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tv   Options Action  CNBC  March 2, 2012 5:00pm-5:30pm EST

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weaker by 12 3/4 points, snapping what has been a real winning streak for the nasdaq that will do it for "closing bell" close. join me this weekend on the wall street journal report. have a fantastic weekend and i'll see you monday. this is "options action." tonight making a mint in microsoft. how would you like to make four times your money in microsoft in just one month? it ain't windows 8, just the options trade on mr. softy, and we'll show you how. plus gold gone wild. bullion has broken down. we have an option trade that can turn gold's pain into your gain. we'll explain. and called out. short apple, but the trade since turned sour. how is he going to get his money back? "options action" begins right now. live from the nasdaq markets, the world's largest equity options exchange, i'm
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melorheostosis. these interest traders here in times square and in sunny florida. we'll get to the trades in just a moment. stocks backing off their multi-year highs today. forget dow 13,000 for a second. forget nasdaq 3,000, because there were some warning signs just below the service. gets get in the money and find out what the warning signs are. mike, just last friday we were talking about the small caps crossing or approaching the 20-day moving. and that is a bad sign for momentum in this index. >> well, yeah, certainly. one of the things we might talk about is the weakest hands are the ones that are going to fold first. when we start seeing the stocks that people are using to try to get a lot of momentum when it goes to the upside, you start seeing them bail out, you start seeing breadth narrow and volumes drop, those are all signs of weakness. not to mention when we take a look at a lot of the fundamentals for companies, names like nike, things like this, these are trading at very high relative valuations. and they just look a little stretched here that combined with a lot of complacency, i think people ought to look down. >> dan, you know the small cap
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index had led the market higher. that something we have traditionally seen, or should we be concerned that for the month of february the smallest stocks have underperformed the biggest stocks? >> that's a great point. the small cap land is kind of a beta trade. when you think things are going to turn, that's where you can get a lot of leverage as a portfolio manager. sometimes you start to see them move early, and it's easier to move them early. we saw the s&p at 52-week highs, but you see the russell 2,000 index down about 3%, that's a very troubling sign when you kind of put it together with where we are in the psych federal the lows, let's say, in october. to me i think like the things that michael just suggested, declining volume and the breadth kind of weakening here, i think it sets up a nasty sell-off very soon. >> we haven't seen that in the volatility, though, scott? >> no, but volatility -- implied volatility is low for a reason. it's because realized volatility
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is incredibly low. the market is higher. but it's a tiny bit higher each day it marches. that's actually a pretty good thing. if implied volatility is what you pay for options and realized volatility is what you get from options, then there is a reason that implied volatility is so low. >> yeah, i think actually that's a really good point. a lot of people look at something like the vix and say the options market is not basically indicating there is any trouble. that's not entirely true because what scott is basically saying, if you take a look at how the market is behaving, buying options are kind of expensive here. the width between how expensive they are and how they are is about as wide as it's been in an entire year. that tells you basically what is going on is they don't want to sell at any cheaper than what it is right now. but they can't afford to buy a lot either. >> professionals like at this implied volatility versus retail. options from a dollar point of view can be cheap. so i would actually in general i would be a buyer of options rather than a seller of options. >> dan, you're looking to take
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aim at one of the best performers of the year, a and that is of course microsoft. why? give me the theory behind it. just because we're seeing an allocation away from small caps, it doesn't mean -- couldn't it mean, i should say that the rally is actually moving into stronger hands because people want to go to those names that have been undervalued during this rally? >> that's a great point. microsoft is a stock that, you know, in a lot of ways it's been left for dead for ten years. it's traded between 25 and 33 for literally ten years. so now here it is at $32, at the top end of this long-term range. it pays a 2 1/2% dividend. they have $50 billion in cash on their balance sheet. they have a product cycle in windows 8 that has caught a lot of attention in the last couple of months here. and i think in a lot of ways, the stock reflects that. it's up 24% year to date. 32% from the november lows. i think there is a lot of good news in the stock. and when you look out to the back half of the year, there is a lot of things that really has to happen with this company to try to keep these gains at almost ten-year highs.
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>> well, you know one quick thing i would say. oracle was just mentioned along with microsoft. oracle is a name that really can move sharply. when you look at microsoft, the stock really isn't all that expensive. you cited the $50 billion in cash they have. that certainly serves as a cushion to the downside. if the market does take a leg down, it's highly likely that microsoft is going to be the one that leads it down. if you had to be long anywhere, that's the place you probably want to stay in while you're busy getting into the stuff that is likely to really crack hard. >> apple also has a ton of money on the balance sheet how. unfair is it to microsoft to compare those two? microsoft has gone nowhere and apple is nowhere but higher over the 15 years. >> when you look at the nasdaq composite, apple and microsoft make about 17% of that index. that is extraordinarily large. so if you do get for any reason, whether it's a broad market sell-off or stock-specific news in these two stocks, the nasdaq is likely to go with it. >> so dan is bearish on microsoft. he is using what is called a put spread.
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we have used this many times before. it is in fact one of the most common strategies. but always good to crack open the playbook and review the structure. it's a bearish where you buy one put, buy a lower put to cut your costs. here is how you make money. you want the stock to foul to the strike of the put that you sold. that's where you make the most money here. that's where your markets are capped. >> this is a sentiment trade. people are going to be looking very closely for a release schedule of windows 8. they're not going to get it on this call. but they're going to look for it. so what i want to do is isolate a down about 9, 10%. that's a 30% retracement off the move from november. okay, so i just want to buy in april 31-29 put spread. when the stock was 32-10, i was paying about 40 cents for it. i was buying one of the april puts and i sold one of the april 29 puts for 20. my max gain is $1.60. my max loss is 40 cents.
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that's four times my money if the stock is down 9%. and to me at this point where the sock is, i think there is a very good chance that this stock breaks even, especially when you consider where the market is and the fact that this stock has been a market leader. >> you disagreed with dan initially, at least, on the direction of microsoft and the fact that you would probably want to be in microsoft if the market looked like it was in trouble. do you like the trade, though? >> i do really like the trade. >> you do? >> one of the things that makes it work is the fact that the options market doesn't perceive microsoft as having a great deal of downside risk. what that ends up doing is making this type of trade relatively inexpensive. so essentially you get to lever the downside move if it makes one, making up for fact that the stock probably wouldn't be the one that tracked down the hardest if we do roll over. >> right. scott? >> i've owned microsoft for 15 years and i really do not want to talk about it. so i hope dan is wrong here. he does a great job of why he is picking the strikes he is. the only question i might have is how about pumping it up to 32 strike, buying the 32 so you get protection immediately in case
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it wallows a little lower, try to go back to the middle of that range. >> hey hotshot, we won't talk about your investment. but so you know, i am long the march 32 puts also that expire in two weeks. >> in spite of all the excitement surrounding windows 8 and the run in the stock, talking about stocks versus options, shorting any stock carries in i risk because stocks can go up forever. ask the poor soul who shotted microsoft in 1990. dan's put only cost 40 bucks. no word when the folks at microsoft will finally include us in their software. the other is gold bullion breaking down and having the worst single day decline in over three years. buying opportunity or maybe a sign to get out of gold? let's find out. call to the charts with a man with the golden touch and an even better sense of timing. huanging in moments ago, carter brackenworth. what do you see? >> there are issues here. this is a multidecade, a
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multiten, 12 years in the making. and we have all the elements of a top. and what started happening is we've been on trend for quite some time now for. basically you're starting to see a struggling of trend. a series of lower highs. and i want to put this in the perspective with the smoothing mechanism, which is the next chart. and it shows basically what happens. when you're okay, you don't break trend. and then we did for the first time a couple of months ago. and now we fought back to the declining and now flat average. not a good position to be in. take a look at the same perspective over the last five years. which picks up even more of the trend. and again, if you're intact, you actually come down the line, kiss it, kiss it, kiss it. you don't violate it. when you start to violate it starts to be the beginning usually of the end. and to us this looks like a pretty important move to the downside. and this week as just
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articulated, it was the worst one-day sell-off in a couple of years. not good. >> we had the month high and the month low in the same day, which is never good as well. >> that's one of the uglier things. when i was on the floor of to see that happen, and i'm not the technician that carter is, but that's something any trader looks to and say this smells like trouble there is one other quick thing. that is if you take a look at the length in the metals, that means how many people are long. take a look at platinum. we're about 98% as long as we've ever been in the marketplace earlier this week. what that tells you if there is any shift in sentiment, there is a lot of room to the downside and not a lot of people who can step in and start buying. for that reason, i certainly would agree. i think the long-term situation for the dollar is bad, but i think the short-term for gold is also bad. >> so what you looking to do, mike? >> here is something that is really interesting. earlier this week, volatility really popped in the price of options, spiked sharply as a result of that more than 5% decline we saw earlier in the week. but the prices immediately came right back down.
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and in fact are as low as they have ever been. i'm looking to buy the may 160 puts outright because i think the options are cheap. what i would like to do is find a way too leg into a spread. but i can pay $2.75 for those, less than 2% of what gold is currently trading for. if we do get to see another sharp downward move, options prices will spike. i can spread out by maybe selling the 155s. >> dan, i'm curious what your takes were. i know you're a closet technician in your time off. and also what you think of mike's trade. >> gold is one of those things. i'm a stock guy. i have a hard time getting my arms around it often as far as direction. but when you see the sort of price action we saw this week, it's got to make you a little nervous. to me, gld is one of the widely helds etfs. a lot of hedge funds own this. a lot of fast money. if there is any reason to sell and multiple people head to the door at the same time, you see the action we saw the other day. to me i don't like concentrated
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holdings. it reminds me of what anal is going to do soon. >> and who is there to catch it if it falls. >> everybody who believes in gold is in gold. i'm with dan. i think everybody is going to head for the door at the same time. >> let's hit the stock option button one more time to get the award on the gold. want a short trade in you could end up like mc hammer, broke and hawking gold on commercials. mike simple put purchase offers huge leverage to the downside, defines his risk to $275. so 275 or potentially end up like a broke pop star? the choice is yourself. our thanks to carter. thank you for braving the traffic here in new york city. got a question? send us an e-mail. the address is optionsaction@cnbc.c that's right after our show on our website, we also have recaps of our trades and clips of old episodes. "options action" classics we like to call it. so check that out. here is what is coming up next.
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call it a sour apple. last month dan made a bearish bet on apple, but now the stock is through the roof. with money on the line, can he polish his trade in time? find out when "options action" returns. time for pump up the volume. the names we're heating up options traders' sizzle. a major player in the red hot cloud compute:00 space. sending call volumes sky is ward on the hope that this stock will soon be in the clouds. who is it? the answer when "options action" returns.
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where were investors pumping up the volume this week eqinix, 15 times its daily average vul. welcome back to "options action." time to do some me we have not done in a very long time, call out dan for a trade on apple. a couple of weeks back, dan made a bearish bet on the tech giant. the trade has been rotten to the core, but he defined his risk, and here is how. just because we risk less doesn't always mean we'll make more. and unfortunately that's exactly what happened with dan's bearish bet on apple. dan thought shares of apple were heading towards nosebleed land. >> you're going to see this stock come from 500 down a bit. >> but shorting the stock --
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>> no, god, please, no! >> well, you get the idea. so to define the risk dan instead bought the march 4 stock put for $11.50. now to make money dan needs apple stock to trade below. or below $468.50 by expiration. but $11.50? >> how can i help you? >> well, siri, you can show dan how to do this for less. >> i sold two of the march 4 60 puts. >> turns out he didn't need her. to spend less, dan sold not one, but two of the march $4.60 puts for a total of $10.80. but he did something even better. he made making money easier. here is how. between the $11.50 he spent buying one put and a $10.80 he collected selling the other two lower strike puts, dan reduced the cost of the trade to just 70 cents. now instead of needing an toll
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fall below $468.50 to make money by cutting his costs, dan is make profits if apple falls more than the 70 cents or just below $79.30. but there is a trade-off. by selling more puts than he bought, dan could be forced to buy more at that low stock price, or in this case 460, even if apple falls below that level. even if dan had to buy apple at this cost, the money he made on the way down he wouldn't see losses until apple reached about $440. beyond that, dan wouldn't lose money. 10 to protect himself against just, that dan then bought the march 440 put for $2.30 and created his put fly for a total cost of $3. that's the most he can lose. and now dan's protected. but since he spent more, he won't make as must have. and now to see profits dan needs an toll fall by more than the $3 he spent on the trade, or below $477 by march expiration.
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>> yeah! >> so what have apple shares done since the time of the trade? gone to the moon. now dan must make a choice. stay long the trade and hope gravity returns apple to earth, or simply close out the trade. and "options action" fans are furiously asking siri the same question. what will dan do now? before we get to that answer, perhaps this will make us feel better. had you shorted 100 shares of apple on february 10th, you would be looking at a $5200 loss. the move has been that fast and furious. dan's put buy can be sold today for a loss of $275. not great, but certainly more palatable. dan, when you take a look back on this trade, what did you miss? would you have done it -- i mean, what has changed since then? >> nothing has changed. you know, this is a maniac. i lived through the late '90s and the tech bubble here. i understand that this stock is very different thania hoo and qualcomm circa 1999. but what is going on here with
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this thing literally leaping $50 billion in ten trading days, you know, and doing it consecutively, this is a mania here. and if you're going to be the last person to buy apple at $550, or whatever it's trading at right now, go for it. that's not something i could ever come on tv and ever tell anybody to do. and if your broker is telling you to do it, you might want to think about a new broker. you don't sell out. it cost morse to trade out. to me recognizing the fact there is something very odd going on here and you've got to be carable at these parabolic levels. >> i didn't get a chance to check out at risk reversal, dan, but have you gone into another apple short? >> another one? >> yeah. >>. >> i've had multiple ones here. and it's been very frustrating trade for me in the last couple of weeks here. but i'm going to stick with it. i think we're very close. i think next week, marchth, the ipad 3, if that thing is evolutionary, watch out below. you're going see a $500 stock quickly. >> something like anning works you ever get in front of it and
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say it's going to go down? is it worth it is? >> you never want to say you're going to make a short bet. >> right. >> apple has a way of making people who do that look really foolish. but that doesn't mean you are foolish. it's just are you getting the timing right. one thing you have to remember. people always talk about valuation with stock. technology stocks need the continue to perform continuously to justify even relatively modest valuations. and that's the thing that people have to remember with apple. and to dan's point, if there is a disappointment on whether they can keep that up, the stock will fall. >> and the historical pattern has been product launch and then sell-off. maybe that will play in dan's favor with his multiple apple shorts a this point. all right. got to take a break here. the phone lines across america are burning up. that's because right after this break you make the call. back by popular demand, we are taking your calls live. if you want the participate, you need to e-mail us at back right after this.
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tonight on cnbc sports biz,
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curt schilling's move from the mound to the video game industry and how he plans to ace the world as chairman of his own company, tonight p.m. eastern on the nbc sports network. meantime, welcome back to "options action." actors, athletes, and even mobsters have all done it. we're talking about calling into the show. it is a sensation like no other. who is the lucky caller tonight? it's just amanda -- we shouldn't say just. it is amanda in new york. she counts modern family and "options action" among her favorite shows. when she is not tending to her dog sid, she is of course watching the show. >> hey, guys. i'm a huge fan of the show. thank you so much for having me on. i saw the huge move in wynn resorts today, and i want to go along. what do you think about buying the april 125 strike call for $9? is this really a winning strategy? >> winning strategy? she has watched the show a lot. she has the corny sense of humor we all share. what do you say? >> i say you picked a great stock. it was really up today, a ton.
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$9, that's a lot of money to spend. i think we can do better. i would suggest buying the april 130-150 call spread. $20 wide. i think that's a better way to play it. >> what do you think, mike? >> that is quite a lot of premium you're going to be laying out if you do that, close to 8% of the stock price. that's probably not the best thing. i think the mistake that most people make is they buy options that are too near dated and oftentimes go too far out of the money you. didn't do that. you obviously have a good sense of it. but i think the call spread is going to be risking a little less money. and i like that idea. otherwise i would say stretch it out a little further. >> amanda in new york, thank you so much for calling in. time for the final call, the last word from the options pit. stan? >> i want to give my dad a shout out on his 70th birthday. i'm down here in florida for it. >> happy birthday, mr. nathan. >> i like mike's put buying in gld. >> i to like the gld put buy. if it does go lower, make sure to spread it out.
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>> it would be weird if you didn't like it. our time has expired. i'm melissa lee. "money in motion" is up next.
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