tv Options Action CNBC September 23, 2022 5:30pm-6:00pm EDT
it is friday, and that means it is time for options action. the dow closing at a new low for 2022 and the s&p struggling to not do the same. all the major averages kept their fifth down we can on rising recession fears we'll help you find recommendation in options. plus, we'll look at one whole market insurance policy and examine why gold isn't behaving as it should yet joining me, carter worth before we get to tonight's trade, let's triage the markets. carter, what's your take on the
action >> i think there's a lot of hope that somehow because we're back to the june low that we'll hold, and yet we know that the s&p is one index, but major indices from the new york stock exchange composite have all understood cut their june lows. i think we go lower. >> yeah. mike, what's your -- we've seen some pretty extraordinary moves across asset classes how do you piece this all together >> i think the real driver here of course is concerns about rates. and if you're thinking about what could happen to equities. you have to think about what's going to happen to rates first now, a lo of people are making a big fuss and say, just over 4%, say two-year rates are high and the fed is stepping on the brakes the fed is not stepping on the brakes from 1998 to 2008 the two-year rate average about 4%, and that
was when cpi averaged 6% right now cpi is 8.8%, which means nominal rates remain negative even if you use the pce deflated that's 6.3, that get us to a negative 2% nominal rate if they're going to stop inflation, we are not done yet, and if rates are not done going up, then the market is not done going down >> yeah, and effect has really felt the pain, dennis. i'm wondering what your take on nasdaq is? >> tech in the nasdaq, weaver seen correlations in the market. the markets are moving much more together now than they were earlier in the year. so it's hard to find tech versus s&p differentiation versus russell. i look at what's going on overseas in europe and european indexes. everything, the only thing i can ever find that goes green seems to be the dollar these day, and that's not good for stocks
if the fed is going to keep raising rates you continue the see strength in the dollar, could continue to hurt stocks. hope springs eternal the vicks is still undercontrol. and there's reasons behind that. i just don't think people own as much equities as they had before i also think people are selling equities, kind of going into cash maybe harvesting, looking to use that cash to deploy later for better buying opportunity in the market. >> higher cash positions, mike, is one take on why the vix remained relatively muted. i'm wondering what you see as reasons we haven't seen a spike yet to a 34 or some astronomica level. >> there's a lot of things going on here, and some of the things we're going to talk about in the options space are indicative of this, and actually some of my own positioning can be indicative of this it's very hard of course we don't want to go completely
to cash but don't really want the add stocks here. you also don't want to buy insurance on the market after it's already fallen more than 20%. so think about the dynamic that that creates if you're a long equity player and you're going to use options instead, you might be inclined to say you know what i want to buy some offside call options. because the market's fallen, maybe i'm not buying aggressively as i was before what does that do? all else equal it's going to increase the price of calls and is going to not increase the value us a might otherwise expect with the declines that we're seeing, and i think that's showing up when we look at something like the vix index, which is going to -- you're going to see, as puts get bid, you're going to see those metrics rise. >> stocks do not head south. the chart master has one name that could be the ultimate defensive play
carter, is that worded too strongly >> maybe, maybe. but any way, let's talk about apple. and listen, this one makes -- you ran around the desk and everybody not sanguine that's fine. just know this before we look at the charts of the eox, only two stocks were up this week, pepsi and lilly. of the 98 others the one that was down the least, apple. on a trailing 12-month basis there's only 20 up on a trailing 12-month basis and they're all utilities, staple, health care, and energy but there's one that isn't, apple. it has dropped 15% hunch so to play it as a safety trade if one is looking to play anything look at a chart or two the first is apple itself. it is range bound. that's the definition of benign to my eye. let's look at relative charts.
the next is just that, a ratio apple divided by the s&p and what the line reveals is how apple is performing relative to the spx. put a line on that it's a perfect trend line. let's put another line on that look at the top. it just broke out. that's the definition of a pendant. final chart is longer term i think apple is telling us that it's a place to be if one wants to be anywhere i respect the other side of the argument we heard it early they are this is the last one to go. apple is just not extended, and i'd rather be there than a lot of other things. >> mike, what's your take, and what's the trade >> yeah, so, well, the first thing i would say is you already heard me say that i think there's potential for further downside, maub a lot more downside for equities. it's hard for me to imagine how apple remains immune
although tim said it well when he suggested they're not as exposed to enterprise or entering a seasonally strong period for apple it's a positive response to their latest product and one of the biggest drives for them. but here's something to think about. yesterday the stock was trading, hit a high of 154 and today almost got down to 148, so we're talking about a six dollars move between yesterday's high and today's low. if there's potential for equity but i want upside exposure, the thing you want to do in a market like this one is number one, keep it really simple. you need to put on positions that allow you to be nifrm and define your risk i was looking out to november, the 160 calls that were in the money only the last two weeks. those would cost 470 that's a little over 3% of the stock price and less than the
share's move peak to trough yesterday's high and today's low. this is a way you could take some upside exposure to apple if you think we do catch a bid, if you think the fed chickens out, which would be another reason bucked bullish for equities. i think they're probably going to stay the curse here that is a way you could make a bullish bet and define your risk to just over 3% of the current stock price. >> dennis, two separate questions. what do you think of might be's trade, and what do you think about the notion that apple is a defensive play in this market? >> i really like mike's trade, for all the things he outlined in my notes i was going write, you're only laying out 3% of the trade. you're moving back towards the 200-day moving average it is a defensive stock. it's a core holding for a lot of famous individuals and core holding for many of the index products so any rebound that cos back in the market i really like one of the things i really like about it to get won i can, but it is an option, you're buying the volatility of the stock has
been moving around, justifies the price of the call. so people may say that options are too expensive now, but they're justified in their price. you're paying 3% you can participate in a market going back up. and you're buying the volatility at the same price a lot of major indexes are priced at. any time i can buy a single stock option on volatility that's the same, sometimes lower than the actual index it's in, that's definitely a buy -- you should always buy this stock just as an option trader rule. >> all right, let's get more macro here as investors scramble for safe havens they might be remiss no to prepare for the potential, as unlikely as it may be, of an unexpected rally dennis, how should you do that >> one of the ways you do this is a risk reversal when markets get extremely volatile, options get more
expensive. so buying outright puts is just -- you're buying them, it's like buying house insurance when the house is on fire it's going to be very expensive. you need offset that cost of buying the insurance one of the things we can do is a risk reversal. when you put a risk reversal trade on you're buying a downside put but you're financing by selling an upside call so being able to participate in a rally or not just bleed out all of the -- all of your profits in the underlying stock, it's important to put the trade on in a proper, well thought out way. one of the things you're seeing in the market right now is the cost of doing this trade is about as low as i've ever seen it right now this is like a tail risk trade you're buying down 10%, buying next year. so january, $330 put and you're financing that by selling a $400 call and you're paying less than
a dollar to do it. they're almost both 10% out of the money. in index trading and options trading on equities, very rarely can you buy puts for roughly the same price as the call that you're selling against it. this is a trade where it will keep you in the stock, make you sleep better at night. you don't make the best decisions when markets are trading on all-time lows so putting the trade on, it prevents you from panic selling. it's a great hedge if you're already long stocks in your portfolio, if you're watching the show you probably are, this is an economical way to putting the trade on and financing it by selling upside call down 10%, up 10%, liei like the trade. >> dennis, what's your take? >> dennis made the most important point -- this is not a setup you typically get. you don't usually get to say, okay, i just want to limit my
exposure right now to up 10 down 10 i could see some really disastrous things happening so i don't want to have exposure beyond that to the downtimed you don't normally get this. that is really a function of essentially the dynamic we're talking about, the unusual price of options, upside versus downside, and actually people going out and doing things i advocate in the apple are helping contribute to the dynamic that dennis identified in the index here. i think if you own equities and you're thinking there's a limit to how much upside there is but i want to sell and don't want downside risk, putting on a protective collar. >> carter, your take >> structurally, the question is, is the market really in a position to bounce meaningfully, or is there downside risk? i have a chart or two, and we can just examine it that way what we know is the market is
back, everybody knows this, to its june low in all my conversations with clients, it's, the market is down so much hasn't done anything in three months it's unchanged since the middle of june, yet everything else is much worse, including all the data we're not extended to the downside look at a longer term it ration. same s&p chart, and same way to draw the lines yes, you can bounce. yes, you can put in a minor double bottom, but structurally the market has an issue. i don't think that's resolved. i'm playing for lower prices >> still to come, gold hasn't been living up to a traditional role of stalwart market hedge. we'll lay out a plan for you more options action right after this
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welcome back to "options action." golding a traditional market hedge hasn't been acting the way it has in the past buck what if it suddenly does professor has a way to prepare. >> we often think of gold being a hedge for other risk assets we might hold truth, one of the reasons people really think of it as a hedge is it's a hedge against a weakening dollar, and of course it hasn't performed well because the dollar that has performed well, and the dollar has strangely been performing well
people think that doesn't make sense, but once policy makers begin to recognize you have an inflation problem, the dollar will strengthen because you see rising rates and folks are hoping that will stabilize we're at an interesting juncture here and now, because we are in wait and see mode to see whether or not the fed is going to follow through with the hawkish talk that we have been getting out of them lately but as i indicated earlier, they still have a long way to go, and of course if they do pause in their activity, i think gold could get a little bit of a bump as i indicated also when we were talking about apple, i think in a market like we have now, it's important to keep your trades simple, important tosh nimble, and i think here, too, the way to limit your risk is simply to look out -- i was looking out to november, the $160 calls because zbold a low volatility asset could be had for just under $2
we're talk about a little bit over 1% of the price of gld to buy those calls. and here's the situation if this thing does catch a bounce, does start to rally, you could look to spread this, roll them i think that's what you want to do, and also okay we're limiting our risk to the downside in the event that gold continues to weaken and we continue to see a strengthening dollar and rising rates. >> carter, where do you see gold going? >> sure. before we get to the charts it's important to say yes, gold day-to-day is not serving as a hedge, but the real way to look at it is this -- when thed the market peak? january 4th and s&p 500 down -- percent since then goal down 4% it's been an excellent hedge three gold charts. first one, is this incident, this sequence, very similar to the 2021 drawdown, in terms of,
down 20% same chart look at the duration of those two. this versus then that was the 150 sessions. this is 143 sessions put the two charts together, number one and two final chart. the question, is are we down to the point where you get some sort of balance? that's my hunch. >> so, dennis, what do you think of mike's trade? >> um, i like mike's trade from an options point of view i'm not a fan of mike's trade from a gold directional point of view so my options, i would actually be short gold here, but i would still do mike's trade as a protection trade in case i was wrong. not to take the other side of everybody in the room, but you know, gold could pop back up this is more carters area, but the 200-day average looms large. you are only laying out 3%, so that's why i like the options trade. i've never been a fwold bug.
i think a lot of gold bugs moved out of the space into crypto and other things no that that's behaving well i can't get my head around being big into gold. i would like being shorted but i like mike's trade from a volatility point of view. >> mike, last word >> you know, the real gold bugs and silver, too, by the way, showed up in the 1970s, and that was a period when we were encountering inflation not entirely dissimilar to what we're seeing now before we dismiss inflation hedges like precious metals, we need remind ourselves it's been a long time since we've seen inflation like this and may again get big rallies in precious metals if this persists. >> all right up next, a special look back on three prior open trades that need some management right now. plus, 'rwee tackling your questions. more "options action" right after this
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welcome back to "options action." over the last several weeks we've laid out several trades in, yr, kyp, spi and jets. they're all moving in favor. are approaching expiration and should be actively manage right now amidst this volatility mike, what do you do next? >> important thing work made bearish bets in several areas. when you put on put spreads, that the underlying -- you should take your profits in these bearish trades and if you believe as i do the market could still go lower you can take a portion and deploy it by rolling down and out, and that's what you should do. >> all right there's your update. let's get to some tweets here. first fan asks, looking at a costco call spread risk reversal
in the line of 460, 500, 550, appreciate your insight. make, can you take this one? >> costco. i like the stock i'm not as crazy about the valuation, but here's the thing. call spread risk reversal, especially in high voltity environments at the least you're going to get nearside exposure, but if you're going to have to stock put to you, you're going to have a lower level. i might be looking at more of a 420, 470, 500. >> our next tweet asks, what is the lng chart doing? carter >> it's doing great simple exercise find all stocks making new 52-week highs and all-time highs. it's a simple group. lng is that group. i think you buy the dip.
>> do you like lng, mike >> i do. i like the natural gas names in general. this is an area that is one of the few that has room to the upside. >> we have time for one more tweet. here it goes this one asks, amazon calendar put spread from a few weeks ago is in the green now. do we close the trade out near the 52-week low? mike, your take? >> i was selling some of my amazon puts today, and part of that is not because i think all the damage was done, but i was pairing my long positions. sometimes it's nice to offset losers from those profits. >> up next, the final call your projects done right
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and anticipate lower prices. >> by the way, we lost dennis because of technical issues but hank him for joining us today. mike, what's your favorite call? >> dennis was suggesting a protective collar. i think that's not a bad play. if you're thinking about making long bets you don't good evening and welcome to this special edition of "markets in turmoil." an ugly week the dow was down over 800 points at one point by the end. the major averages closed well off the session lows but that did not stop the dow from finishing at the worst levels of the year closing at the lowest level since november of 2020 the s&p for the week fell over 4.5% the nasdaq tumbled over 5% joining me now, mike
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