tv Options Action CNBC November 5, 2022 6:00am-6:30am EDT
owdged under oath was perpetrating a massive fraud and the fact that he is telling you that "all i did was send an e-mail" shows that he is still committing fraud on you. -- captions by vitac -- it is friday. that means it's time for "options action." i'm live in times square with the fed's decision and now jobs data behind us, investors spent friday confused. a volatile session of trading left markets on the day. similarly, there are conflicting signals right now down to the sector level. we'll game down two of them to explain how industrial and gold are related. and the economy ultimately comes down to the consumer. so we're taking a look at a way to go big box or go home with
options. special appearance by brian sutland. welcome, brian. let's talk about today's market action. stocks rallying to round out this week. the jump higher didn't save stocks from posting weekly losses across the board. the dow snap ago four-week winning streak while the s&p and nasdaq ended a two-week winning streak. carter what did you make of the action today? >> that's the thing. just as you described those items, it was something for everyone, right, various characteristics on the week and bears, of course, the same. what's important is we are starting to get some dispersion which allows for opportunity for those who are doing either individual stock picking or etf choices. >> brian, what did you think? >> well, i think i look at the s&p 500 and the options that's traded there, and we really -- people are willing to just sort of take their insurance bets off, sell up on the down side, basically if you wanted to get
on the markets, let's all it 3,500 on the s&p. now, i haven't seen that kind of amount of put selling since 2008-2009. what that tells me, when i typically see something like that, the market is going to move big. either there's some new and big bold investing made in the markets and all of a sudden the market is going to be look -- they'll look and say, oh, it's up 10%, or not many people have enough protection with the down side. we haven't seen the capitulation. and it's setting up now that people are taking their insurance off, and that could happen. i think you gotta be careful. i think a big move is coming over the next couple months in this market. >> in terms for capitulation, for many, many shows, we need to see the generals come down. we're seeing apple down 8% or so over the past five days, mike. i wonder if you think that's a sign of further weakness ahead.
>> brian was just alluding to one of them. all of that selling had a dynamic on options prices. it depressed the -- and that actually indicated also that there was a significant bid for calls. it wasn't sort of the aggregate level of implied volatility, the price of options across the board and across strikes, it was declining as a result of the put selling. it was the puts that went down relative to calls. so that suggests there's a lot of sort of resident fear that people are going to miss the rally. at any minute the fed is going to come out and say, no, all is well. we're going to go back to zero interest rates and the first thing you have to do is race out and start buying. so that propels people to sort of buy that up side. it's interesting that brian spoke about the 20082009 period because you should remember what happened there. we went into a bear market, we really experienced the lows, the early lows in the last quarter of 2008. but the s&p actually hit its
total lows in march of 2009, six months later. so i think people need to prepare themselves that, you know, it's not going to be as simple for us to get out of this essentially, that we're not just going to get an all clear all of a sudden. i don't think that's going to happen. >> let's get to industrials now. the xli has had a rough year along with the broader markets, and the master says the technicals are not pointing to a turn around anytime soon. carter. >> so the issue here, i mean, industrials -- all sectors are having a bad year, of course, but industrials have really come to life very short term. in fact, since september 30, the industrial sector is up 15%, s&p up five. and we're thinking the spread is just too wide. let's look at a couple of comparative charts and go from there. what do we know? this is a 60-day comparative charge and you can see the divergence of the orange line and the blue line.
industrials at this point are on a 60-day 12-month trailing base down 6.4%, s&p down 11.6. what if we pull this down and do an 11-day comparative chart? xli on a 90-day comparative basis is up almost 8%, s&p down 2 1/2. and now another way to look at this is actually instead of two lines, one line, it's just simply the ratio chart, xli relative to xpi. and we are now higher above the 150-day moving average on that ratio chart. than at any point in a decade. look at the next iteration. where is it? it's a rally to a very different level. this is the rotation, money coming out of apple, whatever it is and going into so-called old-fashioned gains. but this opportunity has already been exploited. final chart, xli itself. now, while we are not quite
back to that down trend line, we're awfully close. if you have gains in this, we would either sell calls or trim, and on any further strength, we'd sell it all. >> all right. mike, what's your trade here on industrials? >> yeah. pretty interesting to think that industrials are outperforming so significantly when you take a look at the rate market, that's not what we're seeing, that you should be going into anything cyclical. in fact, quite the opposite. i think there's a consensus now that we're probably heading into an economic slowdown, very possibly a recession. so why would we be buying industrials? these things are only off about 11% from their all-time high. it's pretty remarkable when you think about it. of course as we were just talking about it, implied volatilities, particularly for calls remain elevated. i do think you want some upside calls. of course, we don't recommend selling upside calls naked, so i'm going to be looking to a call spread. couple things when in general, you want to keep it short. what i mean by short is short
dated because options decay more rapidly as expiration approaches. that's true for selling outright options, whether it's calls against long stock or naked puts. this is also going to be true for call spreads. also try to look for areas of resistance. and carter has done that for us and identified that we're coming up to a pretty critical level here. the final thing that i would say is when i'm selling call spreads, i try to look for situations where i can collect at least 30% between the distance in strikes in premium. so nick i was looking out to the december 2nd weekly options. i was looking at the 95, 98 call spreads. in this instance, i could collect about $1.10 in premium. that's actually well more than 30%, closing on 40% of the distance between the strikes, about 37% or so. and that sets up pretty favorably. also here you can see we're looking out 30 days from today, a little bit less, so trying to keep it inside of a month. the idea here being that if we do see some weakness, do see
some declines, we'll have opportunities to see some profits >> brian, what's your take here on the trade? >> well, i'm with both carter and mike on this. industrials to me overbought. when we looked at a lot of the industrial names, the only really traditional industrial name is caterpillar. that had some nice movement on the upside of that. we rolled into more the the raytheon, north rup grummond. so play ago short bet or a bearish bet seems to make it on xli and i would be along with it. i really like this trade both from a directional and an optional standpoint of the call spread. >> let's update it now to single stock. brian is taking a look at one staple name that could be a bulk bet. so, brian, what are you looking at? >> costco is one of those bulk names. we buy in bulk. and consumer staples is an area
that we've continued to sort of rotate into as we navigate this bear market over this last year here. one thing i'm looking at in costco is selling a put. taking in some premium and staying very short dated because i think, you know, premiums are somewhatel vated, but we're getting so much movement in the market. it's a dangerous time right now, like i talked about. we could see pretty big moves in the market. costco is one i'm looking at. when i look today, that stock is trading for about nine bucks, so break even for 66 or so on the down side. so below that, i have to be willing to own costco. but this is a way to sort of allocate the consumer staple, taking some premium, now, when you look at that, that's almost 2% premium return on your money in just two weeks. so that's pretty big. and i'm keeping it short dated because carter could probably speak to the technicals. they don't look so great for the stock right now. so i'm staying short dated. i take the premium in, i've made some sort of allocation on consumer staples which i like
as a sector in total. costco up 8% last month, up 10% the month before. so certainly they're passing the buck onto consumers. i can feel good fundamentally about it. take it in. if there's one thing to do it, it would be consumer staples. >> what do you think of the chart, carter? >> well, brian sort of referenced, it's heavy. it doesn't act well. i think we have some charts here, and we might be able to look at them. what we know is that this is the god in the consumer staples space of all of the operators, whether it's coke, wal-mart, protector, you pick, general mills. this is the one that's had the greated growth rate, the greatest earnings growth rate, sales, everything, yet it's always expensive, three times. look at that chart. that is all of the elements at the top. another iteration would be to put in converging trend lines, same chart. so i think the risk here is that this is generally rerated
lar from its sort of rich valuation. >> is this one in the holly index, mike? i can't remember. >> it is. it is. yes. this is a holly index name. and, you know, i'd like -- brian, i agree. this is from the staple stock. people are really sensitive, i think, to rising prices. that includes grocery prices. costco has a way to mit gates that. i am with carter, though. 35 times, this thing is very pricey. but what's interesting here is the expiration that brian has chosen. brian, looking out only to november expiration, he's avoiding a critical catalyst that's coming up in the first week of december or just after. i think it might be december 8th, and that's earnings. and i think if we get the break lower that carter is looking for, that is probably going to be the catalyst that does it, either that or a real washout for equities. but at the very least, he is collecting a reasonable amount of premium, more than 2% of the strike at this point for something so short dated as an attractive level.
>> and brian, last word to you on this one. >> yeah. you got to stay short dated on this. i'm looking to take in some premium over the next couple weeks. then i get out of the trade and move on to something else. don't fall in love. just because i say i like costco, doesn't mean all the way through january and through earnings. keep it short dated. take the premium, keep it simple. still to come, should consolidation in the golden industry having banking on bullion? check out our website and newsletter. there's much more "options action" right after this.
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that. >> yeah. this is an interesting situation. it is not as if capital has become cheaper over the course of time since we saw goldfields making that bid for yamana several months ago. yet here we are with two other competitors indicating they want to get in on the action. nobody knows the industry better than its own participants. let's take a look at some of the fundamental drivers. first of all, we've obviously been seeing rising rates. with rising rates, we've gotten a rising dollar. that is usually not so good on a relative basis for commodity prices. also with the recession, what is typically not so good for commodities either, the precious metals, maybe not as much, but, still, there is 11% or so use for industrial gold. and, of course, we've seen several years now of inflation, rising costs, miners have rising input costs, and these are not really a great recipe. however, i think we should be taking a look at some of the good things too. first of all, as i was just talking about, those that know the industry best seem to be
interested in acquiring assets. and i think that is interesting. also i think this cost price spread, that is what is costs the miners to actually extract and produce gold, what they're selling it for, but that spread is unlikely to narrow much further from here. first of all, they're costs are starting to level off and may possibly decline, including energy and labor. and, of course, as rates do level off, as we were hearing the previous half hour, and the dollar sort of topped out here, there is, of course, the potential for gold to go up. so if costs are going down on the price of good you sell or product you sell is going up, that's a good situation. and finally the miners are actually in relatively decent financial condition, although not as cheap as the market necessarily at 17 times. this sector is probably trading around 21 times. that's not ludicrous when you sort of think of them in a cycle. so i was taking a look at the fact that options were elevated in premium, also thinking maybe the rate picture, the dollar picture is going to take at least until the end of the year to play out a little bit more.
this is a trade i like to use when i think the levels are -- options prices are relatively high, and i also have identified an area where i wouldn't mind getting along, and also we might be in that bottoming formation, and we may have just missed a little bit of the opportunity, and we did see that with that 10% rise. and i was looking at the 2125 call spread risk reversal, selling the 21 strike and then selling an upside call strike around 29 or so. the objective here is to spend as close to zero premium if you can get it, get near upside participation if we do get a rally, not have gdx put to you unless you see a notable decline. in this case it would be in the neighborhood of more than 10%. essentially if it gave back all of today's gains, you would get to own it essentially at the price it was trading before that happened. >> carter, you like gdx, don't you? >> i do. let's look at some stats and charts and things that might
reveal further insight. the first thing we have on the screen, and the color scheme is important. gdx was up in september, every single aggregate was down, every s&p sector, every index from transports to semiconductors. gdx is up in september, up in october and now up in november. you cannot find an aggregate, not one, that is now having three months, november is early in the goings, up. it was showing signs before the news comes out. let's look at two gdx charts. this is a very simple down trend and a very simple arrow drawn. second and final chart, another way to draw the lines, a reversal of sorts. >> brian, what's your take on the trade and gdx? >> well, if there's a true reversal coming, the only thing i would just say is that maybe lay into this option spread, so, in other words, you know,
option 101 lesson here, you don't necessarily have to put a spread on where you sell the -- what i might do is just buy the call right now, wait for some movement because the market is having a ton of movement, up 4%, gold up huge today. so a lot of movement in the metals area and anti-fiat currency. if we get that movement, i would maybe wait to sell the down side or that further upside call, wait for that breakout to happen. be patient with the trade. see what happens here from that point. >> all right. up next, we're taking a look back on one of mike's tech trades. "options action" back in two. n u customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective. and a dedicated trade desk of expert-level support. that will push you to be even better. and just might change how you trade—forever. because once you experience thinkorswim® by td ameritrade
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welcome back to "options action." time to take a look back at one of our past trades. a couple weeks back carter and mike laid out a way to flag microsoft. >> we built above that low, and we've kicked back to it, but that's where you usually fail. >> i was looking at the december second weekly 245, 250 call spread. you could sell that call spread for about $2.05, much more distance between the strike. >> since then, stock has dropped more than 6%, putting this trade firmly in the green.
so, mike, what do you do now? >> yeah. the risk/reward relationship on this one has changed pretty remarkably. so you want to take profits on this. and i think if we get any kind of an uptick in the stock, at this point i think you can be comfortable putting on another trade like that if you get a chance. >> carter, what do you think of the chart here? >> you know, man, talk about a wipeout. i mean, the real message is this the risk for things like apple that haven't done this. but microsoft just wouldn't do it. >> okay. it's time to take some tweets here. our first fan asks, with the recent trend in xom, what do you think about entering a november 25, 1 sten/105 put credit spread? brian wha do you tell this person? >> a little heads up about this tweet. i looked up the prices on it, and basically no risking about 350, just to make about $1.50. so i don't love the risk/reward on that particular spread. however, i do love exxonmobil. i think it's an area that has
strength, even for the next decade. you brought up microsoft. you look at microsoft, exxonmobil, those two actually switch off every decade going back to the '90s of who's in favor. right now i think the 20/20 is exxonmobil. so i like the trade on exxonmobil, maybe not that particular spread, but something a little different. >> mike, do you like exxonmobil as well? >> not really. this is not a multi-decade trade as far as i'm concerned. and, you know, this is sort of steep and uncorrected. that's carter's language, not mine. but we were pairing some of our energy exposure today. >> steep and uncorrected. is that a good thing? couldn't that be a good thing, carter? aren't there god-like charts in the market? >> there is such a thing as too much of a good thing, you know, like 25 cookies or 25 drinks. you want to sometimes stop. let's look at two charts of the xle. the issue here is we're right back to a former high. and even if you're bullish, before exceeding a former high, typically you'll contend with
it. but what we know also, and you can see here how well defined these lines are. i think we back away here a bit and, you know, back away a lot or a bit. but the third and only other choice straight up out, up and out, i don't think that's a reality. i would also point out this, that if you look on a trailing six month basis, you can look at the actual s&p 500 intersector and then the sector which is then limiting the big affect of exxon, chevron and conoco. the actual sector is double the performance of the equally which is to say, yes, it's things like exxon and chevron that have done so well. but they seem a little stretched. >> 25 cookies or 25 drinks, that really puts it into perspective. up next, the final call.
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carter. >> five gdx, sell spy. >> brian. >> >> mike. >> happy birthday by gdx. >> thank you. that does it for here on "options action." see you here at 5:30 for more "options action." don't go anywhere, "mad money" with jim cramer starts right now. - tis a paid program for joint food with tamasteen, brought to you by nordic healthy living, a proud sponsor of the arthritis national research foundation. these statements have not been evaluated by the food and drug administration. this product is not intended to diagnose, treat, cure, or prevent any disease. (gentle bright music) - hello, i'm christine bullock. welcome viewers from across the country to "house call." today we're talking about your joints, what to do about those aching knees, shoulders, hips, and fingers. people often ask me what i think about the latest miracle pill cream or device