tv Options Action CNBC August 25, 2017 5:30pm-6:00pm EDT
we are live at the nasdaq market site. the guys are getting ready here's what's coming up. >> frosteded lucky charms. >> they're magically delicious >> but suddenly, soup and sere ra cereal stocks are tanking. we' it's just metal stocks ab there's a name that looks ready to break out plus, talk about trouble on the home front >> when i look at you lately, i just want to smash your face in.
>> not that kind of trouble. talking about the softness in homebuilders and we'll tell you why it could get worse the action begins right now. >> let's get to it because the amazon whole foods deal has reekeded ravic on the space. droeger, smucker, campbells soup all sinking. the sector is often viewed as a quote safe space, but are these stocks suddenly dangerous? is. >> let's get in the money. dan. >> well, there's a couple of reasons. last night after the news hit, we were talki inin ining about retailers and the damage done there. it was senning the stocks back to those levels when that whole foods deal was announced in mid ju june, but there's a sector that hasn't had a lot of movement based on the deal. when you think b about how these large retailers will be lining
up, you have to look at the products thai going to be selling and when i think about consumer staples, stocks like proctor and campbell 24 types expected earnings only suppose d to grow single l digits you say to ourself at some point, these guys are going to get squeezed and this is a sector that's perform ed well that to me, i think there's risk to it. >> what's the trade? >> here's the thing. >> i think we're jumping the gun. a couple of things going on here to me -- >> it's we know this that this is a, an expensive area of the market because rates have been low. they're not that expensive the truth is, they're not growth stocks they're trading premium valuations to the market and while there are one or two, companies have their own issues, the aggregate, xlp or sector chart is a bit top pi. and presunlgs is if the market's going to go down, these will go down go ahead.
>> as it becomes more apparent 13% of that the patrioticer and gamble trades at a significant premium. this is an area k take a shot at i want to define my risk options are low. volatility has just tipped up off of 2017 lows so january expiration, i think you could look to it in the money. put spread when the stock was trading at 54.75, you could buy the january 55 paying 1.30 for that selling one at 50 cents. that's 1.30 as your max risk you can make up to $3.70 on the downside, one thing that's interesting, 50 seems like a long ways away. it's the 52-week low which was made in early. >> ken: so u i like risk reward
if you think the technical set up, 54 bucks, looks like a big neckline on a head and shoulders. >> mike. >> i like this trade for a couple of the republicans dan mentioned looking at the componen components, a lot are basing significant head winds the packaged food industry not the place to be right now. and some other areas where you have soap and tooth paste, the valuations are quite high. what's interesting is that the staple stocks have relatively low volatility that means that the options turn out to be cheap. that's one of the reasons being long premium or long makes sense. this is one of those sectors that's relatively low beta so even if the market rolls over, you find selling the downside put makes a lot of sense. it's important you're doing this as an options trade because as
we just heard, you're talking about beta of .6 to the mark were that xlp to drop to the 50 level, that's a 15% decline in the market if beta stays the same if one is quite bearish, xlp is going to utperform in a down market but if you think it's specific -- >> quickly on the options structure, i chose an in the money put spread to help with the issue and then did a spread. in a lot of scenarios, this stock could go sideways. and i'm still in the game a little bit >> okay, so moving on to the medicitals copper, zinc and aluminum. all up 20% in 2017 copper tracking for its best year since 2010. that's giving material stocks a boost as well.
alcoa up more than 45% free port and dupont up around 16, 13%. and newmont mining is up around 9% >> we look attal ko, this week, copper just put on a 7th consecutive advance that happened since the low argument could be that it's overdone al ko is going to pop here let's try to figure out and i'll start with a general commodities chart. what we know is that the softs have been terrible go quickly copper it's up and to the right next one aluminum, up and to the right. next one, zinc up and to the right. next one steel. rebar. what you find on the roads up and to the right. what's also up and to the right?
alcoa. so the question is, is there more to go is this an inflection point? roll through charts. okay there's a five-year. you could draw the lines like this what's not random is where we are now. there's your head and shoulders. next, your cup and handle. the bad is we're going to take out this range now, here's the chart. here are the drawings. want to be long alcoa. fine >> got it.
great breakdown. mike, what's your trade. >> this is an interesting situation. because unlike the staple, alcoa is a volatile stock and options premiums are high. still, i think this is a situation that calls for being long premium because commodities prices, which of course are the big drivers here plus a little leverage can create volatility for the underlying equity. and aluminum at 2,000 bucks a metric ton, is get tog a point where we're probably seeing potential for alcoa to be substantially higher, so i'm looking out to october looking at the 41, 46 call spread you could spend about 1.70 for that basically, the idea here is that with commodity prices getting more volatile, seeing these higher prices, there's still additional room for a breakout to the upcyd here, but we can look at that one year chart and see ha the stock was also lower. not that long ago and this mitigates that downside risk in case china starts producing more aluminum again
>> dan >> first things first. i think the technical set up, it is amazing you think about how many times it's been rejected at 40, so the fact mike is looking at, going out of the money you get this thing really get doing i like trade idea. it's expected to move around a few percent a day and it may earn it out ch even if it grinds higher, so i like the the trade idea >> if you put in this contrast, just a week ago, we were make ing the case cat p pillar was overdone it's an all time high. al is no longer near that position and this stock which has lagged, caterpillar has expended a lot o energy. >> final thoughts, mike.
>> yeah, i mean, actually comparing it to caterpillar is a really interesting one it's trading close to $70 billion. for alcoa, about 10 billion. one-third of where it was about three years ago, so if you talk about room to run, there is in alcoa, there suspect in c caterpillar. >> thank you much more still ahead. here's what else is coming up on the show >>. >> that's what housing stocks have done this week and we'll tell you why there could be more pain to come plus buy facebook for under $3 and mike will show you how to do enptnsstha wh oio action returns. [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.
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
. welcome back a slew of bad a economic kdata putting pressure on the housing trade. diana. >> i got the start with cold hard facts about today's housing market there are house for sale, but not enough there is high housing demand, but more and more buyers are struggling to afford down payments and home price gains are accelerating again homebuilders, they're not putting up enough homes. not even back to normal historical levels of production nor are they shifting significantly to entry level models add that up and you see why sales are slumping, but there are two things that could make matters worse. one, higher mortgage rates yes, they've been sitting henear year lows and all the talk of hire rates hasn't happened yet, but the federal reserve is going to shrink its balance sheet of
mortgage baonds and if inflatio rises, the fed could tape r more both of which will push rates higher then there's emotionally and politically popular mortgage interest deduction is never on the table, right except maybe now paul ryan sukted it could be improved and insiders say the treasury is considering cutting the current cap of $1 million in mortgage debt in half. that would only hit about 4% of taxpayers who benefit, but it could take a much bigger bite out of confidence in the housing market bottom lie, if the market doesn't see significantly more supply in the coming months, which is not expected, affordability will weaken more and keep more potential buyers on the sideline. michelle >> all right, good run down. thank you. so, if you are worried about cracks in the housing trade, how should you play the space? dan's at the plasma with the call to action dan. >> so, there was a lot there rates, simply, demand, pricing and you know, when i was looking at this earlier in the week at
the xhb, the s&p homebuilder etf, i started looking at it because of toll brothers results, which were good, but the stock in the morning was down 4% despite commentary that was okay, included some of those potential head winds that we just went through, so i think there's a set up that's interesting. it's had a very nice uptrend here, but it just recently broke it down. seems to be a bit earnings news, which got me looking at that xhb in particular. listen, you know, implied volatility, the price of options in an etf is low you can see that but look at how it's picked up a little by, which tells me with the etf at near term highs, in a lot of way, trhere could be investor concern about the group in general i want to make a short-term bet here that the etf breaks out, breaks down back towards what i think is near term support at 36 bucks. with an etf like this, i can
look to october expiration and do a ssimple put spread. so today, when the etf was trade ing about 36.50. i can look to october expiration and buy the october 37 36 put spread buying one of the puts at 65 cents, selling one of the october 36 puts at 25 cents. it costs me, the whole spread, 25 cents, a quarter of the width of the spread here the stock is about 27. i move 25 cents and the stock is down to 36 that's my max game here, so i'm not risk a lot of premium. it's less than 11% and i can make three time, but i got to get a lot of things right. direction, magnitude and timing, so to me, i like playing this for a risk reward back through the prior breakout near 36 bucks. >> cool. good rundown
mike what do you think of the trade is this. >> i hate the fact we keep seemingly coming up with bearish trades makes us seem lick perennial pest mists, i suppose, but the way prices are setting up, this seems to put the odds in your favor. a lot of things have to work right for the xhw to rise from here you could have several things including some additional volatility in the market it could drag price lower and the ratio is one of the things we like and thest a small amount of prem yum, so given the potential paf, i rather like this trade >> what tudo you think >> two things to keep many mind mind two year, the second or third week in august 2015, the xhp reached its cycle high off the '09 low. weave return today that level and been rebuffed. it's a double top. but what we also know is that this entirable market from the
'09 low, home birbuilders have paceded the general equity market when you do lead as they did in the '02, '07 period, they have not this time and they look top pi the charts you saw that dan put up are what they are >> i love it when you like my lines. >> again, this is really a combination of fundamentals and technicals and it's a risk reward which i think i like at 3-1. >> okay. still ahead, facebook falling 5% from its all time high there's something in the charts that points to an even bigger sell off we'll break it down plus, if you got a question, send us a tweet at options action if it's nice, we'll read it later in the show. much more options action still ahead. i'm here at the td ameritrade trader offices. steve, other than making me move stuff, what are you working on? let me show you. okay.
our thinkorswim trading platform aggregates all the options data you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. see options data like never before. with thinkorswim only at td ameritrade. your insurance on time. tap one little bumper, and up go your rates. what good is having insurance if you get punished for using it? news flash: nobody's perfect. for drivers with accident forgiveness, liberty mutual won't raise your rates due to your first accident. switch and you could save $782 on home and auto insurance. call for a free quote today. liberty stands with you™ liberty mutual insurance.
what?pony neighing] 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. welcome back
facebook falling more than 5% and that's putting our friend mike in a precarious position. here's why >> on options action, it's how we maintain our social status. risk less so we can make more. and that's exactly what mike tried to do with his bullish bet on facebook. mike liked the stock for a breakout but just buying shares of facebook cost more than 16 grand. >> screw it, declare bankruptcy. >> we don't need to go that far, so instead, mike bought the september 170 call for $4.20 now, to make money, mike needs shares of facebook to rise above that price by more than the cost of the trade or above $174.25 by september expiration but spending $4.25 just to bet on facebook? relax, we have a way to do this for less
so to cut costs, mike then sold the september 180 call for $1.75. and created his call spread. he made making money easier and here's how between the 4.25 he spent on the lower strike call and the 1.75 he collected by selling the hire strike call, mike cut the total cost of his trade down to just $2.50. >> just checking your math on that let's break it down more now, instead of needing facebook to rise $4.25, he just needs facebook to rise above the 170 strike by more than the reduced cost of the trade. in this case, b about 172.52 by september expiration >> i'm totally psyched about this, too. >> but don't celebrate too soon. because there is a trade off
and by selling the higher call, mike has capped his profits to the difference by the strike of the call he bought an b sold and since the time of the trade, facebook shares surge today an all-time high, but pulled back slightly now, all of options action's biggest followers just want to know one thing what will mike do now? >> so mike what do you conow >> you know, it's interesting. first of all, i think this tells us one of the reasons we like call spreads if you bought it outright, you'd be looking at losses in the neighborhood of 3 bucks and we managed to cut that down by about .71.75 this is a trade that worked out well first it basically doubled in value in one week, but now, i'm not feeling as optimistic. the market feels weaker. facebook is feeling weaker i almost would rather be short this call spread than long it, so i'm probably inclined to take
my dollar as losses an move on >> dan >> yeah, so, it's interest iing carter did a great job charting the fang stocks on "fast money." talk iing about these inclupds they gap after the earnings. it was an emotional top in a lot of ways. so i like mike's analysis there. he probably traded that thing after the earnings and took it off. at this point, you'd rather be short upside premium, just like for consolidation. >> no, please, and facebook is the one that's held up we know that amazon is down some 13% from its high of just weeks ago. so the question is, is facebook in a position to catch up to the downside with those other sort of high flying names i would say yes. i think a lot of vulnerability here >> any other fang stocks you're looking at >> isn't it tough to look at all of them. really earnings was an emotional day. maybe close to 10% into them at this point, maybe you'd say with the s&p only down 2%, it's pret thety healthy
you're seeing a rotation out of these names. facebook has gained over a $125 billion in market cap alone. for these things to come back, i don't think anyone's panicking at amazon or google for that matter it makes sense for these things uteonsolida >>p next, yur your tweets and the final call don't move 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! the market's hot! sync your platform on any device with thinkorswim. only at td ameritrade
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let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. see options data like never before. with thinkorswim only at td ameritrade. welcome back time to take your tweets alex asks, hey, dan, is xrt still the worst chart ever >> sure, hey, alex, we love you. thanks for the e-mail here here's the deal. this thing is in a nasty down trend. i think you sell it when it gets back above how 40 and look to move back to 35. to maybe january 40, 35. >> time for the final call last word from the options pits. mike
>> alcoa one of the lowest costs producers. with alum numb at $2,000 a ton >> alcoa, the long side for a move to 44 >> okay. dan. >> xhb i like playing october back to 36 bucks >> tt eshado it for don't move, because "mad money" with jim cramer starts right now. my mission is simple to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now hey, i'm cramer. welcome to "mad money. welcome to cramerica other people want to make friends. i'm just trying to make you some money. my job is not just to entertain but to educate and teach you so call me at 1-800-743-cnbc or tweet me @jimcramer. close watchers of "mad money" know i'm not a chartist, but i do play one on tv week