tv Options Action CNBC October 28, 2022 5:30pm-6:00pm EDT
it is friday and that means it is time for "options action. i'm sy sara eisen in for melissa lee. here's what's coming up. >> despite budding optimism, and undercurrent of concern still permeates the markets. carter worth charts out a haven to track and keep your portfolios as healthy as possible then, starbucks, for some consumers, it is discretionary for others, it's a staple. we'll find out how that's balancing out when the company reports results next week.
in the meantime, scott nations is brewing up a strategy. finally, be like buffett berkshire stock is up solidly for the month. it reports results next weekend. if the equity is too rich for your blood, mike khouw has an option strategy to parallel its plays. it's time to risk less to make more "options action" starts right now. >> welcome, everyone before we hit some of the trades, let's talk about today's market action. stocks ripped higher to close out the fourth week of gains the dow jumping more than 800 points on pace for its best month since 1976 the s&p 500 jumping about 2.5% and the tech heavy nasdaq leading the gains climbing nearly 3%. carter, what do you make of the rally, especially in the face of some pretty brutal earnings reactions and big tech >> right i mean, one of the things about
having a particularly good month, which we did, is it almost always particularly follows a bad month, the name of the game when i have client conversations, one of the things that keeps coming up is this, listen, we're in the homestretch, we know there is seasonality on our side, we know there is year-end rally potential, post election potential, and there is nothing to hit us now. earnings are out of the way. fed we kind of know they'll do a little bit more, maybe not crazy. and so let's run this thing. okay but that's not an investment thesis that's just a maybe. >> so you're not convinced >> no. >> scott, what about you >> i'm not particularly convinced either, sara if you told me that the ten-year yield was going to fall by 30 basis points in the course of a week, i would say of course you want to be long stocks i'm not that surprised except for, you pointed this out, the fact it did so in the face of really unfortunate results from amazon and meta the thing that really sticks out to to me is that upside calls,
so 30-day calls have never been as expensive as they are right now when compared to out of the money puts so people are obviously buying calls because they're bullish or hoping that the fed is going to throttle things back and they know that if that news comes out, then the rally is going to be vicious and it is going to be really quick and they don't want to miss it so people are loading up on out of the money calls in the s&p. >> yeah. so sort of the fomo effect mike would you buy it >> yes, so, a couple of things the first is that, you know, we -- you will see in bear markets very sharp rallies we had a couple already. this is one of them, but it is actually one of the most mild. we had two rallies greater than 10%. this one isn't quite as large as the previous two so the important point i would make is that, you know, just the
fact we had a good move off of the recent lows isn't evidence enough i ask people to think about something else too, which is that as we go through this earnings season, and we're reflecting on some results that are not that great, consider this the impact of higher rates, the impact of what everybody is concerned about, the slowing economy, aren't baked into those results. that's something that we are going to see in the future so i think what we're going to have to see is real evidence of mitigation on the inflation front so that we really can take stock of the idea that the fed is going to pause potentially in the near term future and we'll have good cause to if they don't, if they slow down the pace of the rate increases and try to rein in the monetary supply and we don't see a meaningful decline, we'll be right back that's what happened in the 1970s too. the situation that arthur burns faced and the one that paul volcker tried to resolve. >> and you get into reputational
issues as well just if you're keeping score, 19% off the high, sounds like three of three of you say this say bear market bounce as markets continue to climb, the chart master is looking at one group that could act as some good insurance for your portfolio, carter. >> sure. so, there is managed care. if you think about it, the beauty of this particular area of the market well healthcare is that it is truly domestic, right? managed care stocks, health insurance stocks don't care about putin or oil or the u.s. dollar and they are tremendous long term performers. since its inception, managed care doubled the performance the entire s&p healthcare sector it looks like more of the same let's look at a few charts the first is a comparative chart, you can see two lines, two colors and one, of course, the top one, that's the s&p 500 managed care subindustry group humana, united health care, molin and so forth the laggard is the s&p
let's look at the five year basis compared to chart. what you see here is a divergence which is to say that healthcare, managed care has never really faltered, even as we had a very bad year and now a bit of a bounce. so the question is where from here look at this next iteration. this is the entire bull market, 2009 to present. that is a mathematically perfect 45-degree angle. that is the s&p 500 managed care subindustry group. that's not even into the top of the channel. just midrafnge. united healthcare we can end with this, take a look at unh's chart, unh is high today, 553. that horizontal line drawn on the top, it is high in april was 553. it is the exact same price it was, exactly six months ago. not extended, had a nice rest, that is the precondition more often than not for a breakout.
we would play it for just that >> three very convincing bullish charts, mike what is the trade? >> yeah, so, you know this is a company i think you can really get behind it is hard to imagine you can't actually create a chart where you can compare the earnings growth of united health care to the s&p because it would diverge so radically, you wouldn't actually see the earnings growth in the s&p since 1987 or so at all. it is that profound a difference in fact, the stock is a 5,000 bagger since the last quarter of 1987 it is really well managed company, it is in a space economically insensitive and it is in a portion of the economy that grows more rapidly than the economy itself that said, it is, of course, at all time highs and that presents a challenge. it is also a fairly expensive stock. one share of it is 550 bucks so i think one of the things that can be done in an environment like this, if you're concerned about generally speaking equity market pullbacks, if you're concerned about chasing stocks all time
highs, you want to risk less than purchasing a big block of stock would, i would look out to december and buy a call spread so when i was looking at this earlier today, the stock was slightly below 550, i was looking at the december 550/600 call spread. you expend about 17 bucks and change to buy it of course you have to remember, when you're buying options, you have to consider the multiplier each contract represents 100 shares so the actual purchase price is go to be about $17.50 that's more than the purchase price of three stocks. i'm not saying that's the way you should think about the risk here but the outlay is the most you could potentially lose if the stock does not break out, you would have expo her to much more than the three or four shares that that comapital would otherwise get you. >> unh up 10% this year. to make'sike's point, what is y
take on the name >> i like all the businesses you have to own. let's face it, you have to own companies like united healthcare the interesting thing is that they're a little insulated from one of the biggest problems this the broad market and that is labor costs. labor costs for healthcare have gone up 35% in the two years since the end of covid that's a problem for providers and that's a little bit -- that's not a problem for an insurer. to mike's trade, in the past we have talked about the cost of the spread versus the width of the spread and this makes tremendous sense in that regard because he's getting along a call right where the market is, he's paying about 35% of the width of the spread and given again the first call is right at the money, this makes a lot of sense. >> we're going to switch gears now and look at starbucks. because the stock has seen some jitters over the last few months it is outperforming the broader market in that time frame, but
scott is not so sure this latte stays hot as investors gear up for earnings next week why not, scott >> well, starbucks right now has more problems than most companies. it is a discretionary purchase i think it is absolutely a discretionary purchase and that is just one of the problems the other problems are the companies had substantial executive turnover in the past month. the fact that the head of trading, the head of the supply chain have left, their coo has left, and they're not going to replace that person. they're going to do away with that business. i'm not certain how you do that in a business that is client facing i mentioned labor costs when it comes to healthcare. labor costs are going to be a real problem for starbucks as more stores unionize and then let's talk about china. they have a tremendous presence in china, and we all know that covid is shutting down everything in china. they have 6,000 stores there of the 35,000 stores they have total. so about 17%
so, given that the stock is expensive to begin with, i am bearish on starbucks, given all of these challenges and all of these problems i think the way to express that bearishness is in the december expiration to buy the 85/75 put spread when i put this together in the middle of the day, you can buy that for a net of $2.55. so about a quarter of the width of the spread, and that means max loss is what you pay, break even is $82.45, but the max profit almost 7.5 if we get break in starbuck prices that i think we'll get. >> on the last show we were having a discussion about why courtney likes the stock because tim pays an ever higher price for his latte. i think he's passed 5 bucks and considers it a staple. what is your take? >> that's right. so, grasso was -- didn't like
it and, look, i think it is a fantastic chart pattern. that's what makes a market starbucks has all the hallmarks of a bearish to bullish reversal what we know is that it bottomed before the s&p, and to some, of course, it is the unbelievable staple it is a drug you have to have it and some people think it is a discretionary, it gets to be five bucks, i'll get my coffee elsewhere. as patterns go, that's the definition of something that has made a turn, that is reversing. >> mike, thoughts? we got a bull and a bear here. >> yeah. in the middle of the day, in california, which is where i am, you have to get up pretty early in the morning so around noon, 1:00 in the afternoon, i'm getting a little laggard and what happens is i will run to the nearby starbucks. i haven't thought of any other place to go frankly to get my coffee the valuation troubles me a little bit and i understand the pressures in china, so i'm a little bit torn here i have no position in the stock.
but i haven't stopped buying their product. i buy quite a lot of it, actually as far as i'm concerned, i think it is a little bit of a staple. >> still to come, winning like warren tried and true berkshire hathaway the biggest nontech name in the s&p and it is up more than 10% for the month. mike khouw will show us how to play alongside the oracle for less and for everything "options action," check out our website, and newsletter we'll be right back. stay with us calling all "options action" fans, reach into your pocket, grab your phone, and tweet us your question at optionsaction if it is nice, we'll answer it on air when "options action" rern tus. thinkorswim® by td ameritrade is more than a trading platform. it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective.
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welcome back to "options action." a lot comes to mind when you think of warren buffett's berkshire hathaway did you know that out of the top six names in the s&p 500 it is the only one that is not tech and it is the only one that is not down dramatically this year. in fact, it is up 10% or so for the month. mike khouw, is there more to this and how can we all be like buffett here >> i think that's a question everybody who is a long-term investor would like to ask themselves there are no living investors other than charlie munger and warren buffett who have been at it as long and as successfully as those two have and have seen as many bear markets as those two have and managed to navigate them successfully. very successfully. i think it is safe to say. as we look at berkshire hathaway, we need to think about the good and the bad let's start with the good. it is as you pointed out, this
is aversified company. they're not tech related per se, but they do have a big chunk of apple. we don't think of them as a tech company, we think of them as an insurance company, industrials and things like that but they're the largest shareholder in apple so i think it is safe to say they do have exposure to tech as well the other thing is look at how the company did manage to do over the course of the last couple of years. they have been quite profitable in a really tough environment. the other thing is they have just a massive pile of cash on the balance sheet. all of those things are good, especially when you consider that they need to invest and they're going to be investing at more distressed prices it is not all sunshine and roses. there are some bad things too. we could take a look at some of those. inflation does create some pressures for the business it is an input cost in many of them railroads are a good example and railroads are tied to the economy. so they'repotentially lower
revenues they have been able to pass through some fuel costs. the other thing is they have a big reinsurance business and that's going to be hit by things like hurricane ian when you put all of these things together, though, i think what we can expect is farleirly mode moves going forward. they don't move a great deal on earnings the average move off of earnings is about 1.8%, which is to be one of the lowest, meaning that, you know, most people look at this thing, they priced in a lot of the activity already. i think a way to do this is to look at a call calendar spread and specifically the one i was looking at was a november/january call calendar, looking out to january, buying the at the money 300 strike calls, about 14 bucks. selling the 307 1/2 calls against it for november. that was going to collect about $3.65. quick point i would make, i generally don't like to sell
options on stocks, especially in this kind of a circumstance, for less than about 1% of this stock price. you'll notice here we're collecting more than 1%. this is going to give you peak profits if the stock just gravitates slightly north. you'll see some accelerated decay because they do capture earnings as i pointed out, this is the company that moves a great deal on earnings. your absolute risk is limited to the total amount of premium you spent but you won't see the total losses if the stock happens to decline after earnings, even down to the lowest level immediately following earnings some time to go on the january side >> also really good point about the large exposure to apple in terms of its holdings. carter, what do the charts say >> you know, from my seat, this is what i aa pair of 2s is, not particularly bullish, not particularly bearish it is not a great one. i got three identical charts you can draw the lines any way
one wants. my eye sees this we're basically stuck at the top of the range if you excuse that bull out to the top in late '21, early '22, another way to draw the lines converging trend lines, where basically at the apex we're kind of like neither fish nor fowl. and same chart again, and using the smoothie mechanism, we rallied right to it. i think we're likely to be range bound here, likely to be sort of a nonevent >> scott, that's not very sexy what is your take? >> we all love -- we all love warren buffett we all love the company. i love this sort of trade structure because mike is going to use the ball crush that is likely to come as soon as earnings are released in the option that he is selling. one thing you do have to think about when it comes to earnings and berkshire is the goofy way they now have to report earnings
meaning that given the nature of the business, the earnings are not indicative of the success of the business so don't pay attention to big unrealized losses and their stock portfolio as warren buffett would say, he loves to have the stock market lower because he's got all that money to invest. and i bet you he invests a bunch this year. >> in what >> well, you know, -- that's don really well. you can think of the sorts of businesses that he likes to buy, you know why isn't he buying some of the big industrial machinery names like caterpillar or deere. he no longer has to take the companies over he could buy a huge portion of that and put a huge portion of his free cash to work and own wonderful, wonderful businesses. >> all right we'll pass the word along. up next, we're taking a look back on sct'ots energy trade "options action" back in a moment
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 back to "options action." time to update you on a past trade last month that scott laid out as a way to play on exxonmobil listen. >> while crude oil had a tough time, in general energy prices have stabilized. we saw what happened in gasoline prices early in the year and then they came back down that's fantastic and if you look at the names, for example, exxonmobil, you know, that stock is back into the middle of the range and it enjoyed for most of the year we by selling iron condor, let's not get too flummoxed by the terminology. we do that in november by selling an 80 strike put and limiting our risk by buying a 75 strike put and 100 strike call >> so that trade hung out in the
green for a while. but then exxon's gains pushed it into the red, scott. what do you do now >> well, sara, this was a gut punch when it came to the -- russia, russia and the saudis cutting back oil production that lit a fire under all the energy names this is now way past that 100 strike call. there is really nothing to do here there is no way to rejuvenate the trade or rehabilitate the trade. you know, this is the reason we use options. we used a unique trade setup, unique strategy to limit risk and we have done that. >> all right up next, final call. stick withs "tis ti." uonopon
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offensive and defensive. united healthcare, poised to break out. >> a beautiful chart scott, what about you? >> $5 latte is a luxury. my put spread is in starbucks. >> so says you mike, what about you >> call spreads in unh. >> that's going to my mission is simple, to 34 make you money i'm here to level the playing 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 i'm just trying to make you money. my job to educate and teach and tell you how days like today come about call me at 800-743-cnbc or tweet