tv Options Action CNBC April 29, 2022 5:30pm-6:00pm EDT
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healthcare stocks facing the same macro head winds that impacted the markets this week so carter, what are you seeing at this point? >> right, well, the pressure is on, right? and very few things are immune but i thought we would look at today is a stock we have not done in quite some time and also a big stock, we're going to look at cvs to kick off it is the crossroads of offense and defense. we know it is a store, drugstores and other goods they sell all over the country. yet it is defensive because it is in the healthcare sector. the truth is it is underperforming its sector, other areas of the market and looks like it has downside risk going into earnings. the first chart on the screen, this is a relative chart, just simply dividing the stock by an aggregate, in this case, the xlv, the i shares healthcares etf. if the line is rising, it is outperforming. declining, underperforming what it has been doing is underperforming all year look at the next iteration this is cvs versus xlp
this is the ishares consumer staples etf, in would consider this kind of thing as well walmart is a staple stock, and here too look at the shocking underperformance, straight down relative look at some absolute charts here is the cvs chart in and of itself it is a mathematically perfect 45 degree angle, you see the parallel lines, it is a channel, and today we undercut the lower band that's not a good setup, relative performance to others in your sector is especially poor so let's pull this back a little further. this is a longer dated chart going back a decade. what is interesting is where the stall is occurring we almost got back to those highs of 2014, and now we're starting to roll so pull back a little further, here is the next chart, is it a double top i think it is. and then the all data chart going back even further, this is
back 20, 30 years, buy, sell, hold earnings coming up. i'm a seller >> all right carter made it very clear, mike. what's a trade >> it is interesting, we just heard tim talking about walgreens and cvs respectively one thing said was that for cvs, they have inelastic demand that means as the price of the goods rise and fall, demand for them does not. and what i would observe is that it seems like the stock has inelastic demand if we look at it from a fundamental perspective, it looks cheap, trading at less than four times full year earnings, going to grow eps or the street thinks it will at 8% year on year at the year end 2023 so when you look at it from that perspective, you have to think this thing is a buy. underperformed the s&p today, so this is a stock that typically
moves about 5% on earnings and inter interestingly, when i was looking at the june 85/95 put spread that cost $2.5, 2.5% of the current stock price and would be profitable if it made that 5% or so implied move to the downside i'm with carter. this market doesn't feel particularly good. and even though implied volatility in a couple of places is slightly elevated, and sometimes that's a suggestion that you should either be selling premium and sometimes a suggestion that you should be buying the market, the vix closed above 30, a level i was looking for a week ago, i don't necessarily think this is the time to start looking for value opportunities. so i think put spread is wait to go into earnings. >> tony, your take on the trade? >> yeah, so i agree. if you look at the chart itself, this is a stock that has largely consolidated above 100 since mid-december and just today, you've seen that break below that level as carter was referring to break below
that channel you couple that with poor relative performance to the sector, that gives you a good indication as to potentially what could happen on earnings. if you look at the fundamentals here, walgreens recently just reported based on a few -- a couple weeks ago, what we saw here was that covid related revenue is what they're expecting is going to be softer going into the second half of this year and into next year this is really what has carried the two stocks quite a bit over the past couple of years as these are stocks that haven't gone anywhere prior to the pandemic you think about that softness we're expecting from covid related revenues to next year, and then still consider the valuations that mike was referring to, trading at 12 times earnings while relatively inexpensive is still in the middle of the range for this particular stock the low end of the range for cvs is closer to seven times earnings you have quite a bit of room here to the downside from a value perspective. for those reasons i think this
still potentially quite a bit of downside, especially if you see softer guidance into the second half of this year, and i think that's what we see here from cvs. look at the trade structure here, the put debit spread, he's choosing a debit spread out of the money, but by doing so, he's only risking 2.5% of the stock's value. and only paying about a quarter of the $10 width of the debit spread that gives him a 3 to 1 risk reward ratio if cvs get backs down to the $85, which is roughly the breakout level from which cvs broke out above before it consolidated into that $100 range i was referencing at the very beginning so i think the price target here makes a lot of sense low risk, high payoff reward into earnings for cvs. >> carter, how does walgreen stack up compared to the cvs chart? >> it looks terrible, i mean worse. >> worse >> yeah.
>> wow even more clearly a sell, i guess. continuing our theme of seeing through the volatility, sometimes it is best to let all uncertainty get out of the way before you proceed such is the case withtony's next defensive play, a little differently for us already reported earnings, tony what else are you seeing in t-mobile >> yeah, given this week's volatility, i think there is a lot of interest if you will in finding some level of safety and by looking at a name like t-mobile, generally speaking a more defensive name, and the fact that it is reported earnings, and the stock is down almost 7% here today, i think this is really an opportunity potentially to take advantage of some of this weakness, sell some volatility and potentially, again, find a little bit of safety in defense. so if we look at a chart here of t-mobile what you see here is an upchannel and what we're seeing is a trade down to the bottom of the channel, and i'm simply looking for a bounce higher. but i think what is more important than the chart here of t-mobile is the chart relative
to its sector, the communications sector, xlc and we're seeing here that t-mobile is actually breaking out to new highs here, relative to its sector. i think this is really explained by if you look at the fundamentals between t-mobile and the two major competitors verizon and at&t, you're seeing t-mobile add roughly triple the number of subscraibers each quarter. this is driving the outperformance of this stock, it trades at higher valuation, it has the higher growth number, while maintaining profit margins that are equal if not better than the other two competitors so for those reasonsi'm trying to take advantage of a name that currently has elevated implied volatility but also in a fairly orderly uptrend. one way i'm trying to take advantage of this is trading an iron condor and i'm specifically choosing strike prices that gets me to basically the upper end of
that channel, while taking advantage of the elevated implied volatility here. so i'm going out to the june 3rd expiration and selling a 118/124/133/139 iron condor and collecting $3.17 on a $6 wide iron condor. collecting a little bit more than one half of the width or total risk i'm taking on this particular trade and i have chosen my strike prices where the bottom two strikes are very close to the current price, and the upper two strikes are near the top end of the channel. basically expecting that the stock bounces off this channel toward the top end, and -- but stays within that particular channel. and given the type of name that we're referring to, telecom name, without a catalyst on the horizon, this is a safe way to take advantage of the elevated volatility here in the market. >> mike, do you like this trade? >> hmm you know, this is a market where i'm really interested in selling
a lot of close strikes to what the stocks are doing this thing moved ten bucks just within the last 36 hours and i think this -- the lower strike we're looking at here, 124, is already in the money it wouldn't take anything really for this thing to get below that 1 18 strike price. now, the trade structure, i don't take issue with selling iron condors generally and the distance that he's collecting between the strikes is reasonable. the stock can only be higher or it can be lower at expiration and that's one of the reasons why trades like this can make some sense but in a market like this, the chance it is considerably lower or higher is actually quite great. one of the reasons it can be deceptive when you just start chasing elevated premiums to sell, you ought to pay attention to the market you're in as well. often times those elevated premiums are justified. >> tony, quickly, want to address mike's concern that maybe you don't need any catalyst for the stock to swing
to those strike prices >> and he's right. today the stock is down 7% there is no particular catalyst other than the market. that really, again, is the reason why i'm taking this particular strategy. we tend to find that after big outsized moves in stock like this that's when we tend to see a period of relative calm. and that's what i'm using this iron condor, 30 days out, only holding on to this trade for maybe 15 or roughly half that amount of time so i'm really just looking for a little bit of calm here for the next couple of weeks and i'll be probably taking this trade off. >> still to come, when exxon buys back $2 billion in stock in one earnings period, that should tell you something professor khouw will explain how to trade that. for everything "options action," check out our website. while there, sign up for our n newsletter we'll be back in two trading isn't just a hobby. it's your future.
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welcome back to "fast money" and earnings announcement this morning. exxon slipped in, that it is on track to buy back $30 billion in stock through 2023 so, carter, what does that signal to you about the overall energy sector? >> well, i mean, if you think about it as an operating business, is that good or bad? i would say that's bad, consider this that exxon and chevron, the two big ones are going to give more cash to shareholders than they will invest in oil and gas production this year $50 billion between stock buybacks and dividends versus $37 billion in capital expenditure. i don't think that's a good business model but i'm not an energy man. let's look at the charts what do we know? we have a trend and a breaking trend, no way around that. at one point the xle, the etf
was up 50% we broke trend hard. we rallied back and today we hit our head at the underside of that line. and if we look at longer term chart, we saw this sequence over the past two years we consolidate and i think this is the second break in trend i'm a seller, not a buyer. two long-term charts, so this say weekly chart, the next one, we got right back to the highs of 2017, couldn't quite get above, a little bit week or to and faltering. draw the lines how you will. i would call this a pretty well defind double top. >> mike, what say trade here on energy >> this is interesting because if we look at the sector and, you know if we're looking at xle, for example, the etf proxy we use most commonly this is integrated oils, the two biggest constituents or almost half of
it you can add in conoco, another integrated, if you look at the companies, they do look cheap. i would consider that to be a positive and if you compare those companies to their european counterparts, you know, like total and so on, they are getting better returns on capital, and they have good free cash flow at this point and exxon's announcement they're doing these massive share repurchases are an example of how they intend to deploy that free cash flow but i think there is still a considerable pressure on the sector overall bad news in here too for example, and everybody is aware of this, esg, activism and regulatory pressure, this is not the best environment for them overall. even when they did start to make some money, we immediately have some people in washington coming out and, you know, suggesting they're gouging and coming after this, this is after they had massive losses the prior year. exxon in particular is, you know, they reduced their
investment in production and their production is declining. you need to make investment in their business f you if you're not doing that, the question is why. if you look at the bulls upside price targets for the space, they're fairly modest. looking at exxon, the average analyst price target is just under 94 bucks a share, the stock is just over 86. that's not a lot of upside and that's from the optimists. i will add one other thing personally i have paired back my positions in the space a bit i think one thing you could do is look at a put calendar. we have an inverted implied volatility term structure. that means the near dated options have much higher implied volatilities than the longer ones, take advantage of that i was looking at selling may 75 puts, buying the august 75 puts and it was 2.25 that you collect on the mays, pay 5.5 on the augies and that would get you 3.25 in net spend to put that
trade on i think this has a fairly wide band now, when you put a straight calendar on, if the stock goes down very, very sharply, you can actually get the trade wrong but i think that would require a pretty big move to the downside and not expecting that simply because oil prices still reman a little bit elevated. and that creates the near term support. you'll own that longer dated put and can do more things with it. >> tony, what's your take? >> yeah, so, if you look at the energy sector relative to the s&p, it has been a full two months since it made no progress relative to the market that certainly is concerning and then if we go back all the way to 2008, which is the last time energy has outperformed the overall market, since that time, the last year and a half this has been the longest and the biggest outperformance of energy relative to the market so i'm not exactly sure that this two-month pause is necessarily the end to that outperformance here.
and you do have to consider the fact that as carter was referring to, the two largest names, exxon and chevron, make up 43% of this etf it is really those two names in the driver's seat. if you look at the fundamentals of those particular companies, mike refers to the good and the bad. i think the good, i completely agree with him, the bad, i don't think it is that bad if you think about the underinvestment, that's really the -- what drives the potential catalyst of lower supply, that can drive oil prices to significantly higher on some type of catalyst so for those reasons, i'm not as bearish here on energy stocks at least at the moment. but if you look at the trade structure that mike is using, the put vertical spread, the choice of strikes he's using, the $75 strike, the at the money strike, means this is really a mutual play between now and the first expiration of may. it is a relatively short dated play, only three weeks out, but a completely neutral play. if exxon -- if energy stocks just stay where this is, this
strategy is profitable he's able to collect almost half of the premium of the august $75 puts that he's purchasing here so he's collecting a fair amount of premium and i would re-evaluate whether i'm taking a more bearish view here in about three weeks' time or so, so in the meantime, i think this is a great way to play this pause as carter is referring to here in energy stocks. >> we want to stick with the energy space, and do an early look back. there is still time on this one. what do you do now, mike >> yeah, so i tweeted out a little over a week ago that i started to reduce my own halliburton position, something i talked about when i discussed this trade because i was long the stock and had options around it i cut half that position two weeks ago. i actually closed out the last of it today. and for those who have been watching the show or even, you know, seen us talking at various conferences over the years, i had that on for a couple of years.
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he wanted a streamlined version he could access anywhere, no download necessary. and kim. she wanted to execute a pre-set trade strategy in seconds. so we gave 'em thinkorswim® web. because platforms this innovative aren't just made for traders -they're made by them. thinkorswim® by td ameritrade welcome back to "options action." last week tony laid out a way to play amazon ahead of earnings. >> this is a chart that carter has spoken to quite a bit over the past few quarters. you have a stock that has outperformed the broader markets for vast amount of time before over the past two years really going absolutely nowhere from an absolute basis but the most important thing for me is really those relative charts, the underperformance relative to the market and its sector is telling for where it is going to trade. i'm going out to the may expiration and choosing a 28/85
spending about $11.80 for this vertical spread. >> shares of amazon sinking 15% after yesterday's disappointing results. that trade is well in the green. tony what are you doing now? >> yeah, so for vertical spread like this, where we're well below the lower strike price, you're trading near the max gain on this particular trade whether you took the exact strikes i used or adjusted it lower based on monday's open, either way you probably are near that max gain and it is time to take profits and move on to the next trade >> carter, curious, i asked you this during "fast money," i'll ask for the benefit of the oa viewers as well, when does amazon become so bad it's good >> so there is both magnitude and duration to that sort of concept. and we have to some extent magnitude, but it is just fresh off a gap and drop
and orders to your style of trading. personalized education to expand your perspective. and a dedicated trade desk of expert-level support. that will push you to be even better. and just might change how you trade—forever. because once you experience thinkorswim® by td ameritrade ♪♪♪ there's no going back. our first viewer asks, followed mike into the qqq vertical put spread after friday's excellent shui. if he were in a solid decline, will you ever close due to the potential risks? >> you can consider rolling. roll down and out, straight down or even if the it has gotten too steep, roll it down and in. >> final call time, carter >> cvs, acts poorly going into earnings if long, take measures short seller, hit it >> tony?
>> t-mobile, selling an iron condor >> mike khouw? >> put spreads in cvs going into earnings. >> all right, that does it for us here at "options action." see you next friday, 5:00 p.m. eastern time "mad money" with jim cramer starts right now starts right now my mission is simple, to make you money i'm here to level the playing field for all investors. there is 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 make friends i'm just trying to saver you mon on one of the worst days i've seen in my career so call me at 800-743-cnbc tweet me at jim cramer at least it's over i'm talking about this miserable month of april
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