tv Options Action CNBC April 29, 2017 6:00am-6:31am EDT
hey there, we're live at the nasdaq market site after a busy week. the guys are getting ready behind me. while they're doing that, here's what's coming up on the show. >> you know what's cool? >> buying shares of facebook for just under $5. wheel show you how do it using options. plus it's everyone's favorite saying on wall street. >> i'm just another broker. >> no, not that. i thought sell in may and go away. there is something that suggests you might want to take that had vice this year. and. >> ludicrous speed, go! >> that's exactly what shares of
tesla have done, but if you are worried about next week's earnings, we'll tell you how to protect yourself. the action begins right now. >> let's get do it. the nasdaq 100 posted the longest winning streak since 2009. the index hit a high thanks to earnings from amazon and alphabet, both soaring to record highs. it ain't over yet. next week is apple and facebook. facebook hitting an all time high today. apple trading below it both stocks implying big moves with the potential to spark more than a $40 billion shift in market cap. should you continue to bet on big tech and which is a better buy right now? apple or facebook? let's get in the money. dan what do you say? >> i think the earnings we saw last night from amazon, google, microsoft, should lead you to believe we won't see massive surprises next week. the way
investors are positioned, we know they are overweight. they are massive gainers, driving that massive out-performers. the nasdaq is up 12.5%, versus the s&p up 6% year-to-date. i hate to be so blase about it. it's move on average, 5%. i'd be shocked to see it move outside of that range. >> at this point, why would people be looking to offload winners right here. it doesn't make a whole lot of sense. in apple's case, it's not expensive based on trailing earnings. facebook is the story. the expectation there's are for a 45% increase in revenues year on year. for 120 increase in net income year on year in the quarter. that's a high hurdle for anybody to get over. >> what does it ends up being? we all know. is it momentum peak for the crowded successful names or are they going to continue to lead? let's put the current price into
action. it's the biggest annual rate of return, except coming off the '09 low, we were up 60. '98 and '99 we were up about 75 each year. the question, how much more can we do. that's what we'll discuss. i got some charts. >> we will first do a round of would you rather? i want to see where these guys stand before we get to the charts. dan, if you had to put money to work -- >> with both at all-time highs, woi go with apple. i think there are catalysts that are identifiable. as far as facebook is concerned, we don't know. they make acquisitions, use currency and cash and they work out or they have so far. to me they're the ones who have more surprise. apple will be more you can look down the road and see what's coming. >> straight equity i also would be with you. just because i think we are obviously at these very heavy levels at this point. i think apple presents significantly lower down side potential risk. however, that said, given the momentum facebook has had and
given the fact that's the bigger grower, if there's a way to play it with options, tease, then i might lean that direction. >> i wonder what trade you'll have. >> so i will go face backe whbo means it's 2/1. we'll do apple and facebook first. let's get the bigger situation which is this maybe how it all ends? apple what? well, i think you can draut linlindraw the lines like that. something of a head and shoulders bottom. the question is, has it played out? what's the price objective? typically, it's to the high, maybe through a high a little bit. what you got here is the breakout. i'm thinking apple has some check back risk, which is it often what we see after a stock moves to and all time high and back. you'll revisit. so my thinking is apple has
some downside risks going into the number. by contra distinction, this is facebook, this, obviously, what trend is. in fact, few put lines on it, it has lived within this quite precise channel. the question i guess is this, meaning we have been at this low, at this high, at this low, at this high, so to speak. are we getting close? i think we have a little more to go. we will stick with the bullish bet on facebook, we were working on a month or two ago. let's pull it back and try to put this in perspective. okay. these are top stocks in the s&p and valued at about 2.8 trillion. it's the same value as the bottom 250. top five, bottom 250 worth the same. that's not that rare of a circumstance. it happens the 19% of the time. 1990 to present. so take a look at these numbers. market cap, top five, bottom 250. cash flow, it's identical. and they're trading at same valuation. the fundamental guy would say the top five are growing faster,
it's a better bet. let's look at this chart. this is a chart of the 2.8 trillion plotted equal weight. they bounced off the line perfectly and i think it's steep. then vutsi you have the risk tht it will come down like this. back to the chart, i bet you this is ultimately what will happen. we had the earnings from all of them. if i had to pick apple versus facebook, i'm going with facebook. >> mike, you picked facebook, too with an options trade. >> i think the idea here is we have earnings coming up, we want to try to mitigate the expense of options into that. i was looking at the may to september 155 call spread. the options markets implying a 4% move this is a bet that will make that 4% move to the upside. the premium for that near-dated option will decay much more rapidly than the longer dated one. so we'll try to use this
catalyst to take advantage of that. you could sell more calls against it after may expiration. >> this is a trade structure we have not talked about in a while. it makes perfect sense for a stock that has just gone on this leg higher here. is this stock, could it go up 10%? i think it's unlikely. the ability to surprise. the idea of selling near data premium to finance longer data premium, let things consolidate. that chart of the five stocks, when you look at the move it just made, it's scary. when you think about it, what do you do when you buy an index? you buy the collective ernarnin in growth. it makes me nervous. you said you've seen this in the late '90s but that didn't end so well. >> happens 19% of the time. 19% of the time the top five stocks equal the bottom 250. >> but this one in particular, just because of the basically stellar rate of its growth is the reason why it's in there. it's the reason it's -- >> and they're all the same type
of thing. >> jim cramer makes this point all the time. then pick the stocks, if you owned those stocks versus the s&p over the period of time rather than the etf would have massive alpha. another stock on the hot streak is tess lachlt shares hitting a fresh new high, taking a leg up in the day after elon musk was on stage at the ted conference in vancouver and revealed a glimpse of what the upcoming semi truck will look like. he also suggested that the company will likely add four new gig gigga factories, saying the truck can be driven around like a sports car. how should you play it? >> the stock sup 45% on the year, a little more. up 70% from 52-week lows in december. i think there was a lot of trepidation among investors into the election, a lot of the rhetoric that the candidate would not be favorability to
green sto favorable to greenthi. i think there's risk near-term, if you're a holder of the stock you should consider near-dated some protection. today when the stock closed at 13.314, you could buy the may put spread for 10 bucks, selling one of the 280 puts at $2, that's your risk, $8, breaks down at 302. you can make 20 bucks between 302 and 280. down to about 10%, 11%. if you are looking to make an outright bear iish bet this tra makes sense. if you thought the stock could sell up, they already have given q1 deliveries, raised capital, shorts got squeezed, maybe have a check back. >> you can't short a stock like this with the short interest as high as it is. it's not trading on a trailing fundamental. the future is murky with respect
to valuations. on the energy side, it's the sigh of duke, automobile side, it's the size of general motors. >> what has more down side risk, facebook or tesla? >> facebook. what do you think? >> it's a good one. i think facebook, because it's a 4$430 billion stock. and i think that, you know, i think people will be left scratching their head. >> you love the chart on tesla. not long ago. you loved it. it's worked. >> what do you do now? >> stick with it. >> what do you do? facebook or tesla? >> that's fair. i'll go with tesla. >> interesting. >> facebook for me. >> have a question? send us a tweet. for everything options action, check out our website. while there, check out our super cool news letter, nearly 2 billion of you have. bhib n maybe not 2 billion, but a lot of you.
here's what's coming up next. >> called the perfect storm. >> let's not get carried away. if you are worried about the month of may, we'll teach you how to protect your portfolio for less than 2 bucks. plus -- >> let me get aburg wer burbur slice of cheese. >> that's impressive. but not nearly as impressive as mike's option's trade which doubled his money in one week. he has a way to make more cash when "options action" returns. hey gary, what are you doing? oh hey john, i'm connecting our brains so we can share our amazing trading knowledge.
that's a great idea, but why don't you just go to thinkorswim's chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders? i know. your brain told my brain before you told my face. mmm, blueberry? tap into the knowledge of other traders on thinkorswim. only at td ameritrade. whoa,i just had to push one button to join. it's like i'm in the office with you, even though i'm here. it's almost like the virtual reality of business communications. no, it's reality. intuitive one touch video conferencing is a reality. and now it's included at no additional cost with vonage business. see why 3,000 companies a month are switching to vonage. business grade. people friendly.
so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade. welcome back to "options action." the s&p 500 posted its fifth positive month in six. as april comes to a close, should investors adhere to the old adage sell in may and go away. bob pisani has more. >> reporter: this is one of wall street's most famous adages. i can argue about why it works. over long periods there's something to it. since 1950 the s&p 500 has been up 0.4% during the may to october period, compared to a gain of 7% during the november to april period.
this connection was brought to light in 1986. sounds good. but in the past ten years they've refined this call by layering in two additional factors, a technical signal and a signal based on presidential cycles. the technical signals will get you in earlier than may 1 if the market is trending up and opposite if the market is trending down. the other signal involves the presidential cycle. don't sell in may of the third and fourth year of the presidential cycle when markets tend to outperform. this means you only need to make four trades every four years. combining these two signal produces turbo charged results, an average loss of 0.8% per year from may to october compared to a gain of 10% during november to april. translating this to money is a better way to look at it a 10,000 investment made in 1949 from the may to october period would have $4500. that's a loss of $5400.
the same $10,000 invested in november to april would produce a gain of $2 million plus. so you can see why this has such staying power on wall street. back to you. >> bob, thank you. if you are worried about losses in may, how do you protect yourself? let's get to the call to action from professor co. mike, what are you looking at? >> one thing to pay attention to is the timing of hedges. hedges portfolio comes at a cost. if you do it all the time it will create a drag on returns. the next thing you want to think about is the magnitude you're trying to hedge. are you concerned about a big decline? are you just looking at a potentially modest decline? one thing to look at is volatility. that means the volatility of the broad market and also the cost of options. if we look here at the s&p, you can see what i was talking about before. right now you would have made money if you hedged there, maybe
here, here, here. that's five times. the rest of the time would have been tespending money. that emphasizes how important it is to focus on timing. now we look at how the market has done over the course of the last year or so. if you can imagine that you're looks looking for approximately 1% of returns per month, over the course of the next three maybe 3% to the upside whaupside. what we can do is say i want this much upside but protection down there. quu you can do that with a collar. the trade here is selling the july 245 calls, collect 1.35 for that. then using those proceeds to help finance the purchase of the 2.30 strike put. i want to make an important point. we're looking at spy here. they're paying a dividend of about 1.18 in june. when you net out that dividend, this will cost you nothing essentially to ebb suinsure you portfolio. you can have 3% to the upside.
anything worse than 3% to the down side we got you covered. >> a free hedge doesn't downed bad. >> doesn't. back in the day, traders at hedge funds would slap on a bunch of spy shorts. i mprefer a selling out of the money call, which is what mike is doing, and using the proceeds to buy the put. you're giving the portfolio stocks or the spy some room to the upside to preappreciate if market goes higher, but you have the disaster protection below. rather than neutralizing potential gains versus your spy short. i love the idea of a collarment i like it more so on a single stock. i get why you're doing this. >> insurance is always good. that's something. if one wants to go with what bob was talking about, seasonality, there's another reason. we have market construction arguments. there are fewer stocks holding things up as energy continues to fall, as industrials, the consumer and crowding into the
successful but perhaps overdone growth names. >> one quick final point about collars, if the market takes the stairs up and the elevator down, collars let you participate in that mild upside, but protect you against the catastrophic crash. >> still ahead, mike is bringing home the big max from his bullish trade on mcdonald's doubling his money in a week. now he has a way to make more cash. and we're taking your tweets later in the show. dig deep, pull out the phones, think nice thoughts, send them to us with some questions. much more "options action" after this. hey gary, what'd you got here? this bad boy is a mobile trading desk so that i can take my trading platform wherever i go. you know that thinkorswim seamlessly syncs across all your devices, right? oh, so my custom studies will go with me? anywhere you want to go!
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so we can share our amazing trading knowledge. that's a great idea, but why don't you just go to thinkorswim's chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders? i know. your brain told my brain before you told my face. mmm, blueberry? tap into the knowledge of other traders on thinkorswim. only at td ameritrade. . welcome back. it's time for the upside call where we look back on some of our winning trades. last week mike got hungry for mcdonald's and made a killing. here's how. >> on options action it's how we make fast profrtits, risk less d make more. that's what mike did on shares of mcdonald's. he thought shares were going higher. just buying the stock, 100 shares would cost more than $13,000. so instead mike turned to the
options market, where he could buy shares of mcdonald's for less than the cost of a big mac. >> how do you do it? what's your secret? >> it's simple, mr. president. to make a bullish bet, mike bought the september 135 call for $3.40 that 3.40 is the most he could lose on the trade. to make money, mike needs mcdonald's shares to rise above the strike of that call by more than the cost of the trade. or in this case above 138.40 by september expiration. it gets better. here's why. if shares of mcdonald's rise, that call will increase in value faster than the price of mcdonald's stock which means more money in mike's pocket. since the time of the trade, shares are up 6%, meaning mike's trade is right in the sweet spot. >> there's still plenty of time on the clock. >> there is, but options actions fans all over the world want to know one thing, what will mike do now? >> before we answer that, you might be asking yourself if mike
thought mcdonald's was so great, why didn't he buy the stock? let'sversus options. had you bought shares, you would be up 6%, that's not bad. but the strike is worth 7.40, that's a return of 120% in one week. so mike, do you keep this trade? >> the day this news came out, we sent out a tweet about it. the stock was trading about $41 at the time. i suggested taking the money. the advantage of options is that you're risks ling little and yo have the upside. it was worth about 8 0 bic 800 the time. you could take a portion out and make ood movanother move. >> big breakout, news related, take the money and run. >> we can't all be winners, that's the case with dan's bearish bet on tech. >> i want to look out to july. you could put a wide put spread
on today, when the etf was 132, you could buy the july 132, 122 put spread. >> we were talking about this earlier. apple and facebook report next week. how you are managing the trade? >> this is one i liked on an outright basis. i think we'll get a pullback. the concentration of stocks make up 40% of the qqq, they can't keep growing like this. or this much higher. to me, the trade was on for 250. broke even at 129.50. the stock at 136, worth about 140 now. i think it makes sense to use a 50% premium stop. that's how you manage. >> we have plenty of catalysts that could get the market rocked here. we're looking at this as insurance also. >> up next, your tweets and the final call from the options pits.
[pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade. what if we could bring you by having better values? at blue apron, we work directly with more than a hundred family farms. so instead of spending on costly middlemen and supermarkets, we can invest in the things that matter most: making farmland healthier. cutting down on food waste. and bringing you higher quality, fresher ingredients for less than you pay at the store. because food is better when you start from scratch. get $30 off at blueapron.com/cook
@ @ hthis bad boy is a mobile trading desk so that i can take my trading platform wherever i go. you know that thinkorswim seamlessly syncs across all your devices, right? oh, so my custom studies will go with me? anywhere you want to go! the market's hot! sync your platform on any device with thinkorswim. only at td ameritrade
time for some tweets. what are your thoughts on using out of the money ratio put spreads to minimize or eliminate the cost of protection? this screams mike what do you say? >> in a situation like this it's a risky proposition. normally i love this strategy, but selling more puts than you're long means you're short puts. do you want to sell puts or own them? >> or turn it into a put butterfly. >> that's a better way. >> that takes care of the margin implications. >> time for the final call. carter? >> next week, facebook over apple. growth is at risk. >> mike? >> i would use calendar spreads on facebook for modest upside bet. >> dan? >> a lot of times we talk about directional put spreads. for me tesla is great protection
for long holders. >> thank you very much for watching. check out our website. "mad money" starts right now. >> announcer: the following is a paid presentation for the nutribullet, brought to you by nutribullet llc. ♪ >> hi. i'm david wolfe. and for 25 years, i've been teaching people, to get the most out of your life, you need to get the most out of your food. all this food is loaded with nutrition, and you don't just need some of it. you need all of it. and the nutribullet is the machine that can get all of it. for a limited time, nutribullet has an incredible offer. when you order today, we will upgrade yo