tv Options Action CNBC July 1, 2012 6:00am-6:30am EDT
this is "options action," tonight, big bucks in starbucks? how would you like to make four times your money in two months? a super vente trade that could right your portfolio, and dan nathan shows how you can make money. a trade on best buy that could pay to you buy best buy stocks in hopes of a buyout. they'll break it down. why were options traders buying ak steel calls? don nations with the steely call. the action begins now. live from the nasdaq market site in new york city's time square, i'm melissa lee. traders here in times square. we'll get to trades in a moment. but first the markets, the first half ending with the best single day of the year for stocks and
the best june since 1999. e.u. summit giving a huge boost to banks and technology. how do you profit from the volatility? let's get into the money right now. let's start with dan. always the bear, dan. but here the price action was quite good. >> quite giddy in a lot of ways. to close up 2.5% on the s & p, seems slightly artificial and window dressing on what was a pretty bad quarter overall, after getting out of the gates in q1. i'm a bit skeptical. it felt a little bit artificial. when i looked at the screen, there were warning signs. a lot of this was macro driven. the things i saw in the red were nike because earnings, ford because of earnings, to me, that's the leg of the trade. we'll get a lot of color as we enter the q2 earnings period. >> what was taking stocks up, a lot of hope. hope that euro has figured out
their problem. hopes we're starting to see the bottom in the housing crisis. and len ar came out, and kb homes. but we're far from out of the woods. if you see stocks go up on hope but down on facts, i don't necessarily think that's a healthy recipe. >> this time the hope feels different in that merkel has changed her stance when it comes to the use of the bailout fund. in housing, we did get good data points from kay schiller, lenar and kb homes. this is not hope based on nothing here. >> we haven't indeed seen the bottom of housing prices, that is actually great news. i disagree with dan. i don't think what we saw happened on nothing. it was great news. you look at the last 25 or 30 minutes in the s & p, fantastic. midday would you have thought s & p stuck in the range for the rest day of the. broke out to the upside. one thing about the vix, options traders head to be long volatility this time of the
year. you have to go back to one day in june to see vix close that low. before that, all the way back to the beginning of may to see vix close this low. while it might all come undone, everybody feels good right now for a reason. >> there are warnings out there. stocks rallied across the board. the two stories that are tied to international growth in europe and asia, nike and ford, they still firned the day lower. even though hope of macro solution on the horizon. stocks hit in those very regions remain high for the day. >> that's the point. last year we got bailed out by u.s. strength here. right now, in the past, in the last couple of years, looking at emerging market strength. that chart interesting right there. rallies we had into anticipatory events and sold off into all of them. if you are looking at the rest of the world, global consumer
reflation trade to bail us out. not likely to happen, not this summer. >> no, you definitely need to see economic growth, higher employment, and a lot of people racing in, thinking this is the bottom. the fed is telling you not the case. we're keeping rates lower into 15 if that's the case. you start to see the order book fill up. a lot of people still not getting loans, high cancelation rates. problems still persist. >> yesterday, when nike news crossed and you thought about exposure to china, other companies that might be hit on the same concerns, starbucks came up. and on the day, starbucks finished higher by 2% plus. do you think starbucks is vulnerable to the same things that brought nike down? >> i do. potential names highly coronated to the high-end consumer names, starbucks is first on the list. one of the things that got me thinking about it these two stocks have traded in lockstep
the last two years, a recent divergence, that are chart shows it right there. new all-time highs in april and may, and then have sold off since then, when you think about starbucks' exposure, they have 30% exposure outside the u.s. that's why they trade 28 times next year's earnings. any holes in that argument for next year, this stock is going to be revalued and going to go lower. you mentioned it closed up 2 plus%. less than the market. lagging most of the day here. to me this is one where it could be very vulnerable as we go to the summer and we get a sense of what global fwroet looked like. >> dan buying a put spread. good to review the playbook. a bearish strategy, buy one put, sell a lower one to cut costs. how do you make money? fall to the short put strike to make the most money, where profits are capped, so, dan, walk us through the trade.
>> sure, i looked out on-to-outside, will catch the second quarter earnings. but it's not an earnings play. a macro play, and the earrings event macon firm what i'm thinking. august 50.45 put spread. a little bit out of the money. a couple reasons why. i paid 85 cents when the stock was $53.10. i sold one of the august 45 puts against it for 45 cents. my max gain, $4.15 if the stock is 45 or lower and i can make up to 4.15 between 49.15 and 45. max loss, 85 cents in premium that i paid for it i chose the 45 strike, not a high delta option, but selling it there. a huge support level, a big resistance level last year and also the level, the break even level and i want to make one last point. people didn't think nike could go to 85, it went to 85. a well-loved name here. >> you're exactly right.
when stocks start falling down, people don't believe how far they can go. what's interesting about the particular put spread because of the price it's pacing, it's behaving like sagele option. a lot of leverage, paying less than 20%. pretty unusual. basically what's happening, you make a cheap bet, defining the spots where you'd be willing to get back into it, and this is looking like probably one of the best ways to make a bearish bet. >> this costs less than 20% or less of the witt of the spread. 6% out of the money. you have to take those two and weigh those two against each other. also, though, interesting to point out i disagree with dan a little bit. i think what starbucks is doing, most of their new initiatives are actually here at home. only thing really doing overseas, opening 40 stores across all of india. that's what they are doing internationally. there are 40 starbucks in my neighborhood alone, no big deal.
>> the stock could go down to the strike and this will make money if it does that. you don't have to see the stock to go to $45, if the stock drops in the near term this will appreciate. that's part of the leverage i was talking about. a single option. looking at it from an expiration perspective, that is true. you could see profits. >> quick to the fundamental point, i think you are alluding to the consumer products group, those are things they sell in the grocery store, single serve coffee brewers coming onto the market. >> one thing i took away from nike earnings, they are spending more to make money overseas, if starbucks has to do the same thing in europe, those regions underperforming it will hit margins and the stock, and the stock will be revalued. >> they have a lot of things at starbucks, vents, cappuccinos, and half-caf. if you short the stock, you could face unlimited losses. dan's put spread, 4/1 payout,
cost $85. next trade. best buy surging 10% this week alone. we head into the second half of the year, could battered shares of best buy be your best buy for the rest of the year? let's call to the charts for the one and only carter braxton worth of oppenheimer. >> let's look at the charts and see if we can figure it out that way. a couple. two-year chart, a daily, and we'll put this in to so bad it's good category. consistent down trend, not stopping. let's put this in time perspective. longer term chart, where we are now, 21, right back to the lows of '09, when the world was ending, lehman going under, and at 21, this is where it ricochets. a few valuation charts. price to earnings. a record low.
five times. the next one is price to cash flow. three times, this is 20-year chart. lowest it's ever been. price to sales. year two, talking about a .1. this company continues to actually put up the numbers, despite amazon and everything else. and the final chart, let's look at price per share versus earnings per share, going back to the early '90s. a record quarterly result the past quarter, record trailing 12 months, share prices saying something different. which has it right? we think this sell-off has discounted too much. >> all right. technically, the stock looks good. fundamentally, mike, the only catalyst on the horizon, management-led buyout? that's a terrible reason to create a thesis around a stock. >> the critical thing, we need to see evidence of weakening fundamentals, we haven't seen that. a company generating about 1.7 million a yore in free cash
flow. 22% free cash flow yield? if you can get that cash flow generation off of it, that is attractive. net of cash on the balance sheet, not a lot of debt here. the guy already owns a significant portion of the stock, so that's certainly a reason why you might think you are bottoming out. i could potentially see them, saying, we're going to do what we've already done, with the free cash, initiate more buybacks. what has that done in the past? the worst personal things about the fundamentals of the story, but bid the stock. buying at 24. i don't see any reason they wouldn't buy it here. >> bullish, and mike is using risk reversal. in the strategy, buy one call, set a put against it. the goal? stock to trade above the call strike price, but because are you short the put, you may have to buy at put strike price, even if it falls below the level. walk us through the trade. >> the one we're looking at
here, january 13, 18/24 risk reversal. you will sell the $1.75 and use the proceeds to finance the call. net of the trade, collect a quarter. if you own the stock, you would get a 34 cent dividends between now and then. the other thing, you will buy the stock at 21 bucks rather than being forced to buy it down 15% if it goes down below the strike. participate to the upside. runs through that. one of the things you are weighing, would i rather run out and buy calls? the volume is pretty high in the stock. that's a challenge. come up with the buyout, the premium gets sucked out of this thing and offsets gains. we're increasing the put to mitigate the risk. >> melissa nailed it. is it your these led because of management-led buyout, we talk about probabilities all the time on this show. you look at all the times an existing ownership suggests they
may buy assets back because it's too cheap and it actually happened, not a real high success rate. >> call volume higher than everyone this week because of the very rather thanes we talked about. while i ruff risk reversals, i hate this name. even though they have this magical plan in showrooming, even though nobody buys there. i don't want to own it. not a fan in selling puts in a name i don't want to own. >> the company, first of all, you act as if he actually used some of the cash flow to purchase shares and they have if you own a substantial portion of the company, like the walton family owns walmart and he owns best buy, if you use cash to buy back shares, you are buying the company. slowly and steadily, with the company's own cash flow. and basically what he is suggesting, if i'm not going to buy it fast enough this way, maybe i can buy the whole thing. >> that means best buy goes down slower.
>> that actually gives -- that means this is more of a call option. >> playbook one more time on stock versus options. a stock moved by carter's presentation? cost you $21 a share. and mike pays him a 25 cent credit and he could be forced to buy for $17.75 and that is one tongue twister. carter, stay cool in the heat. send us an e-mail, options do firstname.lastname@example.org. that is the lifeblood of options action extra. here is what's coming up next. just short it. dan's bearish bet on nike stock has tripled his money in just a month. and even more left to be made. how did he do it? what's his next move? find out when "options action" returns. time for "pump up the volume." names heating up options traders' sizzle index this week.
this company's roots reach back over 110 years and friends from back then call it the american rolling mill company. these days, they are well known for making road side guard rails which can come in handy when driving gets sloppy, and options traders bet that even though the stock is riding high this week, company's shares are still a steal? who is it? the answer when "options action" returns.
where were options traders pumping up the volume this week? ak steel. call volume eight times the average daily volume. welcome back, you just heard how active ak steel calls were. curiously, the stock was lower today. what did you make of that? >> it's lower today, but done pretty well lately. deutsche bank had good things to say. time for the upside call. we mentioned nike's tough day. a couple weeks back, dan had a simple trade on the giant. just short it. he made three times his money. here is how. on "options action," how we just do it, risk less so we did make more. dan thought shares of nike would get knocked by europe. >> a research report commenting on weakening shoe sales or trends in china and the u.s., and weakening apparel trends
this western europe. >> shorting the stock? might as well go one-on-one with this guy. to define risk, he bought the 97.5 put for $2.50, now dan needs mikey to fall below the strike put price than by the $2.60 he spent. $2.60? we don't have multimillion shoe contracts. just spend less. dan sold the july 92.5 put for $1.35 and created his put spread. but more importantly, he made making money easier and here is how. between 2.60 he spent buying one put and the $1.35 he collected selling the other, he cut costs to to $1.95. and now instead of needing it to fall, he can see profits fall to $96. 25.
hold the applause. because there is a tradeoff. by selling that put, dan has capped his gains to the difference of the strike of the put he bought and the strike of the put he sold. and since the time of the trade, nike trades nailed, making dan a winner. now athletes across the globe are tuned into the show, and they only have one question. what will dan do now? in case you didn't know, the show hugely popular in the world of sports. we'll see how much money was made. i don't think anybody believed me out there. dan's put spread costs 25 and can be sold for three times the amount of you obviously put a similar trade for starbucks. you think nike will go lower? >> nike traded ahead of the starbucks thing, and i would rather find things that haven't broken the way nike did.
to me, a lot of ways, it traded at 85 this morning, probably a decent buy, closed much higher, and a lot of people love the name and get in front of the think they think are the catalyst. >> an interesting couple of trades this week. one, the china trade, which fell apart with nike's warning and a downgrade from citi, saying higher income people feels stock market volatility much more. and a downgrade across the board for retailers that rely on the high-end consumer. tiffany, a 52-week low. at this point, would you go in and look at names or find the next -- the next windful? >> i think it's really interesting you bring these names up. macy's probably part of the henry group, versus those who already have a great deal of money. the one who's have a great deal of wealth are the ones that feel the market volatility. the ones who don't see improvements are probably the ones that will make nike, starbucks, macy's probably more
sensitive to the slightly lower strata, and i think both are probably weak right now. i don't think anybody will feel comfortable run into september with what we just heard. >> tiffany is particularly disappointing, but actually cost go has done really well lately. 52-week high, a good week on some days when the tape was really ugly, and they have a demographic that is very similar to a lot of names. people going in and buying a bunch -- >> guys, isn't this about my trade here? the beauty of a trade. >> i would rather talk about a place where you can buy toilet paper by the ton. >> this is important trading point. yesterday, the stock continued to be weak. into the earrings event, half off for a double and today on the news, took it all off for a triple. mitigated risk into the event. took a profit. >> thank you, dan, reminding us for what we are here for.
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having trouble winning rock, paper, scissors? you want to talk to this guy. a mechanical forearm has been developed to win 100% of the time. high-speed camera and lightning fast reflexes can react in mere mill i sections. we have to hand it to the japanese. this robot is rock solid. and that's what we call optional viewing. obviously, the machine hasn't played mike who is laser fast. time for the "final call." last word. >> so it cheats? whatnot to do when are you selling a covered call. >> dan. >> press consumer discretionary names like starbucks. >> mike. >> i like starbucks trade as well. >> i'm melissa lee. have a great weekend. for more "options action," go to