tv Options Action CNBC July 11, 2020 6:00am-6:30am EDT
we've got a big show lined up for you today >> as the lyrics go, to everything there is a season for the big banks, that season is next week carter worth will help you orchestrate a progression that could help you score then it's a stock with a mixed prognosis, but tony zang has been taking a closer look at johnson & johnson's charts >> there's a lot of potential here. >> and caveat emptor.
>> this is an interesting situation. >> there are important clearance signs flashing in the debt and short interest of some retailers. it's time to risk less and make more options action starts right now. let's get right to it. next week kicks off a flood of earnings with financials our chart master carter worth says one name in the space is heading for a big bank breakout. carter, take it away. >> obviously very, very important part of the economy, part of the market the first is a two-panel chart
you're looking at the s&p 500 financial sector on top and the bottom you're looking at its relative performance to the market what is quite remarkable, of course, is that the bottom panel is right at the 2009 lows. so the question is do we bounce here, do we cut through? independent of that, there is an opportunity. this is morgan stanley it's also a two-panel chart. on the top is morgan stanley over the last five or six years. what you see is morgan stanley is not at an all-time high but relative performance has broken out and is particularly firm over the past several weeks. just two charts of morgan stanley outright this would be a wedge, if you will, a flag it represents an equilibrium phase that's likely to end we think it's a powerful setup
for a move up and out. another way, final chart, another way to draw lines, exact same chart what we have here to my eye is a nice setup going into earnings from a marquee financial that's exhibiting impressive performance to its peers >> mike, what's the trade here >> it's interesting. you're actually going to get a little bit of read-through on morgan stanley's business because jp morgan and goldman sachs are both going to be reporting two and one days ahead
of time respectively we've had a market condition here that's probably going to be supportive of their trading revenues they actually have more revenues from fixed income trading and equity trading than they do from their other key businesses like wealth management and investment management but they get more profits from those latter two categories that makes them a stable business they're not really expensive, trading at about 11 times forward earnings of course that's true for most of the financials but i do like
it options prices are also a little bit elevated i think the way to play this is just with a simple calendar. i was looking at july september. the stock closed at a relatively good level on the day. it's going to cost about $1.85 for that spread. if the stock goes to 50 bucks, that's the best situation when that july option rolls up. that's going to expire a week from today of course you can sell additional calls against it overtime if that's your choosing otherwise you've basically lowered the cost of owning that call that of course is a way you can take a longer term bullish view. >> what do you think of this trade? >> out of all the stocks reporting earnings next week, i
like morgan stanley the most because of what carter said about the strong relative strength of the underlying stock but also revisions over the past few weeks on this stock has been particularly strong. those are some things i look for going into a bullish earnings event. if those july calls roll off worthless, then you can sell more calls against that and further reduce risk. the one question i do have for mike is the fact that morgan stanley moved up 5% here today so i'm curious if mike would adjust his strikes a little higher if morgan stanley opens around 50 on monday. >> it's interesting that you mention that of course the stock was trading around $48 when i was first looking at that. this was really my goal here
with a look for a strike that was 4-5% out of the money basically to the upside. your prices will vary when you look at the market on monday that's something we contend with when we're dealing with a show on friday. we're looking to do a call calendar to target a slight upside move. >> mike alluded to this at the beginning when he was talking about this trade but morgan stanley is the last of the big six banks to report next week. what we've seen in the past is you get some of the big ones in the beginning and you have the whole group move as a monolith right off the bat. would you think that holds true? >> typically that's the case look most recently the good news out of fedex and ups popped. it's not always the case but with this group in particular all in the same lines of business, you might have an idiosyncratic run or two that is not in line. >> we actually have some breaking news on atlanta's reopening plans. let's get to josh lipton for more >> there's real tension breaking out here between the mayor of atlanta and the governor of georgia. so the mayor of that night is preparing to roll back the city's reopening plans as coronavirus cases surge, that the city will go back to phase one. that's where all residents are ordered to stay home except for
enforcing state restrictions tough words being exchanged between the mayor of atlanta and the governor of georgia trying to deal with these surging coronavirus cases there. >> the atlanta mayor notable in recent days because she tested positive for coronavirus herself. psychologically for the markets, we've seen this sort of rollback of reopening plans at this point. does this put a damper on the market or do you think the market has come to accept that there will be ebbs and flows in the fight against coronavirus? >> i think it has kind of accepted that fact
i will say obviously if we do see significant rollbacks in several quarters and you combine that with a rolloff of some of the benefits that were being offered to people in need, you can imagine that's obviously going to create some problems. right now i think what it's going to depend on is the response from washington we've seen the democratic side suggesting really very strong responses, much bigger than a trillion dollars then of course those led by mcconnell saying maybe not quite so much. i think that's really going to be the story
we've seen a big response. it's been good for the market. no response won't be. check out shares of johnson & johnson hitting a bit of a dead end after rebounding off march lows tony, what are you seeing? >> johnson & johnson is actually a stock that i currently have a authority position in that i'm looking to reverse into a long part of the reason i have a short position is because the chart doesn't look particularly constructive not only on an absolute basis but also the relative basis compared to the health care space. it's actually underperforming. if you look at the revisions going into earnings, they're particularly strong. i see the recent decline in this underlying stock as an opportunity to get into a long position going into earnings next week. the stock itself doesn't move very much on earnings, only averg aba 2.1% move afterninor the past four quarters the options market has been 3.6% the markets are implying a significant move and i'm expects that move to be to the upside. they've been extremely strong over pasupleweeks which haen ad indicator ofperforming going into an earnings event i'm looking to buy the 1.43-1.50 call spread. net net share paying about $2.25 which is only 1.5% of the underlying stock price to take this bullish bet normally i wouldn't buy a call option that expires just three weeks from today usually i'll go a little further out. because i'm playing earnings here, i'm looking for a binary event. i'm not looking to hold this going into the expiration. that's something i want to make viewers aware of, this is the type of trade you want to hold onto relatively shortly right after earnings and probably close out next friday or the following monday. >> mike, what do you think of this >> i mean, i think that you definitely are going to make a bullish bet here the stock obviously hasn't performed that welcoming into this event but it could be the catalyst another way one could potentially play it if you're just looking to do the binary is
trade about $2 then of course whether you won or lost, you would know by the end of next week i can understand why given the slightly elevated options premium that tony is now looking at using a call spread if you're going to look at that longer date of expiration of july 31st. >> what does that chart look like, carter >> you've touched on so many key points tony saying it's an uninspiring chart. we also know the implied move is very low you have to do a call spread to try to get some juice out of it. it's a dullard it's also a sleeping giant we know amgen has come to life in a big way johnson & johnson is essentially the same price it was in autumn of 2017. it's one of the lowest beta health care stocks i think it's a low risk long employing an options strategy gives you juice. >> i bet carter got an 800 on the verbal section of the
s.a.t.s. that's my guess. tony, you made it very clear this is a short-term play. longer term would you still be inclined to be short >> not necessarily i think the pharma business is particularly strong. the medical devices business which took a short-term loss as a result of covid-19, i expect that recover fairly quickly and the consumer business is holding up fairly well i like this long-term. i was only short for a fairly short amount of time. >> check out our website optionsaction.cnbc.com what's the deal with retail stocks sometime the there's a reason to get flooded with coupons how to find out if you're getting a discount or a
obviously the market has had quite a rally off of the bottom. people might start screaming for stocks that look like the price has declined considerably. i think it is really important that people exercise some caution. right now if you take a look at the russell 3,000, there might be about 20 retail stocks that have implied volatility over 100. should you look to buy those stocks and sell calls against them i would exercise some caution. let's take a look at a stock like bed bath & beyond here's a stock down about 50% over the last year but the stock actually doesn't make that company cheap. why? because they've taken on about $2.5 billion worth of debt in the meantime the value is 50% higher than it was a year ago even though the stock is lower so it's not really a bargain
you want to sell puts on those or sell calls against the stock you own? take a look at the debt as a warning sign if you take a look at the debt that matures in about four years, that's trading about 80 cents on the dollar. their long-term debt, 50 cents on the dollar. that's telling you bond investors don't really believe there's much of a future for these companies. i would urge people if you're looking for expensive options you could sell, looking for cheap stocks to buy, that might be illusory. those options as expensive as they appear to be, are insurance against that equity. it's quite a risky place to play. >> is there a trade you would put on in retail, mike >> yeah. so here's the thing. you probably want to avoid those hard beaten stocks and take a look at the ones doing well. home depot is one of the better performing retail stocks in the home improvement space the thing is going into earnings
which they're going to be reporting just into the third week of august you're going to see elevated options premium there is you could sell for example the august 265 calls those were trading about 4, 4.5. relative to the stock price today, you still have 8% worth of upside. if you own that stock, that call has over time been a winning trade over 80% of the time it's about a 5% boost to your annual return. is that going to knock the cover off the ball no, but it is a much safer play on a much safer company. >> thoughts on home depot, carter >> you're seeing best in class and also within the entire consumer discretionary sector, home builders and related stocks are acting very well i'm all for home depot >> tony? >> i'm a little conflicted because you have consumer spending strong on home improvement but you have home depot stock that has found a bit of equilibrium around this 250 air that it's closing almost 2% of the underlying stock price in 45 days
if you own home depot stock you're collecting about 2.3% for the year on dividends. the yield here looks very attractive especially with home depot finds a temporary top around 250-260. >> because the stock has performed so well, because so many people hold it, because you have this catalyst, you're basically looking to enhance your returns that's why we're going to look at selling an upside call against it it's not a bullish bet we're trying to get a single here welcome back.
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welcome back time to take a look back at some of our open trades just last month mike said one consumer stock was about to rack up some big gains. >> the stock continues to bump up against the 33.50-34 level and a breakout here would be in principle clear sailing all the way up to the mid to low 40s i think it's a tremendous opportunity. >> i was looking at the august 32.5 puts. you could collect $1.90. the downside risk is you would own it at 32.50. of course you're also going to still have that $1.90 you collected. >> since then shares of kraft heinz have rallied what do you do
>> we've got the stock pretty much right on that strike that we sold. one of the reasons you do trades like this as an investment strategy, you're basically saying i'm comfortable buying the stock here or maybe at a bit of a discount. i'm comfortable staying with this position. we have about 40 days to go. >> our first viewer asking lockheed martin, how much will the upcoming election affect the stock's next move? >> obviously depending on how we think this election is going to turn out, is it good for defense stocks or not. that 50% retracement is a little bit trouble. i might look to sell some covered calls.
otherwise i might exit my position and look for a better entry point. >> is that retracement troubling to you, carter >> it's especially poor. the group is poor. i do not like this area of the market. >> our next viewer asks what is the best tragic for amd at these levels >> i really like amd especially compared to intel. it has recent outperformance it did have a pretty big move this week. it pulled back about 2.5% today and i like that pullback as a potential entry for long the strategy i like is going out to august and selling a put spread here, maybe the 55.50 put spread that type of possibility or edge that i'm looking for in options is the type of trade i would do. >> our next viewer has a question on facebook
he's holding facebook's september 270 calls. sold one at $8 to cover costs. should he hold the other >> with all the popular tech names, this is the he's least extended i would stay >> mike, what would you say? >> i think so. this is something you can stick with. >> time for the final call carter >> buy it. >> tony? >> i like pharma going into earnings, long johnson & johnson through a call spread. >> mike? >> home depot earnings coming up in august. >> that does it for us we'll see you back here next friday at 5:30 meantime, very special bonus edition of "fast money" coming up right after this. i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. oh. their award-winning content is tailored to fit your investing goals and interests. and it learns with you, so as you become smarter,
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