tv Options Action CNBC July 26, 2013 5:30pm-6:01pm EDT
this is "options action." tonight, who you calling small? small cap stocks continue to make record highs, but there's a big warning sign every investor needs to watch. brian will reveal what it is. plus, miss the rally in facebook? >> doh, doh, doh! >> relax, because scott nations has a way to double your money in just two months. you will like what he has to say. and why are options traders expecting a bombshell from herbalife earnings? a special report. the action begins right now.
i'm melissa lee. these are the traders here on the desk and this is the stock that has defied gravity. bankrupted short sellers baffle even the best earnings. the all-time high at $300 in change. could 400 be just around the corner? let's find out. mike, it does seem like -- give the reaction, we saw tradedown initially and immediately reversed and then zoomed to an all-time high here. >> it's pretty extraordinary. i think wall street optimists are looking for probably somewhere in the 270 to 280-ish share range for this thing. that gets it trading somewhere between 110 and 130 earnings. that's obviously pretty heavy stuff. i've often said that i sort of thought that this was the walmart from 2000. remember, walmart used to trade close to 60 times earnings back then. the company has continued to grow, but the stock did not. what happened was it grew into its own multiple. i think people who are along the stock might be using the
rationale that that's actually their backstop. amazon will continue to grow. revenues will be higher. ten years from now, mark my words, they're going to be a multiple of what they are today. the question is are they ever going to get the margin and earnings? i think people are saying someday they'll get that, i'm willing to wait. that i think is the reason for the stock. i wouldn't buy here, but i think that's the rationale. >> they can turn the switch on and deliver -- i mean, they can deliver it if they wanted. >> he's focusing the business on growth. >> exactly. >> and as long as he does that, nobody else seems to be concerned about that. i think that's the thing. the company is $135 billion -- >> how big do they want to grow? they have this gigantic revenue and keep spending all the money they should be spending on fulfillment centers. i think it's a great service. it's a great service. >> answer me this, scott nations. how much do you buy on amazon today versus how much you bought on amazon five years ago? because that answers your question. >> well, we just redade bathroom and we bought everything on amazon, it all got delivered for free. the problem is the company still
doesn't make any money. so it's a great service. it's a horrible business. but that doesn't mean it's a good short. that's the problem. >> and they're growing much more. to mike's point about walmart comparison, that's true. but the other thing is amazon is becoming so much more than just selling goods. they're trying to develop themselves, trying to turn the corner in the electronic tablet world. you know, they find growth, they continue to, you know, develop themselves and turn themselves into whatever company that is needed by the consumer, and they go ahead and serve the consumer. that's why wall street loves them. >> the amazon web service is going into the cloud here. let's get a read on the charts here. this is a stock, carter, that seems to have no fundamental valuation. >> it doesn't. it's trading at 2,200 p.e. the chart is important here in the sense that if you were to look at the trend that it's been in since the '09 low, you've got almost a ten-bagger here at this point. having gone from 30s to almost 300. or 312, in fact, with today's
close. we would think the upside here is to the top, that implies about another 7% to 335. the momentum is real. the market sold off in may and june. amazon didn't budge. this is an important period of momentum, and it would be dangerous to be against it. >> dangerous to be against it. carter can't be much clearer than that, brian. >> yeah, and to the momentum point, it took off and led the market basically in may and june and was able to stabilize because of the viacomm deal. if you look at that chart, it's sort of trading towards the top end of the range, and i think when you look to the options market and if you want to play this stock, really that channel there is something to consider, because i think the upside from this point after this earnings is maybe somewhat limited, but something if you want to dip in and buy the stock. >> brian tonight is using a cei call calendar. you buy one call and sell in your call the same strike to cut costs. it requires a little timing
here. you want the stock to stay below the strike of the first call, but above the strike of the second call by the second expiration. so walk us through the trade. >> i think if you're going to buy the stock here, you have to have a ton of cash and it's risky. get some upside exposure and use options. what i'm going to do here is basically use the earnings that it's past and sell the august -- ending at the end of august month option, the 330 strike. i can go ahead and sell that for about three bucks. what i then do is use some of those proceeds to buy in october a regular option 330 call for 750. net on this trade, i paid $4.50, so what this does, it basically limits that cost outlay to buy that october call option, and if the stock trades above 330 after october, that's where i get all the upside. before then, so i kind of want the stock to trend sideways to lower to let that august call go out worthless and i own that october call to get all the upside. a couple things can go wrong. if the stock never makes it to
330, we lose that $4.50. if the stock explodes, you would miss out on the upside because you start getting short stock from that august call. but i think this is a trade that makes sense. >> you have the accelerated decay of the near dated option working for you. we have that going for the rest of the summer. i kind of like the timing of trades like that, because if the market sort of treads sideways from here, you're going to actually capitalize on that decay. and i wouldn't buy the stock. i mean, i just wouldn't. i tend to look at fundamentals. this one is hard to explain. but the options trade actually from a fundamental standpoint does make sense. >> if you're going to do something like this, you have to do it math advantage. so a call calendar is math advantage. the problem is you've already lost five or ten times what you could ever make. but i think it's going to come all unwound in a hurry, they're going to change the business, do the data services thing that you suggested, and then the stock
will be off to the races. >> let's imagine how it would be if it had a little stocks versus options. that will set you back over $30,000. brian's call calendar offers a big potential payout risk, just $450. let's move on here to what will be a big event for wall street and investors alike. that is herbalife earnings. it will report earnings after the bell on monday. and according to herb greenberg, investors will be looking at more than just profits. herb is back at cnbc headquarters with the latest. herb? >> herbalife reports monday after the close. but the real news will come on its earnings call tuesday morning. if you take a look at the chart, there is no question that investors are betting this will be a really good quarter. but here's what you need to watch and listen for. first and foremost, any indication of a slowdown in sales. herbalife recently lost the second of several big longtime distributors. it says the impact will be minimal, but still, this could
impact growth, especially if other big distributors leave. second, in the wake of recent controversies, herbalife is changing the way it does business. that's a good thing. but, will it impact revenue growth? and third, in recent days, stories have been circulating that bill akman is shorting herbalife stock. in the end, that may trump everything else. >> thank you very much, herb greenberg. so how big of a move is the market pricing at this point? >> it's pricing in a pretty big one. you take a look at the august options, this one didn't have weeklies. but it's one of these things, we're seeing august options are trading around 68 vol. these are big, big moves that it's expecting. so essentially the short-dated options are highly inflated. it's interesting, because the earnings aren't what's going to drive it. whether it goes this way or that, it's trading at less than the market multiple. the real issue is the
controversy, whether or not the company is a pyramid scheme. i think there's some good chance if it is. but i also don't think that's going to matter between now and august expiration or september expiration. i think they're going to continue probably to deliver similar results to the bottom line. the company is trading cheap. and icahn versus icahn, i've got to go with icahn. >> there's a 31% short interest. >> i'm looking at doing the same thing actually that brian was doing. i'm trying to take advantage of the fact that those options are very inflated. specifically, i'm looking at the august-november 65 call calendar. sell the august against it at two and a half. that's a net debit of $3.25. this is a situation where those 65 calls are obviously very inflated based on the earnings, based on the news in the stock and i think a lot of that's going to come out. you only have one day to do this
trade and that's monday before the earnings come out. >> the multiples are compelling. i think their sales -- they're still growing sales. fundamental-wise, i would be a buyer of the stock. the compression in the multiple is so strong because of all the controversy around this stock and that's why it's that case. so to mike's point, if they never do something about this, we talked about this in an agreement beforehand. are they going to -- is the government going to take down just because one hedge fund is short this thing? i don't know if that's going to be the case. and thus, this is a good buy stock. >> i think what's driving the stock right now is i have bill uekman and carl icahn after school. that is what's really leading the stock around. it's really adult swim, you have to be careful. you have to define your risk. buying this calendar does that, but i'm not certain the stock is going to do well. i think it's heavier than most people think it is. >> it is amazing, because if these two were not in the stock, we probably would not be talking about it tonight. have you ever traded the stock
prior? >> believe it or not, yes. several times, actually, in the past. one of the reasons that we did that was exactly the fundamentals we're talking about. the controversy that ackman has brought up has lingered, as it has with many multi-level marketing oh,s. that headwind has made it look very cheesm i thiap. that's the reason that we were buyers of the stock. it just looked cheap. we had to way the question about whether or not it really was a scheme and we got out with some profits. we're happy about that. >> earnings on herbalife out on monday. got a question out there? send us a tweet @cnbcoptions. tonight, scott has a trade that can double your money in facebook. you'll also get great trader blocks as well, so you want to check it out. here's what's coming up next. talk about the golden touch. >> this is gold. >> carter and brian have a way to make even more.
plus, now he's got a big warning sign for small cap stocks. brian will explain what it is when "options action" returns. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade.
[ 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. ♪ welcome back. there are good trades, great trades, and then there are blockbuster trades. a couple weeks back, that's exactly what brian and carter had with gold. in fact, it was so good it's been made into a movie. here's a preview of it. ♪
>> it was a town with just one rule. risk less to make more. and one brave man came to find one thing -- gold. >> the chart is excellent. >> but he knew it was a road he couldn't travel alone. he needed a partner. >> well, i think carter makes a lot of great points. >> two men on a path toward profits. but the quest for gold came at a price. 100 shares of g.o.d. costs almost $12,000. but brian had another plan. >> what i do is a purchased the july 113 call. >> so to spend less, brian and carter bought the g.o.d. 113 strike call for $5.90. now, to make money, these two
need the g.o.d. to rise above $113 by more than the 5.90 they spent on the trade, or by $118.90 before the expiration. >> i can sell a july 121 call. >> so they created their call spread. they did something else. they made mining profits easier, and here's how. between the 5.90 they spent on the lowest strike call and the 1.40 they collected by selling the higher strike call, brian and carter took the total cost of their trade down to just $4.50. that means, instead of needing the g.o.d. to soar above the $118.90, they just needed to see a rise above the 113 strike
price by more than the 4.50 they spent on the trade. above $117.50 by july expiration. >> i can't explain it any better than that. >> well, john, actually, you can. because in exchange for reducing their costs, these two actually capped their gains to the difference between the strike of the call they bought and the strike of the call they sold. and since the time of the trade, the g.o.d. has climbed 10%, meaning these two prospectors have struck it rich. what "time" has called the most momentous options event of the summer. brian, carter, and john wayne, if he were alive, star in "more gold more money." rated pg-13 for general audiences. >> pg-13. all right, before you start buying tickets on fandango, let's just see how much money
was made here. you would have made 10%. brian's trade expired last week and captures the full value of the spread and that was a run of almost 80%. not bad. this is a big week for gold with the jobs report, so should you hold gold going into next week? let's call to the charts with the man who made the golden call in the first place. carter braxton worth. what do you see for gold? >> we like it long here, but let's look at the charts. this is the last year or so. we know that gold has plunged from 1,800 down to a low of 1,180. what's key here is it really got ugly and dropped 15% in about three days. now we've had that ricochet. you will in principle spend a little bit of time stuck here, contending with these people who are now happy to get their money back. they didn't dump here, but now they've got their capital back there wanting to get out. so after some time, though, you've removed this supply, you
can then advance further. we think ultimately, second chart, where we're going is back to the channel that it was in before the really ugly stuff started. so we think 1395, 1400, maybe a little bit more. at that point, off the 1180 low, it's time to basically call it even, out, just get flat. >> okay. so with that said, brian, what would you do? >> we'd run a macroeconomic theoretical model for our clients. basically saying the reduce some of the position. about 56% allocation to gold that you would normally have to it. i still think there's room to move higher. short at the money. call is against it. i think you have to take a little bit off the table, and a great call was by carter and carter and i, we're in love now. >> that was a good call. and it was interesting, because of that call, i've actually had a short bet and we covered it because of that. i think we put that out on twitter. it's hard to sometimes understand gold, because the fundamentals aren't there. you don't generate cash with
this kind of a trade. personally, i'm not a big fan of owning it, but, you know, i think what carter is saying makes a lot of sense. the big gains this year having in small caps, but there is a big red warning sign on the horizon that you'll only hear from this desk, right after this break. ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. 0 from td ameritrade. we do? i took the trash out. i know. and thank you so much for that. i think we should get a medicare supplement insurance plan. right now? [ male announcer ] whether you're new to medicare or not, you may know it only covers about 80% of your part b medical expenses. it's up to you to pay the difference. so think about an aarp medicare supplement insurance plan,
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♪ all on thinkorswim from td ameritrade. ♪ it has been the hottest trade of the year. we're talking about small cap smocks. one of our traders has spotted a little watch warning sign that could carry some pretty big implications. brian, what are you watching? >> when you look at the russell, it's having tremendous move the last couple years. up 24% this year, year to date already. but what happened here basically is we like to use fear as an indicator. we saw basically the red sea part, just like for moses here. as volatility started contracting and fear subsiding down here, the russell began a huge bull market. we just saw that thing separate, fear going down, russell making new successive highs, and the russell vix making new successive lows. that's what you want to see in a trending market. but when you look at the tail end of this, there's some concerns to be had here.
so let's take a look at what's happened the last three or four months in the russell right now. what you're seeing basically is those things move together. that red sea is starting to close. the russell vix is starting to move up, as the russell is making new highs. we'd like to see fears subside. look right here, march 15th when the russell vix made a low here, it's now at a higher level than it was in march, yet the russell itself is significantly higher, which means basically, hedges are out there buying quick protection, protecting themselves in case this market rolls over. >> so you have a trade on the iwm, which tracks the russell 2,000. what is it? >> simply put, i'm looking to buy september quarterly put, the 97 strike for 1.15 that gives me exposure to the downside. i get some protection to the downside. this is a great way to either hedge a portfolio or take a
flat-out short bet on a market that's trading higher. >> we can't let stutland do all this charting here. carter is still in the house, so you brought along your own chart. >> sure. and this is excellent work. the truth be told is the russell has achieved a level now which is in principle suspect. if you were to look at the long inception, we have now attained the internal trim line, which is to say you connect the highs of 2000 with the highs of 2007, we are now just approaching that level. it is also, of course, annualizing something over 45%. the recent angle of the last month is 130%. this thing is just a ramp job and we would fade it. >> i agree with that. look, the best time to buy insurance is when the market is up and the price of insurance is down. you have both. i think that's absolutely the trade to make here. >> all right. coming up next, the final call from the options pit. stay tuned. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ]
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a salon in tokyo has rolled out a new treatment that is getting second looks. beauticians put snails on the customer's face in a believe that the slime removes patches and moisturizes the skin at the same time. the beautician in charge of the snail treatment said it feels almost like a massage and the procedure is so relaxing, many customers fall asleep. don't fall asleep with your mouth open, the salon uses 5-year-old snails native to japan and can only service one customer a day. the price of this five-minute snail treatment, $105, and that is tonight's edition of optional viewing. time for the final call. scott? >> ick. >> if you missed the spike on facebook but you still have to get long, web extras about how to do that sensibly. >> brian. >> fear is rising in small caps right now. got to be careful. at least take some profits. rotate. do something with your money in small caps. >> mike.
>> i also like calendars into herbalife earnings. personally, i'd stick with escarg escargot. >> eat them. not on your face. i am with coe here. thanks so much for watching. check out our website, see you back here my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere and i promise to help you find it. "mad money" starts now. hey, i'm cramer! welcome to "mad money." welcome to cramerica. i'm trying to save you a little money and my job is not to us entertain you, but to educate and teach you. so call me at 1-800-743-cnbc. tonight, i'm letting you in on something big! the method to my madness. i know this show is the