tv Options Action CNBC February 12, 2012 6:00am-6:30am EST
this is "options action." tonight forget 500. how would you like to quadruple your money in apple in just one week? it ain't on itunes, but it is our options trade on the tech giant. we'll show you how. plus talk about fleet of foot. we've got a trade on nike that could double your money. we'll explain. and can this man put the spice back in msg? options traders think so and we'll tell you why. "options action" begins now. live from the nasdaq market site, i'm melissa lee. these are the traders here in times square. in an unfamiliar color washing across the screens. that is red.
stocks posting their worst day of the year on concerns of european's debt crisis. curious enough, high growth stocks held up pretty well. is this a good sign? apple, sales force, linked in. all bucking the trend at this point. is this where you still want to be at this point? >> let's talk about three. apple, ralph lauren, coach all making highs today. this is people just sticking to what's working, i guess, in a lot of ways. it's not an overly bullish sign for the breadth of the market. but if you have other things not working so well, maybe it's just like a flight to quality in some ways. >> i think apple unlike the other two names is actually kind of a value stock. i think what a lot of people might be hoping is an opportunity to buy it lower. when they didn't get that opportunity, then there wasn't anybody coming in selling. that held one that one. in the case of the other names, in the other valuation, i'm concerned. we have some potential bad news on the horizon.
when i look at those names. ralph lauren is -- the valuation always seems a bit high. of course, they tend to have good results time and time again. >> i don't know if these are growth companies or consumer companies. >> can't be both? >> they can. but is apple a growth company? the pe would say no. the only thing that grows with apple is the balance in your statement. but apple doesn't trade at a humongous. none of these do. linked in had a fantastic day. and not all the social media names are doing well either. despite the facebook hey owe. this says more about the consumer. >> and you got to wonder. what point does apple mask what's going on in the underlying market. so that's helping lift here. and our friend carter braxtonworth who will be on in a bit and others say in the overall market that we need to pause here. and we're in the fill. the vix has gone up.
>> the options market is backing out. >> there's two ways to see that reflected. options are rising. and also put skew. how much puts are relative to upside calls. that's one of the primary drivers for the vix. the vix was up more this week than you would have expected because of those factors. that does express some skepticism saying this would be a good time to buy some downside protection. or even -- >> we actually saw the vix start to rally last friday -- about noon last friday. the vix up over 20%. even though the s&p was down .2. and i think options are just cheap and people want some protection. they're worried about iran and political stuff. >> right. >> in some ways it also comes back to breadth too. when the s&p closed yesterday, if you look at the composite of new highs, it was only 400 back in july when we had the same high.
1350 before we fell off a cliff. the readings were up 800, 1200, that sort of thing. it shows a bit more enthusiasm. now it's becoming narrower. >> for the stocks hitting new highs, have the volatilities gone up? and what are vols like at this point? is that your phone ringing? >> thought i turned that off. >> anyway. >> mike was taking the call in early. >> that's right. >> the vols on some of these stocks, is it hard to express your view or these stocks in that they might be more expensive at this point? >> actually no. i take a look at names like apple for example. i think you can buy options at reasonable prices in names like that. wr you're starting to see it is in the s&p. for example a three month at the money put in the s&p, about a week ago would have cost about 3.7% of the index. now it's about 4.25. that's a 20% increase for the price of that option. so the cost is more expensive. but i think some of the bigger names where people haven't
expressed as much concern, the volatility has been very low. the prices also remain low. >> with that said, it might be a good time to think about putting on an options trade on apple. looks like the stock is destined for a date. the ipad 3 event is supposedly the first week of march. we know that now. so dan, what's your view here? >> this is tough. we were sitting on tuesday on "fast money" talking about how i was buying the february 460 puts. trying to buy puts in apple this week was like living through a johnny cash song. right up until today's closing bell. so to me i tried taking a shot here. but what i want to do now is looking to march. they're going to have this ipad event. last year they introduced ipad 2. they announced it on march 10th, it unveiled the next day. there's a lot of pressure on the new ceo because this is the first real product here. you're going to see the stock come from 500 down a bit to the gap level.
>> dan's a little bearish in apple in the short-term. so he is using a strategy called a put fly tonight. let's hit that playbook. you buy one put, sell two lower strike puts against it of the same expiration. to protect yourself, then you buy one even or lower strike put. give us the trade. >> it's a little more complicated than the vertical spreads we do. let's walk through it. i'm trying to isolate a certain level here. i want to define my risk. i want to spend as little premium as possible. $10 wide put spreads cost about 350. it doesn't look attractive to me. i want to look to march and look to buy when the stock is about 4.93. the put fly paying about $3 for it.
i sold twof the march puts. so i -- that's a total of 10.80. then i bought one of the march 440 puts for $2.30. this is a ratio spread. i'm covering my tail on the end. so i'm only risking the $3 that i spent for the spread. now i make money between 477 and 460 i can make money. may payout trails off between 460 and 443. like i said i can lose up to three between 477 and 460 and 460 -- 443 and 440. that's a long ways away. i don't think it gets there in just a month. so i like this kind of targeted tactical trade. and expending $3 to maybe make 17. >> one of the challenges is the fact that the stocks keeps going up. you want to mitigate what you spend. butterflies can be a little bit tricky. you're trying to thread the needle a bit. pick some timing.
but i think in this instance it makes good sense. it's really the only effective way to make a bearish bet in the stock. >> to collar up apple. if you still add that on, this can work to help rehab that position. because you have a bunch of legs here, you have to watch your execution. because if you just pay the offer or sell the bid, then you get yourself into a situation where it's tough to make money. >> just quickly i'm curious. with the march event, do you think apple is going to sell off as it has in other product events where we've seen the stock run up and then sell? and if you do, why not just use a weekly? >> i'm going to be long then too. >> here's the thing. i'm staking it in the ground here. i think we're going to see a 500 print probably monday morning. i think at that point -- this is a frenzy going on here. this is a $460 billion market cap company. this is bigger than microsoft and google's combined. stocks moving like this, this cannot last forever. if you're buying the stock here, be very careful.
there's going to be better opportunities to buy in the near term. >> one of the reasons there's so much anticipation over the new ipad is it is thought to have this. a stocks versus options app. want to short apple, the equivalent of jumping out of a plane without a parachute. it could kill you. dramatic on a friday night. dan's put fly risk, $300. so quadruple your money or fall helplessly from a plane. simple choice, i think. apple's not the only stock soaring into the stratosphere. shares of nike hit an all-time high as well. it's up 25% since the october lows. has it run too fast too far? let's talk to carter braxton, worth. what do you see? >> it's just that. the advance. meaning the october, february advance i've drawn the trend line of the last two years. you would show this as a mature advance. in terms of duration. october, february five months. almost 30%.
then put it in context of the longer term move. you'll see in the longer term chart where exactly we've come to. here's the same move october to february. five months, 25, 30%. the general principle of trends and channels is when you get to the bottom of it, it's not about bye juncture. when you get to the top, it's not a bad sell juncture. too far too fast. if you're buying nike shares here, whom are you going to sell them to? who's going to buy it higher? fade nike. go short. do something. >> carter's clear about where he stands on nike. do you agree fundamentally? >> i do. we might have a graphic. if you took a look at the multiple of this stock over time, the price to earnings multiple or the enterprise value. over the course of the last ten years, you're going to notice a pretty striking pattern. once you get up to about 25 times earnings, i think we're about 23 times earnings right here. we're starting to look at situations where the stock rolls over.
this is a company that has over that course of time had revenue and earnings growth. how it has moved around and the valuation has changed. we are at the upper end of the range. i don't expect anything materially bad to happen to the stock. i don't see why you would reach for it here. >> no surprise. mike and carter agree in terms of the bear go for nike. using a put tonight. most common strategy. here's how it works. in the structure you buy one put and sell a put of the lower same expiration. you want that to go to the short put strike. walk us through. >> so i'm looking at the april 190 put spread. i'm going to buy the april 100 puts. pay about $2.25 for those. sell the 90s against it. that creates a favorable risk reward. i'm only a little over 1% of the current stock price. to put on a bearish bet if the stock drops about 15% it could be worth as much as ten bucks.
>> do you like this trade? do you agree in terms of the fundamental direction? >> i don't have a strong view in nike as a stock. but stocks like that, charts like that make me ill. i want to short them. i like the idea of using a put spread that gives a ten dollar wide over what you're spending. i like the risk reward of that. >> scott? >> i'm not a big fan of getting in front of charts like that. mike makes a compelling case. one thing. i like the fact mike is buying a put spread rather than selling a call spread. in a situation like this, the risk reward works out better. >> there's a couple stocks. some of those have bad weeks this week. this is one of the options where options remain cheap. and when options are cheap, that's the great opportunity to try to buy a bit. >> let's hit the stocks versus options here. shorting nike is like running a one legged race. good for a few laughs but unsuccessful. shorting any stock carries unlimited risk.
mike's put spread offers a 7-1 payout. our thanks to carter braxtonworth of oppenheimer. got a question? e-mail us. we'll answer it in the web extra after the show on our website. we also post trade updates there as well. you got to check it out. here's what's coming up next. talk about a linkedin letdown. a couple weeks back dan made a bearish bet on stocks. shares continue to defy skeptics and gravity. what's his plan for making a winning connection now? find out when "options action" returns. time for pump up the volume. the names that were heating up sizzle index this week. this company makes everything you'll need when you strike black gold. this titan lives up to its worldly name tapping markets in over 100 countries. traders drill down on the company's calls this week hoping to strike it rich when they gush skyward. who is it?
where were options traders pumping up the volume this week? weatherford international. at one point call volume was eight times the average daily volume. welcome back to "options action." you just heard how weatherford calls were active. why do you think there was action in that option? >> well, weatherford is one of
the big names. with all the geopolitical risk, people worry about the price of oil. and the fact that daily rental rates for the rigs are through the roof. everybody is bullish on this. >> time now to do something we have not done in awhile. that is get called out. winners are great but it's the losers that can make you a better trader over time. dan made a bearish trade on linkedin but so far it's been a bit of a let down. here's why. on "options action" just because you risk less doesn't mean you'll always make more. unfortunately that's what happened on dan's bearish trade on linked in. dan thought shares were going lower. >> in february, there's going to be 55 million restricted shares that are going to come unlocked. they're going to get sold this time. they were pushed out from this last offering. i think you can look out a bit.
>> but shorting the stock, you could and you could go a couple rounds with this guy. >> i want to eat your children. >> so to define his risk, dan instead bought the feb 55 put strike for $3.50. now to make money he needs linked in to trade by that price or below $51.50 by february expiration. but $3.50? you keep spending money like that and we're going to get linked out. show us how to do this for less. >> i was selling one of the feb 45 puts against it. >> well done. so to spend less, he sold the february 45 strike put for $1.50 and created his put spread. but he did something else. he made making money easier. and here's how. between the $3.50 he spent buying one put and the buck 50
he collected for the other, now instead of having it fall below $51.50 to make money, it is now needing to be below $53 by february expiration. there's a tradeoff. in selling that put he limited had his gain to the difference between the strike of the put he bought and the strike of the put that he sold. good thing he did risk less. because since the time of the trade, linked in shares have rallied making this trade a loser. now options fans are furiously checking dan's profile. and with expiration just a week away, they only want to know one thing. what will dan do now? >> before we answer that, perhaps a little stocks versus options might make us feel a little better. had you shorted 100 shares of linked in you'd be out $2500 and howling at the wind.
dan's put spread expires next week and is essentially worthless. but it only cost $200. not great, but better than a couple grand in losses. earnings were out last night. and the stock soared today. so are you still bearish on the name? >> this is not a stock i would buy. i don't use their products. i don't find it interesting. i feel it's a flash in the pan when we get to other competitors. the biggest problem with this trade -- listen. if you buy or sell a stock like linked in, you can making a speculative trade. if you're going to do that, you like to do it through the options market in my opinion. so i'll do this trade all over again if that's my inclination to short the stock. my biggest mistake was letting it run. >> i was going to ask you. you put the trade on in mid-december. did you really let it go all the way through? >> i think the stock was 66 when i bought. the stock was 74 the other day before earnings. so to me there was a chance if it had gone down 18% after earnings, i could have made my money back. >> this would have been a different segment.
it is the sensation of the highest order. we're not referring to "options action," which is a sensation of sorts. but instead to jeremy lin. saved the coaches jobs and brought world peace. and it's only his fourth game. the question is can he force time warner cable which is in a brutal dispute with msg to start carrying knicks games. hi, darren. >> hi. i'm trying to give the sense of the lin-sanity here. modell's 62 jerseys were sold in an hour and a half. and this dispute with time warner has been going on since january 1st. there's really been nothing that gets people to really complain. knicks are like a .500 team.
but this could be it. i mean, if this guy -- this economics major from harvard who's played three incredible games in a row playing kobe tonight at the garden, this could get people to either -- you know, tell people hey i got to switch here. or put pressure on time warner to do a deal with msg. time warner saying they don't want to deal with the 53% price hike. msg says that's not really true. and msg despite having the 31% revenue decline on the sports part of their business because of the lockout hitting highs today. so 52 week highs. so it's going to be an interesting question. this is like the basketball version of tebow. and it's pretty crazy right now. i can tell you that. >> darren, quick question. to me it seems like the nba's big dropoff in viewership. but still when you look at espn and disney being the biggest thing there is in cable. 44% margins. here you're dealing with the
largest sports market, it would seem to me. don't you think that will put more pressure on? >> there's big potential here. and obviously espn's making their money because they run highlight after highlight. they pay for that. but it's the cheapest programming in all of tv. the amount of times that espn runs those highlights. i think there's going to be pressure to get something done here. at least in new york and time warner. >> thanks for coming out to new york city. you can see more of darren tonight on cnbc sports biz. from undrafted new agent to super bowl hero. new york giant victor cruz talks about his sudden rise to stardom. that's tonight on the nbc sports network. let's hit the final call. >> vix up 20%. it's not too late to buy protection. apple touching 500 next week. you can take a shot. >> and the protection you want to buy is the put spread in nike.