tv Options Action CNBC March 10, 2013 6:00am-6:30am EDT
all right. we've almost made it to the end of "the suze orman show," but before we go, there's still one more thing that i want you to know. i have to tell you tonight's show has seriously upset me, and i don't know if i'm more upset about juniper, who is a mother, a doctor, she's 40 years of age, racked up hundreds of thousands of dollars, 200 and some odd thousand dollars of student loan debt, credit card debt, and so forth, and doesn't have the money to pay for it and didn't pay attention. she wasn't being responsible with it and now she's in big financial trouble. or, am i more upset about sasha whose mother took out a $100,000 student loan in sasha's name, has not been paying it, so it's going to grow. who knows what else sasha's mother has done, but sasha feels like it's all right. she's my mother. we have a strong bond. really? really, sasha? so i don't know. all of these things have upset me, and the reason that they've upset me is none of these things
had to happen. i want you to know that every single financial disaster in your life very possibly could be contained, could be controlled, could be handled if you just got involved with it right away, if you just took steps before it happened to protect yourselves, but, no, you're all too busy. i have to wonder, what are you busy doing? now you know. well, i guess i should be happy that you're not too busy to watch "the suze orman show" because you join us every saturday night here, and that i love. so that makes me happy. so, therefore, there's only one thing that i really want you to know when it comes to your money and it is this. join me every single saturday night so i can stay happy, but people first, then money, then things. now you stay safe. bye-bye
>> this is "options action." tonight, america is back. a strong jobs report sending the dow to another record, but there's a warning sign every investor needs to know about. he'll tell you what it is. social media stocks are soaring, so is it time to like facebook? a trade that could get you long for free. they're going to break it down. and could it a better deal be in the works for dell? some traders say yes. and scott nations explains why. the action begins right now. >> and live from the nasdaq market in new york's times square, welcome to the show. happy friday, everybody. well, of course i have all the
traders here as well in times square and across the country. welcome to the show. and four new record highs for dow, a blow-out jobs report this morning as well. better than expected, really helping those hopes of the recovery is real. stocks posting second history best week of the year. so if you missed the rally is there time to still get in? let's find out. it may be slow and steady, but we've seen some incredible moves here. just been mounting up, blowing out every possible head wind. do you believe in this rally, dan? >> well, i personally don't believe it. it's happening, but the question you have to ask yourself, is what news is priced in the market here? as far as committing new capital, investors get excited to see new milestones in the market, new highs in the dow jones. we're close to new highs in the s&p 500. does that mean you have to get in? i would tell you that one of the
biggest mistakes that retail investors make are doing things improperly at highs and lows. so i would say, be careful here. you're going to have an opportunity to buy stocks lower. to me, just because you see new highs does not mean you have to jump. >> when you talk about opportunity to buy at lower levels, when do you think that might come? what would be the catalyst for us to hit a brick wall and move back? >> right now, it feels all things are hitting on all si cylinde cylinders. the fed said they're going to keep the pedal on the metal. but if you look at the unemployment rate and the dow jones, the last time it was up here, unemployment was below 5%. so we're cheering 7.7%. doesn't make sense to me when you see equity valuations getting stretched. when you think about where we've come from, 7.7% feels like the new normal and people are cheering it. my question is, at what point will we say this market is looking too frothy to be in right now? >> i would argue that i'm saying that right about now.
when i start seeing no or low growth companies trading at well over 20 times earnings, above the average multiple, names like proctor & gamble, it gets me concerned. i will point out, you know, one of the thing that is's a propellant is the fact that unemployment is higher. the cost of labor is low. when interest rates are low, the cost of capital is low. all of them help businesses and they're all risk factors. i think we need to be aware of that. when people become aware of it, probably a pullback in equities. >> some people were saying that if really we were just based on fundamentals here and saw a really good jobs number, we should have seen a much bigger rally. but when we say good economic data, people price out quantitative easing from the fed. is that a concern going forward? scat scott, are you there? >> it's because of the fed.
the fact that people think that the fed is going to keep interest rates really low going forward. so dan makes a point that last time the dow was up here, unemployment was much higher. but the other thing is, interest rates were much lower the last time the dow was up here. so if you want to buy equities, it's a lot easier to be brave with interest rates where they are. i don't think that the market is frothy. the s&p going forward is about 14. pretty reasonable. if you look at the action today, in the spider, volume was much lower than it has been over the last 30 days on average. so it's not like we have a bunch of people rushing in to buy stocks. and finally, in spider options today, if you were buying options today, you were about 12 times more likely to be buying puts than calls. so i think people are justifiably optimistic, but they'll buy puts and get protection. >> understood, hedging their risk. let's talk about the housing
stocks. they've led the way. you say considering the run-up some of them stocks have had and this started way back last year, some of them are being looking expensive now. >> they definitely are on a valuation basis. it doesn't do anybody good to short a stock on valuation. here is the thing about housing. you look at that chart. toll brothers is a stock that reported a couple weeks ago, and just can't get going. they missed on earnings and deliveries and revenues and gross margins. that chart there, just made a new five-year high. toll brothers is yet to do that. i think a lot of reason because of that bad number, but also it's a wait and see story here. to me, here's a sector that was like a coiled spring. they got so depressed and earnings got just nailed down from $5 in total to half a dollar or something like that. it's picking back up here because of demand. i get the reasons why it's picking up. rates are low and inventories are low now. people are rushing to get in.
i think the next leg of the housing boom or housing recovery is not going to be a boom. so i want to look down when everyone's looking up. >> you're being the real bear. it's tricky. this is how it works. this is a bear strategy where you buy one put and then sell near at the same strike to reduce your costs. the goal here, you basically want the stock to stay above the strike of the put that you sold by the first expiration but fall below the strike of the put by the second expiration. it requires a little timing. what's the trade? >> one important thing about this countertrade, it's at the money. it's not outright bearish. net long premium but the idea is i want to base here, sit here. i think it will play out over time. i want to use the short data premium that i'm short and stay long for an event in june. so the trade i bought today was 35.20. i bought the april, june 35 put
spread. i paid 105 for it. i sold one of the toll brothers april 35 puts at 135 and bought one of the toll june 35 puts for 230. that cost me 105. that's my maximum risk. i really want the stock to stick around 35. if that happens, the april puts that i'm short are going to start to decay. i'm going own those junes. why did i choose june? that will be their fiscal earnings, i want to own puts for that. if they duplicate what they did a couple weeks ago, i think the stock is going back to 30. >> yeah, mike? >> one of the things that dan's alluding to here is the valuation on some of these home builders. it might surprise people to know that almost all of these homes, kg homes, lennar, they're actually valued more richly now than before the credit crisis, a time when most of them had revenues two to three times higher than what they have now. i'll grant these companies are
probably better positioned, certainly made themselves more efficient, but still, i don't understand how people could be thinking at all about chasing these stocks here. any kind of a bearish bet, that it will trade sideways makes sense. i might lean a little more bearish myself. >> one more quick point. that was great what mike just said. toll brothers in 2006, when the stock was 36, where it is right now, earned $4.50. this year they're expected to earn maybe .85. so it's trading higher versus the eight times in 2006. valuations are crazy. you're going to need to see a massive recovery for the stocks to make sense. >> it feels like a number of the stocks are priced for protection at these levels. what do you think, scott? >> we like buying calendar spreads on the show and i would really like this if i owned the stock. i had a nice run. want to protect some earnings. dan is exactly right, talking
about the catalyst that would worry me, next earnings announcement. so i would do this if i owned the stock. >> you might be wondering if dan is so bearish on toll, why not just short the stock? why mess around with all this? the answer is found by playing a little stocks versus options. want to short toll, that carries unlimited risk. that could mean a lot of pain for your portfolio. dan's trade offers a bit to the downside and defines his risk to just $105. sounds better than the alternative. in the meantime, let's move to one overlooked story, shares of pandora, rising 20% on some blow-out earnings. and linkedin made another new all-time high. so if all these new internet stocks are doing just so well, why is facebook, the so-called mother of all social media stocks, so unliked by investors, falling 2% today. let's go the charts and get some answers now with the always very likeable and hopefully very knowledgeable carter.
tell us all about facebook and its chart. >> sure. just as you suggested, this is the big one and the one that's lagging. let's put it in the context of the big moves. all the other stocks have been on fire over the past few months. at this point, we would make the bet that facebook catches the bid. let's look at some charts and we'll try to figure it out together. facebook is what i would characterize as a well defined head and shoulders bottom. the pattern is not very old. only been in business for the better part of a year if you will. what you see going on here, a well defined left shoulder, a well defined head and a well defined right shoulder. the key here, the right shoulder is higher than the left shoulder. that's what the beginning of a major bottom out is. it's approaching the neckline. we think that's the objective for this trade, that the stock will reach 30, 32, close around 28, plus or minus today.
so you have a 20% pop from here. we would get involved, play for a catch-up move in facebook. >> that's what the charts are telling us. thanks very much for that, carter. let me get to you dan, with regards to facebook. it feels like this stock just can't catch a break. kind of like from the debacle of the ipo from the get-go, kind a shadow over it. >> no doubt about it. 1.7 billion shares outstanding, part of the problem here. takes a lot to move this stock. don't forget, people own a ton of it. retail owns a ton of it. they need it to get back higher. if you look at the price action yesterday, it rallied into the zuckerberg speech. up 4%, down 2% today. looks like investors are using every opportunity to sell into the strike. i think a lot of the underperformance has to do with it. investors know they can get more leverage in a link in or pandora. >> in terms of a turnaround, is there anything that you see that could allow this stock to lift?
>> there's a couple things. for one thing, this is one of these growing stocks that really is growing, about 30%. there also isn't any other social media stock that has the penetration that facebook does. it's a stand alone on that basis. also they are proving they can monetize both mobile and their website. that's important when people think about what this company could become. volumes are decent, what that suggests a lot of desperate sellers are probably get out and once they do, that could allow the stock to go a little bit higher. >> sounding like the course is bull. mike is using a strategy called a call spread risk reversal. we don't use this method too often. let's crack open the playbook to see how it works. this is a bullish strategy, sell a put and use that money to buy a spread. how do you make money? you want it to go to the short call strike. that's where you make the most money and where your profits are capped. since we're short a put, we must
be willing to buy the stock. with that said, mike, what's the trade? >> as you mentioned, cautiously optimistic here. what i'm looking at is the april 25, 29, 32 call spread risk reversal. sell the april 25 put, collecting 90 cents using those proceeds to purchase the april 29 calls. and selling the 32 call for 60 cents. by doing this, laying out no premium. if the stock declines i may be compelled to buy it at the lower strike, a discount of 10% from where it's currently trading. otherwise if the stock rallies, i participate at 29, up a buck from where we are now and i capture the upside up to $32. when you short more options than you're long, one of the things that happens, these thing will decay a little bit. so if the stock sits, chances are i can collect some money and take it off before expiration approaches.
>> dan, what you think? >> i like the trade structure. here's a tech stock where implied volatility is elevated. you're getting paid to sell that put. at the end of the day, you have a stock that's been range bound here. sooner or later something will break it out. they're expected to grow earnings and sales at 30%. if there is an interesting twist, investors don't seem to be buying what zuckerberg is selling right now. but if there's something, i think the stock works back towards its ipo price later in the year. >> well really keep people engaged. one last time on the stocks versus options button, want to buy facebook sfl convinced of the turnaround? one share will cost you just over 27 bucks a share. mike's trade costs no premium. worst case scenario, he could be forced to buy facebook for 25 bucks a share. that's just the magic of options. >> okay, at this point, do you have a question? post it on our facebook page.
at facebook.com/options action. that's a mouthful, isn't it? we're going to answer it in your web extra. and this week scott will help out "options action" fan david with a trade that can make money with blackberry goes up, down, or nowhere at all. blackberry is the new name for research in motion. you can find it on our website, it's got lots of great things on it. it's been revamped. in addition, you got trader blogs, educational materials, exclusive trades, go check it out. meantime, this is what's coming up next. winning the battle and losing the war. when mike debated dan, he was a winner. but his trade was anything but. can he turn it around? how can you make money? find out when "options action" returns. it's time to pump up the volume. the names that are sizzling this week. dude, you're getting a buy-out. that's what this computer
company is saying, but they're saying, not so fast. he's taken a big position and says buy-out price is simply too low. and that was music to options traders ears. they traded like crazy. who was it? the answer when "options action" returns. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪
where were options traders pumping up the volume this week? dell at one point, call volume was almost three times average daily volume. we just heard how dell calls are active. did traders see a better deal coming for dell? >> they do. when this deal was announced, lots of questions about whether or not 1365 would be rich enough to get it done. now that carl icon is involved, it seems like it's not. so we saw lots of cal volume particularly on wednesday, saw buyers on 14 strike calls across a variety of expiration. as far as the option market is decided, the question is the when. >> i want to stick with another troubled tech name. is it time to get called out on a losing trade on apple? a couple weeks back, mike said the pain in apple was over. but the stock continues to make 52-week lows. mike hasn't lost a great deal of money and this is why. >> on "options action," just
because we risk less, doesn't always mean we make more. sadly that's just what happens with mike's bullish bet on apple. he thought their shares were set to recover. >> i think we are getting local -- >> but, buying the stock, 100 shares would have set him back $45,000. so to avoid shelling out that kind of cash, mike sold the april 450 strike put and collected $19. to keep all the money, mike needs apple to stay above that put strike price to april expiration. of course there's a trade-off. and in exchange for selling that put he's obligated to buy at the put strike price even if it falls well below that level. so how can we protect ourselves in case apple takes a nose dive? >> on the downside -- >> bingo! so define his risk, bought a lower strike put. specifically, the april 4 strike
put for 14.oo and created his bull put spread. he put the odds in his favor and here's how. between the $19 he collected by selling one put and the $14.50 he spent on the other put, mike took in a total credit of 4.50. that's the most he can make on the trade. but now mike can do what no apple genius can do. make money whether apple goes up, down, or nowhere at all. how's that? even if apple does trade below that 4.50 strike put, he wouldn't see losses until it falls below that 4.50. below that level, mike will see losses, but by buying that put, he protected himself below the level. good thing he did. since the time of the trade, apple shares have lost another
4%. mike's defeated, self-loathing and living in shame. but it might be time to save the trade. option action fans only want to know one thing, what will mike do now? but before we answer that question, perhaps this might make you feel just a little better. had you bought apple at the time of the trade, you'd be looking at a loss of about $1,700. mike's put spread gave him $450 credit. it could be closed today for a $150 loss. so, mike, apple, we know it's a volatile stock, do you think a rebound is in store and are you sticking with the trade? >> well, you know, this is what happens sometimes when you try to catch the falling knife. you get stabbed. i think that's what happened to us here. i feel like the valuation at apple will be compelling to bring buyers into the stock. but we have a problem with the
options trade right now. when we're short that out of the money put spread time was working in our favor. now that it's an in the money put spread, something has changed and time is working against us. as time progresses that could go to the value of the distance between the strike. so the right move is to take the trade off, take the $150 loss and move on. >> let's bring it back to the desk. guys, where do you see apple going? dan? >> well, to me, next week is going to be very interesting. samsung is in new york, doing their first launch of a phone here in new york. it's going to be the galaxy 4-s. that could weigh on sentiment. another thing is, here's a catalyst for apple, they had that shareholder meeting a few weeks ago. maybe they announced what they're going to do with cash distribution. >> final call from the options pits up next. [ indistinct shouting ] ♪
and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade. time for the final call. last word from the options pit. mike? >> sell home builders. >> scott? >> close mike's apple trade. >> what about you, dan? >> toll calendar. >> you guys are fast. our time has expired. for more "options action," go to our website.
have a fantastic weekend, folks. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪