replacement at this point. what would you do? >> well, you know, first of all, one of the things that's important to remember is a lot of times people hold core positions and view apple as core. stock replacement is an attra attractive alternative, some do not sell the stock. if you're not going to, which people won't, one of the things you ask yourself is how to collect yield off of it, and in those instances, overriding makes sense. >> okay, let's do it, dan.
with apple. >> here's the thing, stock was 115, that's where it closed today. look out to three or four percent to the upside, that's the 119 strike. look at january 2 weekly options, and why am i doing that? catches christmas and gnaw year's eve, two days we're off, just adding to the potential decay of the option. with the stock at 115 today, you can sell the 119 call, january 2 at 1.15, 1% of the underlying stock price. what it's doing if the stock is basically above 119, you get called away. you can cover the call, okay, but you add 1%. on the downside, there's a small buffer. >> okay. up next, the final call from the options pits.
and stocks. >> delicious. dan? >> ge dogs of the dow, long calls. >> look at override like what dan recommended. >> our time expired. see you here next week at 5:30. in the meantime, "mad money" starts right now. >> announcer: the following is a paid presentation for body beast, the fast, proven way to build muscle, shed fat, and sculpt your best body faster than you've ever thought possible, brought to you by beachbody. >> this is real, as real as it gets. we're gonna learn, we're gonna sweat, we're gonna have fun, and we're gonna see results. >> before body beast, i was just soft and chunky and -- and pudgy, and this is the "after" result. >> it's gonna be amazing. come on. you can do this! >> body beast has completely transformed my body. swimsuit season is here, and