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tv   Options Action  CNBC  May 22, 2022 6:00am-6:30am EDT

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to this fake art shows that this is a life pursuit. >> maybe he was just trying to get that one big, final score, and -- and that was his goal -- greed, basically. it's friday and that means it is time for "options action." i'm melissa lee. the major indices just barely pulled out of bear market territory today to close essentially flat what does one do when clinging to the edge of the precipice on this show we use options to risk less and make or maybe preserve more. one of the worst performing sectors today, industrials the sector dropping 1%, now down 15% for the year if you want to be constructive on the group, carter and mike have some thoughts before you hop in carter, take it away. >> yes, let's plunge right in. the first chart is a comparative chart, two lines, very straightforward. it's a five-year chart simply
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looking at the s&p 500 and the sector in this case we're using the xli industrial select etf. and what we know, and you can see it there in the lines, the orange line, industrials essentially peaked a year ago and have never sort of participated in the ongoing rally that has all come undone when the market peaked in january of this year so reference points. the next chart looks at a similar exercise to what we were doing at the top of the hour where we are now juxtaposed against the pre-covid high so you can see there's not that much air left. while it doesn't have to stop there, that's a major reference point, and that would be down 3% from where we are now essentially. the next chart puts in context where support comes into play. now support again is not a plywood board or concrete floor, it's a mattress top. you sink into support.
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you get then support and you can go into support. were we to get down to that second line, that's another from here 8%, but still tolerable and not out of the question. and the final xli chart is what would that represent were we to be fully into support, it would represent a 25% decline peak to trough from the highs of essentially a year ago. >> all right so, mike, what's the trade-off with these charts? >> yeah. so i mean we have a situation here we touched into bear market territory today. i'm not convinced, i think, that all of the damage is done. and of course in a situation like this, we have high options prices, but they are not necessarily expensive given the kinds of moves that we are seeing now, of course the real news for the industrials today was john deere's results. i think john deere's results really -- a lot of people thought that might have been a safe haven, that agricultural equipment would be supported by high agricultural commodity prices
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what we found out today, of course, is that although we do have high agricultural commodity prices, they also have high input costs as well and the results were fairly disappointing. so i think what we can do is take a look at using a diagonal spreads. sometimes when i use diagonal spreads, we're looking to make sure that if it moves too far in one direction, even our favorite direction, which in this case might be just a little bit lower, we want to spread those diagonals out. however, in this case i happen to think most of the damage to the industrials now is likely has been done already, so i was looking specifically at the september 86 puts, purchasing those for about $3.65 and then selling the near-dated june 84 puts against them for a dollar those june puts should decay more rapidly than the longer dated ones that i own.
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if the industrials really crater from here, something i don't think is going to happen, but if they did and it went down very far, then of course we could begin to see losses down around the 75 level but that would be quite a move lower from where we currently sit. so i think this is a way to take advantage of how options prices are setting up, anticipating a little bit further downside, kind of in line with what carter was charting there, but probably not a whole lot more damage after that >> tony, what's your take on this >> yeah, so, when you take a look at that chart of industrials, what you see is that we are trading near relative lows. there's always some concern are we chasing this market lower but i think the important part is to look at that relative chart of industrials relative to the market if you look despite the underperformance of the sector, over the past year or so it's traded largely in lockstep with the market right now we're near the upper bound of the range for industrials relative to the market
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so i actually think now is a good time to look for an entry for industrials to underperform the broader markets. if you look within the sector itself, mike referred to the john deere results today that certainly is going to impact the industrials but once a part of the particular sector that i'm still paying attention to are the shipping names if you look at union pacific and u.p.s., these are stocks that have recently broken below some major support levels that can see further downside but i think mike is right, the damage is largely done i particularly like the strike prices that he has chosen on this diagonal spread because of the risk that he is referring to he's paying more than the distance between the strikes so he does have downside risk but if you look at the $84 level, that's my target level or some of the chart levels that carter is referring to those are the exact levels that mike has chosen to sell that short strike that's where he's going to have
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maximum profit by that june expiration so i like how we're aligning the technicals with the options strikes to try to maximize our potential yield on this diagonal spread >> last word, carter >> one thing to note of course, all sectors are influenced by the market cap weighting of certain stocks if you take this sector, 71 stocks which is skewed toward caterpillar, deere and union pacific it, the equal weight sector is outperforming the actual weight which speaks to some extent that we're getting closer to the end than would be expected >> all right as markets continue their wild swings, tony is setting up short trades on a couple of already beaten-up big tech names he thinks are ready to hit even lower still. so, tony, despite the reversal we saw into the close, apple is one name you're looking at >> yeah, that's exactly right. if you look at kind of the carnage we've seen out of the markets this week, whether you look at names like target or john deere, if you look at the tech names like apple, while they're somewhat insulated from
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this type of inflationary concerns and slowdowns from the consumer, i don't think they're immune if you look at the chart itself, i don't necessarily think they have reflected some of the risk we have seen from the markets this week. if we look at apple, i think the key level to pay attention to is $140 we broke that level just today i think this is the concern that there's further downside you can draw your lines multiple ways whether you want to draw a horizontal line on $140 or some of the trend lines startin to break on apple. i would argue we haven't seen the downside of apple relative to some of the real carnage that we've seen in the broader markets. from that perspective it's hard to poke holes in apple's business model and certainly hard to even justify from a valuation perspective as to why this might be an opportunity to buy, but i think you really have to consider the fact that the market is not trading on valuations, it's not trading as much on fundamentals and that's really why i think you do see
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some downside targets into that 120 level. now, because we are cognizant of the fact that we are chasing near relative lows here on apple, i do want to use a trade structure that allows us to risk a relatively small percentage of the stock's value. so i'm using a debit spread. i'm going out to june and i' buying the 130/120 debit spread paying $2.33 for this debit spread as of today's close because of the buying that we saw into the close this is trading now at about $1.80 so you're actually paying less than 20% of the vertical width to pay for this debit spread that's about just a little over 1% of a stock's value. this allows us to take some downside exposure and potentially play for a collapse in some of these names if we do see some further weakness, while risking a very small percentage of the stock's value to do so. >> before we get to mike's take on this trade, carter, i want to know how you are drawing your lines for apple.
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>> well, just the way tony is drawing it because tony knows how to draw his lines. the point is, and we talked about this at the top of the hour, that first chart, in relation to that spike high in september, apple has made no relative progress to the market. that spike high, apple was trading higher above its 150-moving average at any time in the past 12 years and has really never gotten over that moment of excess >> all right, so, now, mike, what do you say? >> well, a couple of things. first of all, when netflix announced that they actually had a decline in subscribers, that really shocked a lot of people and of course apple is not the same kind of company as netflix is necessarily, but, you know, we have seen some real signs of weakness amongst consumers and there's a couple of things that we ought to just remember about apple. number one, there was a lengthy period of time where it traded at a multiple considerably lower
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than the one where it is right now. the other is if we have weak consumers at some point, that could hit them and will probably come as a big surprise if and when it does so i think if we see anything like that, then there most certainly could be further downside >> all right so, tony, what's the next victim >> unfortunately, if you look at names like tesla, you have almost an identical chart setup. i would argue very similar concerns around inflationary pressures and the slowdown here around consumer. and that important level here for tesla is $700, which again we also cracked today. and even at the close we couldn't manage to get back above that $700 level. so from my perspective you have the same risk here for tesla you're chasing near relative lows the way to do so, especially with the implied volatilities as high as they are the ivy rank on tesla right now is at 80%. the only way to play for a
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downside is to use a similar trade structure that i did here for apple, using the june 620/600 put spread earlier today it was $7.80 for that debit spread. as of the close here today it's actually trading $6.55 so i'm paying just about one-third of the vertical widt for this out of the money put debit spread again, the goal here is to consider the fact that i am chasing lows and i want to do so in a way that limits my risk here by using a debit spread that costs $655 per contract on a roughly $660 stock means i'm risking 1% of the stock's value. so very similar trade structure, almost identical trade setup from a chart perspective and valuations perspective, far greater valuation that we've seen here on tesla, so i think there's further downside potential in tesla than there is in apple >> mike, your take >> yeah, i don't think tesla has ever really traded on its fundamentals
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certainly it's trailing fundamentals the interesting thing about what tony is using, this is a way to take a relatively small amount of capital and apply a bearish bet to a very expensive stock. just in dollar terms not shorting the stock so if you're inclined to take his directional thesis, then i think this is a good way to do it. still to come, just because your crypto holdings have been smashed to bits of coin doesn't mean you can't rebuild something constructive out of them we'll show you how for everything "options action," check out our website and sign up for our newsletter much more after this trading isn't just a hobby. it's your future. so you don't lose sight of the big picture,
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welcome back to "options action." check out bitcoin dropping below 30,000 as the crypto crashes the bitcoin breakdown doesn't mean that your portfolio needs to take a beating. if you're in the crypto space, there is some good news. mike khouw and carter worth are here to show you how to add a little extra coin to your pocket carter >> sure. what we know is this is nothing new for bitcoin. look at the table that comes up on your screen basically how many times has
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bitcoin sold off 50% or more from an all-time high, meaning having achieved a new record you've seen it on your screen, it's kind of every year, year and a half this one is currently 63%, the sell-off now from its peak of november the question is, does it go more that's my thinking let's look at the charts the first chart shows where we are in relation to where we've been and the authority and importance of the 30,000 level so we had that recent plunge about three weeks ago dropping from 36,000 to 30,000 in about five sessions and actually undercut, went as low as 25 intraday and then we've been stuck here the longer you sit at a level without bouncing the more at risk you are of finally undercutting that level. so where might we be headed? look at the next two charts. the first one is a longer term chart citing exactly that level, the 30,000 level
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now were we simply to break and break hard here, the final puts it in context. the key reference point is it spiked high in late 2017. while it doesn't look like much on the chart, that's essentially dropping to 20,000 and i think it happens pretty quickly. >> mike, what's the trade? >> so of course we can't really trade options on bitcoin itself. but there are plenty of equity proxies, many of them are very well known certainly microstrategy would fall into that camp. and so, of course, would coinbase coinbase is the one that i'm taking a look at now, an important thing i think i'd like to mention about this whole space is that the crypto area tends to skew a little bit younger in terms of the investor base. just as a reminder to some of the younger investors that might be participating in it who weren't participating in the
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tech wreck in 2001 and '02, what tends to happen is, prices will swing a lot further than you expect. what ends up happening when you do see these kinds of declines, you'll realize that we've come down so far, it becomes very difficult psychologically to try to press a short in that circumstance because everybody gets very used to the notion that you should buy every dip. so one of the ways that you can do this is actually very similar to the trade that we were talking about in the first block about xli. i'm specifically looking at another diagonal put spread, specifically in this case looking at the september 65 puts, purchasing those you'll notice, and this is not surprising given the volatility that we see both in all of the cryptos but anything that's associated with them, so you'll notice that the september 65 puts in coinbase cost $16. that's well more than 20% of the strike price
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of course that also applies to mirror dated options so we're looking at selling the june 60s. those were also over $6. once again the idea here is to try to collect the decay on an accelerating basis the near dated options will have. you'll notice when you take a look at the payoff graph that, if coinbase simply stays roughly where it is, this would see profits and ideally it would see profits if it drops a little more it would need to drop below 45 before we expect to lose on the downside that would be quite a significant move lower from where we are right now i mean, we're talking about another third again lower than where the stock is currently trading. >> is this a trade you've put on, tony >> so, let's take a look at some of the names -- the levels here that carter is referring to in bitcoin before i comment on that if we look at the 30,000 level, which bitcoin has broken down and carter's charts show you back in 2017 that $20,000 level, that's your immediate target
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as he says, i think we're going to get that really quickly as mike said, things can go a little bit further than we expect the downside target beyond 20,000 is 13,000 so we're really talking about potentially another 50% -- more than 50% haircut to where bitcoin is currently trading right now. as to what does that correlate to in terms of coinbase's stock price? that's the difficult thing to nail down at the moment. so from my perspective, if you look at coinbase, there's clearly a chart that's oversold and it's difficult to chase this but you did have a nice bounce over the past couple of weeks and that potentially is your opportunity to re-enter a short. so while i agree with mike's trade on a potentially re-entry on a short position here for coinbase, for me i'm not as keen on this particular diagonal spread but to explain a little bit, the diagonal spread makes a lot of sense because of the difference in implied volatility between the september options
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that he's purchasing and the june options that she's selling. the septembers are currently at 120% volatility and june is trading at 140%. he's selling the short-dated higher volatility options and buying the lower volatility options despite as elevated as they are my concern here is really the short strike here, the $60 strike that he's using because we have a gap fill at around $60. that's really where i think that the stock can trade down to very quickly, but my concern is that this is going to get back down to those all-time lows especially if we talk where bitcoin can trade down to, 20,000 and potentially 13,000. what that means for coinbase, hard for me to say, but i think there could be downside and risk that it does get below $45 relatively quickly up next, answers to some of your tough questions after another wild week in the markets. we're taking your tweets when "options action" returns
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suggest for the trade? >> we had a call spread risk reversal i'm still long halliburton shares and i am inclined to sell some upside so that would set up an options trade that i have to overlays our next viewer asks, i owner 100 shares of kweb at 49 should i sell a covered call at 32 by june 17th? tony >> when you're underwater like this on a stock and you want to sell covered calls, you want to prioritize capital appreciation. so use a low 15 delta that translates to a 33 strike price for the june expiration. that will collect about 1% over the next 30 days >> all right, our next viewer asks, do the qqqs fill the 350 and 360 gap? carter, take that one, please. >> those are far above the 348 the exact gap would be a 20% move from here and the higher one, the 360 would be 25%. i don't think those are in the cards any time soon.
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>> all right up next, more tweets and the final call
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and just might change how you trade—forever. because once you experience thinkorswim® by td ameritrade ♪♪♪ there's no going back. time for more tweets our next fan asks my favorite etf and contraryia january ignores the sentiment. is it a good time -- tony, what would you say >> i would say it absolutely is. the relative performance of brazil as an emerging market relative to the u.s. makes it a good candidate my upside candidates are 35 and 38 to the upside so consider that in selecting your strike prices for that diagonal all right, time now for the final call carter worth >> bitcoin it's ominous i would get out of the way >> tony. >> i see downside risks in names like apple and tesla buying a put spread in both names.
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>> mike khouw. >> if we're nearing an intermediate bottom with, just to put a little bit more on the downside xli diagonal put spreads all right, that does it for us on "options action. >> "mad money" with jim cramer starts right now (dramatic music) ♪ i really can see the difference. i can see this hair coming in. i have hair on my head. i can brush my hair now. within two months, i've gotten my hair back. it's just like a second chance on life. ♪ no hormones, no surgery. ♪


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