tv Options Action CNBC September 24, 2022 6:00am-6:30am EDT
guess he's not too old. ♪ oh my god! ♪ that was amazing! i'm a little out of practice, but yeah. 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 week on rising concessions. we keep our eye 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 composites, to dow jones comports have all undercut 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 >> yeah. i mean, i think the real driver here, of course, is concerns about rates, and if you're thinking about about equities you have to think about what's going to happen with 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 let's be very clear about this. 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 tech has really felt the pain i'm wondering what your take on technology of the nasdaq is, dennis >> technology and the nasdaq, we've 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 even look at what's going on overseas in europe and the european index it's like everything, the only thing i ca ever find that goes green seems to be the dollar these day, and that's not good for stocks right?
if the fed is going to keep raising rates you continue the see strength in the dollar, it's continued to hurt stocks. it's, you know -- hope springs eternal. the vix is still under control 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 cash loss harvesting maybe looking to use that cash later to deloy better buying opportunities 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 astronomical level. >> yeah. i mean, there's a lot of things going on here, and actually, some of the things we're going to talk about in the options space i think are indicative of this, and actually, some of my own positioning actually 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 >> hmm. >> you know,s 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 it's going to not increase the value of puts as much as you 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, for example, which is going to -- you're going to see, as puts get bid you're going to see those metrics rise. >> right well, stocks continue to go south. a defensive play
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 on apple that is, and that's fine. just know this before we look at the charts of the oex, the s&p 500, only two stocks wer 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 are all in utilities, staple, health care, 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 on the long side. look at a chart or two the first is apple itself. it very range bound. that's the definition of benign to my eye. let's look at ratio charts the 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. it's not extended. final chart is longer term i think apple is telling us that it's a place to be, if one wants to be anywhere now, i respect the other side of the argument. we heard it earlier. this is the last one to go. apple is just not extended, and i'd rather be there than a lot of other things. >> hmm 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 down side, maybe a lot more down side 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 and it's a very positive response to their latest product and one of the biggest drivers for them. but here's something to think about. yesterday the stock was trading, hit a high of 154 and today it actually almost got down to 148. so we're talking about a $6 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,wh
actually be 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. like i said. >> dennis, two separate questions. wham do you think of mike'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 writing out 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 individuals and also a cor 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, kind of wonky, but it is an options show
you're buyin 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. so anytime i can buy a singl stock option on volatility that's the same, sometimes lower even than the actual index it's in, that's definitely a buy that you should always -- you should always buy that 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 not to prepare for the potential, as unlikely as it may be, of an unexpected rally hmm. 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. so you need to 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 so you're buying a down 10% put, 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. it will 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. you know, it's a great hedge against if you're already long stocks in your portfolio if you'r watching the show you probably lost some in your portfolio, and this is an economical wa to putting the trade on and financing it by selling upside call down 10%, up 10%, i like the trade. >> dennis, what's your take? >> dennis made the most important point, which is, 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 down side 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 just advocated in apple are helping to 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 unlimited down side risk, putting it on sometimes called a protective collar is a way you can do that. >> carter, your take >> i guess that's what's makes the market, i'm independent of the trade, and structurally, the question is, is the market really in 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 so the question is in all my conversations with clients, are the markets down that much? yeah, but, it 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 iteration. 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 they issue is resolved. i'm playing for lower prices >> still to come, gold hasn't been living up to a traditional role of stalwart market hedge. put that in change and what should you prepare we'll lay out a plan for you more options action right after this
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$1b to open doors for the next generation so they can build a future of unlimited possibilities. welcome back to "options action." gold, a traditional market hedge, hasn't exactly been acting the way it has in the past, but what if it suddenly does we have a way to prepare. the professor. mike >> 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 is it's a hedge against a weakening dollar and, of course, it hasn't performed well, because the dollar has performed well, and the dollar, strangely harks 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 really wait and see mode to see whether or not the fed is sort of going to follow through with the hawkish talk that we've 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 actually 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 it is important to be 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 gold is a relatively low volatility asset. could be had for just under $2 so we're talking about only 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, of course, we're limiting our risk to the down side 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 the see the day-to-day, yes, gold is not serving as a hedge, but the real way to look at it is this --
when did 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 2020, 2021 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 carter's area, the 200 moving 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. a gold bug i think a lot of gold bugs moved out of the space into crypto and other things so i don't know that that's behaving very well, bu i can't get my head around being big into gold. i'm not really big into gold i would like being shorted but i like mike's trade from a volatility point of view. stock me up. >> 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 right 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, we're tackling your questions. more "options action" right after this >> announcer: "options action" is sponsored by -- td ameritrade, this is anna. hi anna, this position is all over the place, help! hey professor, subscriptions are down but that's only an estimated 15% of their valuation. do you think the market is overreacting? how'd you know that? the company profile tool, in thinkorswim®. yes, i love you!! please ignore that. td ameritrade. award-winning customer service that has your back. thanks to avalara we can calculate sales tax on almost anything, anywhere, automatically. avalarahhhhh. what if tax rates change? ahhhhhh. filing sales tax returns? ahhhhhh. managing exemption certificates? ahhhhhh. business license guidance?
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welcome back to "options action." over the last several weeks we've laid out several trades in iyr, kyp, spy, and earlier today 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? >> yeah. an important thing, of course, we make bearish bets in several areas is tha when you put on put spreads, as in all of these cases, the underlying thing is 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 of those profits 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. holly index name. 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 like we find ourselves in right now. volatility 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 in the last two weeks. s&p dropping for six months. it's a simple group. lng is in that group i think you buy the dip.
>> do you like lng, mike >> i do. i like the natural gas names in general. i think this is an area that is one of the few that actually has room to the upside >> all right we have time for one more tweet, so here 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? >> so i actually was selling some of my amazon puts today, and part of that is not because i think all of the damage is done, but i also was pairing some of my long positions. sometimes it's nice to offset losers from those profits. i was taking some profits on amazon puts. >> up next, the final call >> announcer: "options action" is sponsored by --
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>> by the way, we lost dennis because of technical issues but thank him for joining us today. mike khouw, what's your "final 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 have to do so in a linear fashion by calls and stock. >> that does it for us cnbc special markets in turmoil starts right now. >> this is a paid advertisement for csn. >> you know, the world's kind of upside down right now. at least from a metals standpoint. well, from a lot of standpoints, but metals. we are in, you know, kind of uneasy times -- i guess that's the best way to put it -- in so many different ways. and usually in these times, times of whatever, you have gold and silver has absolutely, positively skyrockete