tv Options Action CNBC October 7, 2022 5:30pm-6:00pm EDT
welcome the friday i'm melissa lee. the markets tumble today after better than predicted jobs picture left the market worrying the fed will keep the pedal to the metal. we may see it in earnings next we can with the bank bhiel the fed impact is one thing, it's amplified in small caps there are ways to dampen the noise with options first, before trades, let's get
quick thoughts on this week from all of you since it has been a roller coaster week. carter worth, what did you mac make of it >> i think there's that exprevention "when you're hoping it's hopeless. i think there's a hope we're not going break below the june lows, and i don't think that at all. i think we're going to break and break substantially. >> mike? >> yeah, i think we still have more concern ahead you know, if you were just taking a look at how we did week over week, you'd say, we're up a little over 1.5% since last friday, but none of the situations we're talking about since then have gone away. if anything there's more evidence central bankers should try to fix the inflation problem. one of the things people try to focus their time and attention on, which is the headline inflation number at any given moment what's the pci deflator today rather than looking at aggregate
prices and where those stand relative to incomes than, say, two and a half years ago if you look at things that way and say, wait a minute, housing's up 65% agricultural commodities are up anywhere to 120% the you look at it in that sense, metals and everything else, doesn't look good. tough get these things back in line and rates in a historical context are not high here. that's something else we have to remember. >> it's amazing to think that over the course of the week with all the volatility and hopes and hopes dashed that we ended the week higher, solidly higher. and i'm wondering how you think that gets us set up going into earnings season? earnings season where we have an amd warning overshadowing us and fedex as well. >> i think there's a few things. i think there are some short that are squeezed and that's why you saw the moves to the upside
we saw earlier in the week and then going into earnings, i think there is still -- the reason why we see these knee-jerk moves is that there's still this underlying feeling that the fed has this credibility problem. let's take me, for example last time i got chastised for calling back someone on set. i think the fed has been chastised enough where they get it now and they're being extremely transparent about what they're going to do. they continue to be data driven and the approach has been well signalled. and yet and still, you still see these bucks to the trend in the market i think this earnings season you might actually start to see a little bit of the read through or trickle down effect of what the fed has been doing and now the posture is starting to change. so i do think, yes, perhaps a percent, a percent and a half, but i don't think that tells the story, the interweek volatility is really where focus should be, not the absolute number from
monday. >> well, it is that time again, and it could be more important than ever. we're talking about earnings season kick off with the big banks. the group struggled alongside the bigger market. chart master taking to where the sector could be headed next and how that could set the tone for the season carter >> that's right, 15 stocks in s&p reporting. half of them are financials. let's get to the charts. the first is a weekly chart of the xl app, the etf that tracks the sector not just banks, property and casualty insurers, brokerage managers what we know is the sector is always way back to its precovid high the line drawn there is that support. the thing about support is you get down to support and you can sink further into support. i think that's presumptiviely
what happens top panel is what we esaw on it own, bottom panel -- football sector peaked right after the election in 2016, has been underperforming ever since not so good. xlf itself, here and now up close and personal charts. there's one. no lines or drawings, no arrows. look at it with annotations. pretty epic inverted cup and handle doesn't matter what you call it, it projects lower. other iteration. same chart all points to lower. does the xlf find support because it's at the covid highs? it's at support, i think will sink further into support. >> sink further into support so, mike, what is the trade base on that? >> yeah, i mean, the volatility we saw this week and that we have been seeing, unsur unsurprisingly, is also impacting options premiums
they're all considerably elevated options premiums are going to rise as we start seeing events like earnings coming up, and that's going to impact the price on individual stocks as well as prices of indices of which they're constituents and the etf that trade them, like xlf. one of the things we could try to do here to take advantage of the elevated options premium and anticipate it's unlikely next week and the we can following are going to provide the needed boost to get xlf to bounce off this support level -- i was looking at the november 32-33 call spread. selling that you could collect 30 cents in premium for the $1 widespread. 40% distance between the strikes, which is attractive and the other thing i would point out is in the event it does miraculously bounce, you
will not lose the full dollar, even if it runs through that longer 33 strike you have to the upside so it's not exactly that you are risking 60 cents to make 40, provided you cover this if you do get a strong bounce buck that is obviously not what i'm anticipating here. >> bwhat's your take on the financials >> challenging frame work going into the earnings. i like the trade i think your net shorting volatility, which i like going into a bounce like we've seen today. and the fact thaof the matter is markets can remain rational longer than we can remain insolvent. >> mike, it's always tricky with the banks because a bulk of them report on the same day, but then there are stragglers afterwards. how do you anticipate managing the trade? because most of the time they move in a group on the back of the first runs out of the gate.
>> that's exactly right. you've got basically the premier name, which is j.p. morgan, i think, if we're thinking about investment banking we're thinking about trading in terms of commercial banking. that's number one. black rock and morgan stanley on assets management side, it's hard to imagine the numbers would be that great when you have declining prices. their numbers are tied directly to aum that is a function of declining market prices, although some aren't going to show in the recent quarter. people are going to look at that, factor that in i'm not ants paying the stragglers in terms of reporting to release any information that's new we're going to find out what we need to know by the end of next week. >> large caps are one thing. small caps could feel the impact of the economics faster and more intensely than any other part of the market in fact, they already have in
one direction. let's look at the other direction. what are you doing >> taking a look at the iwm. a lot of weakness has been attributed to currency exchange rates and weakness abroad. i think the fed focus is going shift to economic health, to actual earnings health and what i want is a more -- way to do that if you're construct in the terms of dow or s&p or large cap, bellwether name. i want something that's going to give me more tail risk i'm taking a look at the iwm 160-150, one by two put spread, but you can put that on for even money depending where you are in the middle of the day. this is real tell risk when you've seen shocks to volatility it's not often at the money. it's how you think those tails are going to flection. and yes, in the crazy case where we're down net net 50%, this trade is channelling
but between down 10% and down almost 20%, this trade is profitable there's no cash outlay to put this on, and this really gives you that crash protection that i think if you're going to see you'll likely see it in this more sensitive pocket of the market. >> do you see a crash in the cards for ewm, carter? >> well, remember, the conventional wisdom is, right, that lower quality assets in a route do worse than higher quality assets there are no small cap utilities, for instance. but the point is, if you're playing beta, you play it through certain vehicles and iwm is a higher beta no currency risk he mentioned the macro it's domestic and it really getting down the earnings. i would also point out that bank exposure is much higher than it is in the s&p 500. it's got a lot of characteristics that have to be contended with it is also -- and finally this,
important to say, that since may, small cap stocks have been consistently outperforming large cap. it's not a function of the russell 2000 going up. it's just going down less than the big heavies because app and others are starting to come apart. right. still to come, the semisetup and for everything "options action" check out our website and newsletter more "options action" after this good luck. 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®.
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welcome back to "options action." check out amd plunging to a 50-year low today. he delivered disappointing preliminary results for the third quarter, saying they expect revenues to fall short. investors done think this will be an isolated scenario. semiconductor stocks also fell these chapmakers' pain could be your gain. mike is here to show you how to turn a choppy outlook into smooth sailing for your port portfolio. captain mike, take it away. >> captain, i like that. i'll have to share that with some other people. the semis as a group are down about 40% since their highs earlier this year. significant apply more even than the s&p declined if you think that's so bad it's good, you might then take a look at all all of these companies are looking relative to their
trailing and their originally forecasted earnings. if we look back about 20 years, the semiconductor on a group are trading pretty close to their cheapest valuations. one of the things i would point out, and i think it's important for them to remember this, cyclical businesses look cheapest from things turn south, and that is because people are still working with operating assumptions for how these things were going to do those are changing that's essentially the news we got out of amd that said it's challenging to press short when you're looking at a group of stocks already down 40% so, how do you do that in this case i was looking out to december and i was looking at a 185.55 put spread. when i was looking at that, that's a $35 put spread that costs -- that's about 4% of the current price of smh as a way to
make a bearish bet we're in a situation where we certainly could see further dips i don't think we're going to resume bull market any time soon personally, but if we do get a sharp bear market rally, which is certainly a significant possibility in every bear market, and we've already seen it several times in this one, you want to limit your risk. and i think by risking 4% of the etf share price, that's how you can do this. >> how does it look to you >> they're going to get worse. let's look at three charts the first predicts where the smh is relation to its precovid high it would need to drop 6% to get to free covid high for the amh it's 16% if we want to draw lines, the first way to do it would be like that, which is converging trend lines. we broke into the downside out of that formation, and i think
it all projects to the precovid high so substantial down from here. third and final way the draw the lines, it's all the same chart, just to annotate, predict the reversal doesn't matter where you call it a head and shoulders the question is, is the reversal finished i don't think so i think more downside. >> are you staying in the same camp >> i am. it's a lilt expensive. i want to focus on the widths of the strikes. if you're going to lean into this, you might as well make sure you're going to get your bucks here if there's more downside it's really going to roll over heavy as carter said, and i think the width of strikes allows you to capture the bulk of that move. >> mike, last word i'm wondering how you manage a trade, especially when it look like -- when stocks are swept up we go to the downside pretty
decisively, such volatility in the market how do you manage this in term of swings? when we had two updays, semiconductor his huge rips to the upside. >> right, and i think that's why we're defining our risk at the outset to 4% of the share price. if you were going to short smh it would be reasonable to say the risk you're take field goal it should move to the upside is going to be significantly larger than that. but speaking to his point, one of the reasons why i chose strikes this wide i wanted to to have a trade i would be able to imagine if we do start to see things roll over we know there can be bear market rallies. let's stay it drop down to 175 you can that i can that 185 strike that you're long, roll it down, keep the short side on, and essentially reduce your exposure if we do get a bear market rip, and those happen, they have happened, and they will continue to. >> yeah. up next, rapid fire takes on a number of big moves this week. back in two. it's an entire trading experience.
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good luck. 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.
welcome toe "options action." it's been a wild week on wall street we're going tackle some of the biggest names in a rapid fire section. a lot of these names traded this week first one, twitter shares jumping after tesla ceo elon musk said he'd wbuy the company for the original bid m mike >> right after that news came out, a lot doing the original trade, buying the stock, selling call up near that strike price close to where the deal is supposed to take place as the week rolled on, we started seeing bear, activity. people were seeing the january 40-50 put spread i think the action is elon tried to walk away from this deal when things look a lot better than they did now then they wanted out of the court case he got that objective and right
now i think the market is implying there's a 15% chance this deal breaks still a significant possibility. so i'd be a punt per i was along the stock here, basically take the gains this week and walk away. >> i like that short vol set up. any time there's a cash takeout you want to make sure you're not caught long volatility it is going to crash to zero because that is the -- and realize volatility despite what we've seen in the dixie. if you want to spend some small modicum of premium to bet this crashes i would say the risk/reward sets up well, but it's a loser >> carter? >> chart implies a completion of the deal you can see here we might have it as drawn, it's a normal flag get the heavy volume thrust. deal's on, and this lilting pullback to $49.18
ultimately we ahead towards $54.55. >> hess up 18% this week loon. carter, how does this one look >> sometimes you can use the word trupp end or steady as she goes or god like up to the right, orderly, a nice ascent. >> godlike did you just use the word godlike? i feel like you've only used it a couple times >> a couple times. maybe not appropriate for the market, but it's as close to godlike as one might see in the charts. >> wow okay let's get to chewy, doing wet up more than 17% this week. >> i think for this one it's interesting. i'm not particularly -- of the name i think versus consumer discretionary it is more sticky. if i'm going play the long side it's definitely via options but i'm likely going to spread this.
i don't want the mess of cash lay that being outright vol in this environment after today is likely going to cost me. >> let's goat draft kings. that was up 9% on the week mike >> this is an interesting case they had some positive news, talking about a collaboration with espn. of course, i don't like long duration equity, and that's what this thing is. it's not making a lot of money yet. if i were going play it for the upside would only do so using call spreads or a call spread reversals because i think that news generates some floor. >> carter, what do you think of draft kings? it's not godlike >> bearish to bullish reversal we looked at at the top of the hour dropped 85% buck it's a week over week, month over month, price action is developmental. >> let's goat nike this is a good one up 5% this week. carter >> talk about down and to the right, opposite of hess, and i don't see any reason to own the
stock. >> what do you think of nike >> in the short-term it's challenging. this is an anytime i have been wants to get long for a while. it's going to be challenging in the short-term, but there are specific names i think will hold up and have stood the test of time nike fits that bill. >> yeah. mike, was there a will lot of activity with did that activity to you indicate >> we owned this stock put that in the past tense don't do it is what i would say. this is not one you want to own. this is a little bit of relief after poor performance that's the reason we got this bounce, you i don't think it's going to last. >> all right, up next, final call
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position short fpy. >> bonnwin. >> high beta leverage downside. >> mike? >> take advantage by selling vertical threads with limited risk. >> that does it for us on "options action. meanmedo nti, ot go my mission is simple, to make you money i'm here to level the plays field for all investors. there's 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 want to make friends, i'm just trying to help you save some money. my job is to entertain, educate and teach you and explain days like today so-call me at 800-743-cnbc or tweet m me @jimcramer. when you have ru