tv Options Action CNBC April 8, 2022 5:30pm-6:01pm EDT
it is friday it's time for market action. here's what's coming up. >> when the pendulum swings too far, carter worth explains why the safety of utilities may be getting stretched. in case you haven't heard yet on cnbc. >> the stem cell research starts next week with the numbers. >> but tony zane thinks there is really only one to speak up about. finally, a special edition of look back, with professor khouw. how you manage some of our
recent trade suggestions depends entirely on how you are using them it's time to risk less to make more "options action" starts right now. >> let's get right to it today the markets close. lately, we have been spending time on offensive and defensive posit positioning. case in point, carter's hideout last month other sectors mate be getting long already for a different reason carter what are the charts telling you? >> we thought we'd focus on utilities here there are very interest rate sensitivities in the market. the whole discussion we had at the top of the hour. but utilities in principle are less desirable if you will in a rising rate environment, all things held equal. yet utilities are through the roof let's look a a table or two, or a chart or two the thought is to fade
so the market low you saw statistic there is from jeff mills. if you look at the six-week return, here you see that utilities, of course, are leading the pack, defensive, healthcare, coming in second defensive, rates staples and the s&p up 5 the point is, you will see this in the next chart that at this point i think the spread is getting a bit wide just as it's a bit wide the other way with home builders so this is a comparative chart three lines. you got xlu, spider etf up to the right, versus tlt the ishares treasure bond etf and itb the home builders etf. i want to look at a championship him ratio charts this next one is optically incredible it's xlu not itself its relative performance to the tlt. so it's just a ratio and you see the textbook breakout.
now it's literally so steel it's almost going up to the left. you can't do that. you got to go out to the right the next day look at the next chart, going back some 20 years a definitive breakout. in many ways, it's the equal and opposite moment of the pandemic plunge and then the final charted, we have an epic breakout but it's happened. it's broken out, utilities seem a little too far, too fast we are thinking fade this very defensive area of the market >> wow those charts speak for themselves mike, what's the trade here? >> if we saw some other charts, we might think they have got on the an extreme level sol if we take a look at xlu, the utilities etf. we take a look at the utilities select sect ror index we look at valuations. carter has often told us that valuations are not a very good timing tool. i'll admit they aren't but i think we need a little bit
of context here. almost no matter how you slice it, utilities are about as expensive as they've ever been, price to earnings 22-year highs, ebitda, 20-plus year highs whether we are looking at pre-cash flow to debt, whether this is trailing or forward looking, it doesn't matter it's essentially at all-time highs. from my perspective, if we are looking at cyclical stocks, sometimes those can be contrary indicators but utilities aren't cyclical. they tend to be the steady eddies right. sol from my perspective, this does seem a little bit too far too fast maybe even a lot too far too fast so i was looking out to skwlun at the 7670 put spreads. i am looking at that today it costs a little over $1.30 to put that spread on xlu and constituent stocks are not super high volatilities. so the option os premiums are not that great so you will notice that you are
actually checking about a third of the premium of the money that we're suspending on the 76, collecting it on the 70s that's the reason i am looking at a spread. the other thing is it is essentially from that 70 level that we really broke out so to me, i think, that's sort of the level that i would be targeting in the near term and in this case, we're talking about a little over two months and i think this is the way that you probably want to play it it's always very difficult to pick a top, so we don't want to short something like this. but this is a way we can bet against it >> tony, what's your fake on this trade >> yeah. so, overall, i completely agree with this. we have been adding long exposure to utilities on the breakout when it brock out above that $72 level when you look at the trading range of xlu prior to that breakout it projected a target of $78 because of that, we started taking profits on those trades earlier this week. i think that aligns quite well with fading this particular
move if you look at the specific constituents of xlu, especially the major once, garrett energy, duke energy, southernco. these are companies trading at the same type of extreme exhaustion moves some really sets up well for this collapse if you will or a fade to move back to that mean reversion. but i think what's interesting sheer tiply the when an asset like this trades near all-time highs, the implied volatility of the options tend to be inexpensive. but that's not the case we soon for xlu. it's trading in 70th percentile relative to its previous year. within i look at this applied volatility, i would be more inclined to sell premium but looking at mike's debit spread the fact that he's able to collect one-third of the $76 put options premium and he has a risk/reward ratio here of over 3.5-to-1 i am far more inclined to take a debit spread when we fade these moves, we
tend to see the collapse happen fairly quickly that's what will you get from the debit structure mike is useing carter, are we entering reversion territory for some of the other sectors that have done well since february 24th >> well, that is the irony of trading. right. when it's loved, think how tech is loved it get ahead of itself you see nit crude oil, my goodness, it went from 90 to 130. wall street is calling for $200 a barrel and the thing is in freefall at 90 when it gets a little hot, too far, too fast. or the reciprocal, too much of a plunge, you start to see a mean inversion, what you are applying it's in all areas of the market, all sub secretariors all asset classes. >> let's switch gears here check out the bank earnings, bank of america, j.p. morgan, citi, set to report. tone is eyeing one name in particular he thinks can be money in bank. tony, which one?
>> the meme i have my eye on is wells fargo. the first one i want to look at is the financial sector slf relative to the market basically, since february, we seen this sector make absolutely no progress. it's been rahnge bound right now we're at the bottom end of that range. from a timing perspective, looking at financials going into earnings, it seems like an interesting time to do some when we look at the major banks reporting next week, from my perspective, wells fargo seems to be the better reporting one wellsfargo, we seen them outperform the sector. recently it pulled back to a trend line this is a good opportunity to look at wells fargo going into earnings if you look at what's interesting i think for a lot of investors currently asking about you know rising interest rates and why are banks struggling in this rising interest rate
environment? you have to look at the spread between the when the year and two year to have a better understanding. because it represents the difference between the rates the banks lend out at and the rates at which the banks have to pay depositors when we see a rate inversion, that puts pressure on wells fargo and bank of many earthquake that generate a fair amount from interest margin. as we get out, it starts to ease some of that pressure. lastly, look at a chart of wells fargo, simply trading near the bottom end of the range. i am looking for a bounce here going into earnings. the market is currently implying act a 5.7% move versus the average that we have seen over the past eight quarters of about 4.2% so the market is implying a fairly sizable move. but the implied volatilities are quite high it's in the 70th permanentile. i am going out to the may 13th weekly option, selling the 48, 45 put ventilator cal here
like in about there are 2.04 for the $48 puts paying 1.04 netanyahu a premium out of a $3 credit spread. this is typically the one-third minimum we seek on a credit spread but it is a fair amount already out of the money so for those reasons, i am willing to accept a credit spread that collects only one-third of the width >> mike, what do you think of this trade >> well, i mean, it's interesting, of course, because i haven't been overwhelmingly bullish on financials and, in fact, we put bearish trade we got long put spread in xlf. a part of the reason for that, of course, is one of the things that tony bass discussing, which is obviously if you have a flattening yield curve, that's not good you know, there are two things that actually end up hurting financials when you get that dynamic. one is net interest margin of course, the other is you need something to have a margin on
and what i am referring to, specifically, is that when you start seeing recessionary pressures, you know the cni loan growth is probably also going to decelerate you are not earning any margin at all on loans you don't make in the first place not the mention the fact that, of course, all equities typically will start to perform fairly badly we have rapidly increasing rates and recessionary pressures a lot of these things working together that said, selling the put spreads like the ones he is doing when options premiums are elevated doing so, so it's out of the money, oftentimes, when you do that into catalyst, that can be a winning strategist so for an options strategy perspective. i rather like it, even though i haven't been overwhelmingly enthusiastic about financials. >> let's talk more about that xlf trade you mentioned. we will do an early look b.c that's a treat at the top of the show, mike laid out a bears trade on xlf. the group is down 2.5% since
then mike, what are you doing now >> this is an interesting situation. when you put on put suppressed or if you do outrights, the important thing to remember is once you start seeing the underlying run through your long strike, some of the benefits that real optionality that you get starts to come down. so, that doesn't mean that i am no longer bearish. what i would suggest, though, is that people consider taking some of that money off the table and adjusting down you can roll those strikes down, take some profits here but maintain that position you can do that, whether that is a hedge for other trades that you might have on. which could be even idiosyncratic ones like th bullish trade that tony is proposing. it's really a neutral that tony is producing on wells fargo. >> for everything "options action," check out "options action" while you are there. you can sign up for our newsletter that's up next still to come, a look back
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believes there can be an opportunity here mike, take it away. >> tlt which is the etf that traction the 20-year plus year long treasury market has had one of the weakest ever. it's right up there. the only other time we have seen declines as sharp as the one we have seen since december in this etf, since it was first listed in 2002 with on the rebound that we saw off the credit crisis in spring of 2009 and we are actually not that far off to declines that we saw at that time now, the thing is, of course, if you really do believe that rates are going to go higher but you've already seen this thing has gone down 19% and that's very close to actually the biggest kind of declines over comfortable periods of time we seen in the past, you may be wondering if there is an opportunity to get in. you highlighted it this week, institutional traders out there buying the 118 strike puts that go out to april, may,
june even as far out as november so, obviously, there are some people who are still making some significant bearish bets the thing is, this is an awfully tough time to try to make those kind of bets so the question i think we ought to be asking ourselves is, if you are in the camp that bullards, rate targets, she put it three and three and quarter are in scope that would put tlt back at the levels we saw in the fourth quarter of 2018, question is down around that 115 to 118 level, what can you do now well, options premiums are pretty elevated in this thing. that's not surprising given the big move that we've seen the other thing we may say, we may be closer to the end in the near term of the move lower than we have been in a little while, finally, i would suggest it's probably, therefore, going to make some sense to try to minimize how much you rick by making a bearish bet also to pick your levels
i am, in fact, targeting that downside level that we did see in the fourth quarter and i was looking up to june at a 120/114 one by two-foot spread the idea is i am trying to tell two down side puts on my downside target in the event it does continue lower. i am trying to put this trade on in a way where i am essentially going to layout little or no premium. the idea being that if it actually sort of stabilizes here or if we get any kind of a rebound. if recessionary fierce keep the long end of the curve depressed, i am not risking anything. no harm, no foul, in the 20-year doesn't decline or it rebounds when i was looking at that today, this was only going to cost 30 cents. the idea is you sell two downsize puts close to that downsize target, collect enough premium you are essentially offsetting the cost of a higher strike put >> carter, what are your
thoughts >> well, this is very much the same as if you will the utilities trade, there is a lot of auto correlation. this is some of the most rate-sensitive areas of the market i think we got two charts here to put in context how extreme the current move is. so the first, you see here is a ratio. this is again tlt, but it's the reverse. tlt's relative performance so the ishares treasury bond etf to utilities have you literally a collapse, a breakdown of epic proportions to all-time lows. one versus the other but the tlt, itself, the second of the two charts is down to trend. so this is the all data chart, looking at tlt we have come town to the trend line that connects the '09 lows with the 2018 event levels that mike was citing and i think sequencing calls for a bounce here were set differently. the long end will start to reflect some recessionary issues
that are around the corner >> so, tony, you got the charts and the trade. where do you stand >> i agree with carter here on the expectation especially given the extreme moves here my trade goes out to june. if you look at long-term, the breakdown 132 on tlt the subsequent retest as resistance and rejection points us certainly towards that 112-114 low that mike was referring to back in 2018 now, if you look at a ratioio spread like this, it might look intimidating you can break it down into a 120-114 debit spread, which is similar to a trade mike is using on xlu he is selling an additional put against it to offset the costs of that put debit spread and getting it for virtually free by adding the obligation of owning the stock at 114 by selling that
114 put. but the few things that's required i think to understand thisparticular strategy is the additional obligation to buy that stock at 114. but also the strike prices it's very trick why i to pick the strike prices on that lower strike price now, he happens to pick one level 114 which aileen really well with the 2018 lows. but also the one standard deviation move from the june options. that's what the market is implying that if flt is to move lower, that's expected movement i think that is a great way to quote/unquote thread the needle on price the last thing is if tlt moves down to that downside parth pri target prays tell e relatively qui quickly, you will see a paper loss you have to hold to thread the needle not only on price but also time. >> a good point there. we got to take bra a break here. up next, more lookbacks, we are off next friday for the holiday so we thought we'd do a lot of
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because platforms this innovative aren't just made for traders -they're made by them. thinkorswim® by td ameritrade >> welcome brooke to "options action". they made out a bearish way to pla i the triple qs. it put the trade in the groan. that prompted a fan to tweet us, do i sell the triple qs now. i never make money, it is all timing i am green, chances are below 360 in the middle of june, so, mike, what do you do with this >> first the options market is sailing there is a 60% chance, we are below 360 by june second, if you are hedging, you need to keep your hedges on as long as you have your portfolio on fine amy, you don't need to sell it you can adjust it, roll down and out. >> good angst.
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♪♪ as promised, a third look back tonight this is on tone's tan trade last month. it's still in the green. it expires the 22nd of this month. tony, what do you do now >> the rule of thumb you get within three weeks of expiration, if you are above break-even price, it's time the take your profits and move on. >> time for the last call. carter >> one of the best things you can do is buy a pair of long home builders and short utilities. >> tony. >> wells fargo going into earnings selling a put vertical spread >> mike ko . >> this is a bit of a barwell trade, i think if you are bearish on the xlu you can do put spreads. if you want to prep use ratio spreads
>> that does it for us on "options action" remember, we will be back on the 22nd have a great weekend don't go anywhere. "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 i promise to help you find it, "mad money" starts now. >> my job is not just to entertain but to teach you, call me or tweet @jimcramer, the grand pivot is upon us, a lot of people are having trouble processing it, tha