tv Options Action CNBC August 26, 2017 6:00am-6:30am EDT
hey there. we are live at the nasdaq market site guys getting ready behind me while they do that, here's what's coming up on the show ♪ frosted lucky charms ♪ they're magically delicious >> cereal stocks are tanking it's a bird, it's a plane. >> no, it's just metal stocks. there's one thing in particular that looks ready to break out. we'll give you the name. 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 home builders. we'll tell you why it could get worse. the action begins right now. yeah, let's get to it because the amazon/whole foods deal has wreaked havoc on the consumer, j. kruger and smucker all sinking this year. the consumer staples sector is often viewed as a, quote, safe space. are the soup and cereal stocks suddenly dangerous let's get in the money dan? >> a couple of reasons they could be dangerous talking about the retailers and the damage that was done there it was really setting the stocks back right to those levels when that whole foods deal was announced in mid june. there is a sector, consumer staples that you just mentioned, that haven't had a whole heck of a lot of movement based on the deal itself. when you think about how the large retailers are lining up against each other, how they're competing with a bar bell omni channel strategy you have to look at the product they're
going to be selling. when i think about consumer staples, procter & gamble, coca-cola trading at 22 times expected earnings. you say to yourself, at some point these guys are going to get squeezed a little bit. this is a sector that has performed really well. to me i think there's some risk to it. >> what's the trick? >> here's the thing. i think we're jumping the gun. there's some technicals, a chart. things going on here, to me -- >> it's -- we know this. this is an expensive area of the market because rates have been low so the argument is, they're not that bad they're bringing trades to the market there are one or two, tobacco companies have their own issues, the aggregate, exxon pe and sector chart is a bit toppy. the presumption is if the market's going to go down, these will go down go ahead >> yeah. i think as a fundamental story
becomes a bit more apparent, the xlp, carter mentioned the smp, 13% of that is procter & gamble as we said i think this is an area that you can take a shot at i want to look out to january expiration i want to define my risk option prices are low. volatility has ticked up off of 2017 lows. so january expiration, i think you can look to it in the money put spread when the stock was trading at 54 poip poip $75, that's the xlp. buy it at $1.30 buying one of the january 35 puts at $1.80 selling one of the january puts at 50 cents. that's $1.30 it breaks even at $53.70 on the down side, one thing that's kind of interesting, 50 seems like a long ways away. that's 10% that's also the 52 week low. so i like the risk/reward especially if you agree with the
fundamentals you think the technical setup which is pretty nasty, 54 bucks, looks like a big neckline on head and shoulders. >> mike, what do you think >> i like this trade for a couple of reasons dan mentioned. first of all, taking a look at the components of this particular etf a lot of them are facing particular secular head winds. the packaged food industry is not the place to be right now. some other areas where you have things like soap and toothpaste, the valuations are quite high. what's interesting is the staple stocks typically have relatively low volatility the options turn out to be cheap. being long premium or buying options makes sense. at the same time, this is one of those sectors that is low beta even if the market rolls over somewhat what you do find is selling the down side put makes a lot of sense for mitigating the time indicated. >> it's important that you're doing this as an option trade because, again, as we just heard, you're talking about a beta of .6 for the market.
were that xlp to drop to the 50 level, that's a 15% decline in the market i mean, if beta up to the market stays the same if one is quite bearish generally, xlp is going to perform in a down market if you think there's something specific to these stocks, let's go to amazon, this is as good a deal as it gets. >> i think real quickly on the options structure. i chose an in the money put spread to help with that decay issue and i did a spread to mike's point because i want to sell a down side option that's going to help with the decay in a lot of scenarios this stock or etf can go sideways and i'm still in the game a little bit and waiting for some of the fundamental stuff. >> let's move onto the metals surging this year. check out the moves on copper, zinc, and aluminum they're all up 20% in 2017 copper now tracking for its bester since 2010. that's giving the stocks a boost as well. alcoa is up more than 45%.
freeport and dupont up around 16, 13% and newmont mining is up around 9%. carter, do you say some of these names have more room to run? >> alcoa, copper just put on the seventh consecutive advance. that hasn't happened since the '09 low. alcoa as a stock i think is going to pop here. let's try to figure it out i'm going to start with a general commodities chart. what we know about commodities is the softs have been terrible. corn, wheat, soy beans energy has been basically down this is broad aggregate. by contradistinction, take a look at the following. copper, it's to the right. next one, aluminum, to the right. next one, zinc, up and to the right. next one, steel, rebar, what you find in the roads, up and to the right. what is also up and to the right, looks identical, alcoa.
okay so the question is is there more to go or is this an inflection point? let's roll through some charts okay here's a five year you could draw the lines like this ready? and it's played out perfectly. you could draw the lines like this either way, what is not random is there we are now. all right. so here's a really long term chart. put the same annotations back on are. really there's your cup and head and shoulders. cup and handle what is the bet? the bet is that we're finally going to take out this range that's been in effect since effectively a decade here's a chart here are the drawings. i think you put your green arrow like that. long alcoa >> all right got it great breakdown technically. mike, what's your trade based on
what you saw >> yeah, so this is an interesting situation because unlike the staples, alcoa is actually a fairly volatile stock and options premiums are relatively 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 bit of leverage, can create volatility for the underlying equi equity aluminum at 2,000 bucks a metric ton are getting to the point where we're seeing potential for alcoa to be substantially higher i'm looking at the $41.46 call spread spend $1.70 for that with commodity prices getting a little bit more volatile there's an additional room for an outbreak here. we can take a look at the one year chart we can see that the stock was considerably slower not that long ago this mitt at this gates the down side risk in case china starts producing more down side risk.
>> the technical setup is amazing if you think about how many times it's been rejected at 40 so the fact that mike is looking out, going long premiums, going slightly out of the money, giving six, seven weeks for this thing to play out. i suspect you get a consolidation in and around this breakout level or you get this thing really getting going as carter suspects. i like the trade idea. i like using defined risk. at the end of the day like mike said, this is a 30 vol name. it may earn it out even if it just kind of grinds a little higher. >> what's interesting, if you put this in contrast to a week ago where we're making the case that caterpillar is over done, caterpillar is at an all-time time alcoa, it's nowhere near that position and the bet is that this stock, which has lagged, a stock like caterpillar can play catchup. caterpillar has expended a lot of energy. >> final thoughts, mike? >> yeah. actually comparing it to
caterpillar is an interesting one. caterpillar is trading very close to its all time peak valuation of $70 million alcoa is 10 million. if you talk about room to run there is in alcoa, there isn't in caterpillar. >> we have much more "options action" still ahead. here's what else is coming up on the show that's what housing stocks have done this week. we'll tell you why there could be more pain to come. >> plus, $1 million isn't cool >> you know what's cool? >> buying facebook for under $3. mike will show you how to do just that when "options 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. it lets you chat and share your screen directly
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anywhere you want to go! the market's hot! sync your platform on any device with thinkorswim. only at td ameritrade welcome back to "options action." slew of bad economic data putting pressure on the housing trade. diana olick is in d.c. she's got more on that story diana. >> reporter: michelle, i have to start with cold, hard facts about today's market there are houses for sale but not nearly enough. there is high housing demand, but more and more potential buyers are struggling to afford downpayments and home price games are accelerating again home builders, they're not putting up enough homes. they're not back to normal historical levels of production nor are they shifting significantly to entry-level models add all of that up and you see why sales are now slumping, but there are two things that could
make matters worse in the next six months one, higher mortgage rates yes, they've been sitting near year lows and all the talk of higher rates hasn't happened yet, but the federal reserve is going to shrink its sheet and if the rate rises the fed could taper. both of which will push rates higher then there is the emotionally and politically popular mortgage interest deduction is never on the table, right except maybe now house speaker paul ryan said it could be improved and the treasury is already considering cutting the current cap of $1 million of 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 line, if the market doesn't see significantly more supply in the coming months, which is not expected, affordability will weaken even more and keep even more potential buyers on the sideline. >> good rundown there. thank you, diana. if you are worried about cracks in the housing trade, how
should you play the space? dan is at the plasma with the call to action. >> there's a lot there it's about rates, supply, demand, pricing. when i was taking a look at this earlier in the week at the xhb, which is the s&p home builder and etf, i start looking at it which actually were pretty good. the stock was down 4% despite commentary that was okay including some of those potential head winds that we just kind of went through. today i think there's a setup that's interesting the chart has obviously had a very nice up trend here. it just recently broke down that up trend it broke it seems to be a bit of earnings news which got me looking at that xhp in particular listen, you know, high volatility, the price of options, etf like this is relatively low you can see that look at how it's picked up which tells me with the etf at near term highs, there are a lot of ways there could be some investor concern about the group in general
so, listen, i want to make a short-term bet i want to make a bet that the etf breaks down back towards what i think is near term support at 30 bucks. this doesn't move a whole heck of a lot i can look at october expiration i can do a simple put spread i'm looking to risk a certain amount if i'm right on direction and right on magnitude of the move over a certain period of time today the etf was trading at $36.50 i could look to october expiration and i can buy the october put spread paying one of the october 37 puts at 65 cents selling one of the october 36 puts at 25 cents it costs me -- the whole spread costs me 25 cents. that is a quarter of the width of the spread here if the stock is above 37. if the stock is down to 36, i can make up to 75. that is my max gain here i'm not risking a whole heck of a lot of premium less than 1% of the etf.
i can make three times of what i'm risking. i have to get direction, magnitude of the move and timing i like playing this for a risk/reward. >> cool. good rundown, mike what do you think of the trade >> you know, i hate the fact that we keep seemingly coming up with bear trades it makes us seem like perennial pessimists the way option prices are setting up, this puts the odds in your favor. a lot of things dan didn't point out have to work out right you could have several things including some additional volatility in the market it could drag prices lower that ratio, spending 25% of the difference between the strikes is one of the things we like it's a relatively small amount of premium to outlay given the potential payoff i rather like this trade >> what do you think, carter >> two things to keep in mind. we know exactly two years ago, literally the second or third week in august, 2015, the xhp
reached its cycle high off the '09 low. we have returned to that level it's a double top. but what we also know is that this entire bull market from the '09 low, home builders have not paced the general equity market and they've badly under performed the consumer discretionary sector when they do lead, they have not led this time. and they look very top heavy the charts that dan put up are what they are. >> i love it when you like my linings. again, this is really a combination of fundamentals and technicals it's really kind of a risk/reward which i think i like at three to one. >> still ahead, facebook falling 5% from its all-time high. there's something that points to a bigger selloff we'll break it down. if you have a question, send it to options @"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.
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 to "options
action." facebook falling more than 5% from its all time high that's putting our friend mike koh in a bit of 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. claim bankruptcy >> we don't need to go that far. so instead, mike bought the september 170 call for $4.25 now to make money mike needs shares of facebook to rise above that strike 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? at last, we have a way to do
this for less. to cut costs mike then sold the september 180 call for $1.75 that created his call spread but he did something even better he made making money even easier, and here's how between the $4.25 he spent on buying that lower strike call and the $1.75 he collected by selling that higher price call, mike cut the total cost of his trade down to just $2.50 >> checking your math on that. >> let's break it down a bit more now instead of needing facebook to rise $4.25, mike just needs facebook to rise above that 170 strike by more than the reduced cost of the trade, or in this case about $172.50 by september expiration. >> i'm totally psyched about this, too. >> but don't celebrate too soon because there is a tradeoff, and
by selling that higher strike call, mike has capped his profits to the difference between the strike of the call that he bought and the strike of the call that he sold. and since the time of the trade, facebook shares surged to an all-time high but pulled back slightly now all "options action" biggest followers just want to know one thing, what will mike do now. >> so, mike, what do you do now? >> you know, it's interesting. first of all, i think this tells us one of the reasons we like call spreads if you just bought that call outright you'd be looking at losses probably in the neighborhood of 3 bucks. we managed to cut that down by $1.75 because that upper call is worthless. this is a trade that worked out well at first. it basically doubled in value in one week now i'm not feeling as optimistic the market feels a little bit weaker here. facebook is also feeling a little bit weaker. i'd almost want to be short this
call than long it. i'm inclined to take my 1.10, $1.20 losses and move on >> what do you think >> carter last night did a great job charting the fang stocks on ""fast money." they gapped after the earnings it was like an emotional top and they worked their way back i like mike's analysis there he probably traded that thing after the earnings and took it off. at this point he'd rather be short up side premium just forconsolidation. >> no, facebook is the one that's held up we know that amazon is down 13% from its high of weeks ago google has dropped so the question is is facebook in a position to catch up with the down side with those other sort of high flying internet engines? i would say yes. i think there's a lot of volatility here. >> any other fang stocks you're looking at >> isn't it a tough thing when you look at all of the earnings was an emotional top they have run 10% into it. at this point maybe you'd say
with an s&p down 2% it's pretty healthy. you're seeing a rotation out of these names. facebook has gained $125 billion in market cap this year alone. it's up 25%. for these things to come back, i don't think anyone is panicking in amazon or google. it makes sense. >> coming up next, 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
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 to "options action." time to take your tweets alex asked, hey, dan, is xrt still the worst chart ever and what options strategy would be best to play it? >> sure. hey, alex. we love you. thanks for the e-mail. here's the deal, this thing is in a nasty down trend. i think you sell it when it gets back above 40 and you look to move over the next couple months back to 35 maybe january 40/35. >> time for the final call last word from the options pit
mike >> alcoa is one of the lowest cost producers of aluminum i like the october 41/46 call spread. >> carter? >> moot 44. >> xhb, i like playing in october back to 36. >> that does it for us on "options action. don't move because "mad money" with jim cramer starts right now. >> announcer: the following program is a paid advertisement for the hd mirrorcam, brought to you by inventel products, llc. yep, they're out there, driving recklessly, causing accidents, and driving up your insurance rates! this is a show about car accidents... ...classic cars... ...and the hd mirrorcam, the personal security camera for your car. this is... "accidents caught on camera" with the hd mirrorcam. today, we're going to hear from people who have been in accidents and used the