tv Options Action CNBC January 26, 2014 6:00am-6:31am EST
bye-bye! the dow had its worst week in two years. the s&p 500 over 2% to the down side. closed below 1800. the nasdaq sharply lower. tonight the question is simple, what do you do if you own stocks and how severe could this pull back be? let's get in the money now. dan, how are you doing? >> you don't panic here. at the end of the day, we're down 3%. we made an all-time high last week.
the data in the u.s. had been okay. the fed had basically signaled as recently as last month and we got the hilsenrath thing that they may continue to taper more. where's it coming from? we've seen a ton of put buying over the last month or so in een puts. it was very cheap a month ago. not so cheap now. this is where a lot of the head winds are coming from. you just mentioned the vx. there are people who are looking for protection. i think they're doing it so they don't have to panic on individual names, especially in the u.s. where the data is better. >> this is the biggest drop in the vx. what does that tell us? >> i think that's a great point. if you look at the vx at 18 historically cheap. what's that mean? you have to buy protection. how expensive is protection on your portfolio.
i think there was some not bad news, not good news. reasonable news today in the fact that people were selling the highest flyers is good. when people are selling their winners, then that's good. they're taking profits. >> that's going to be faster money. take a look at some of it. faster, smart money. people who are playing on the economic expansion theme. a lot of the stocks that people have been talking about for probably several months, the autos, ford, general motors were among those hard hit. airline stocks are living in a new paradigm of function of both the economy and cheap multiples. names like delta airlines are hard hit. facebook, there's another stock that got exceptionally hard hit. you wouldn't be surprised that people who are faster money typically are the ones that are going bail out fast. >> you make a great point. it's not just the fast money, the high flyers.
we've seen it in consumer names. costco, made new all-time highs just late last year. we saw it in stocks like nike, too. people have been coming out of these stocks for weeks. costco is a domestic story. nike not so much. it's been going on for weeks now. the crowded trades, gm and ford, big winners last year, they've also fallen off a cliff. >> nike like general motors and ford, also a place where valuation is getting ahead of itself. i think it's true for the s&p as well. trading at eight times earnings, you get a little bit more concerned. and the pe of nike, your mid 20s, close to 30. that's pretty heavy for companies that are not growing. >> as we've been saying, the s&p is no longer cheap. probably not expensive. it's fully valued. >> i want to hone in on the idea that perhaps in a session like today people are reaching for safety. in order to do so they're liquidating some of their winners. we have seen some gains. large cap stock is where we're going.
easily liquidated, right? is that what you've been noticing, mike, in terms of this rotation? >> i definitely see that. if you're going to hit the sell button, you have to hit where there's a bid. the thinner places aren't the places you're going to go. also, it's because these are the names that have been most active generally. as we rode the stock market up, these were the ones seeing the flurry of activity as well. we shouldn't so surprised when it starts to turn south. i think dan probably more than anybody on the desk had been highlighting the emerging market threat. i don't know how many times in the last couple of weeks i've heard you mention the eem as a potential hedging mechanism if you're long u.s. equities. >> dan, you've been looking at google. you've been questioning the valuation for a while now. >> listen, this is a company that's firing on all cylinders. they have a near monopoly in their core business. the stock has appreciated almost 30% since they reported their
q3. that quarter was fantastic. there were some issues there. the gross margins are coming down. costs per click. the core business in search was down 4% year over year. these are things to keep an eye on. when you go to stock that made all-time highs, this company gained the market cap since october of yahoo and ebay together. it seems like the world has anointed them the safe haven status for u.s. equities. for me, i don't want to be in names like that right here for the very reasons that we talked about. when people go to raise cash, they hit the register in a name like this. >> so what is your trade? >> to me, listen, i think if you're long in this thing, a fabulous company. this company on average over the last four quarters has moved 6%. expect some volatility here. i'm not doing this trade. next week before the thursday report i'm looking to basically make a defined risk, bearish bet taking advantage of the high
level of the implied volatility. very high. when the stock today was 11:35, okay, i can buy the february 1100 900 put. i can make my max gain of $85 at 1,000 and i'm targeting those ranges. they're really important here. 1100 is basically the 50-day moving average. if it breaks that, it's going down straight probably 5%. then i want to kind of find the meat of this trade right at 1,000. that's the 200-day moving average. >> does anybody remember when google and apple were about the same price? where we were. look where we are now. this is absolutely unbelievable. when everybody is looking up it definitely is time to start thinking about looking down. what might be the catalyst? we have a combination of erkts and a combination of the market looking like there might be an adjustment cycle here.
i absolutely love this trade. i definitely think it's the way to trade it. >> given that google is so expensive outright, the options themselves are expensive outright. you have to do a spread here. even an options trade gets expensive. one thing, google does have many options, correspond to only ten shares of stock. you can use those as well. >> mike makes a great point here. this resembles apple so much in 2012. the sentiment was so high and so great. people couldn't see it. they're banging up against large numbers. they're seeing deceleration. at some point when investors don't get the growth that they expect, that's when they hit the pause button. >> large caps not the only thing that's getting whacked. an important segment of the market took it on the chin today. dominic is back at headquarters with more on this. >> melissa, like you said, not just the s&p and the dow, the russell 2,000 index of small cap companies fell 2.5% in today's trade. the big move means that the russell which hit a record back
on december 23rd is now 6.5% below that record level more than halfway to what's considered a correction. now among the worst of these small cap performers in the index were names like wireless broadband producers company tesco. snowmobile maker arctic cat fell by nearly 10% and intercept pharmaceuticals, a volatile name, fell by 9.5%. the drop in the russell has some traders concerned, especially those who look towards it as a possible leading indicator for the overall market. that's the reason why it's a big deal. back over to you. >> thanks for that. don chu. what can this tumble in small caps mean for the broader market? let's call to carter braxenworth of oppenheimer. >> sure. this is by virtue of the small cap nature of the stocks in the russell, the most speculative part of the market. heretofore they've been limited from the market. there are no risks of syria and korea. these very extended small cap names are going to succumb.
here's a comparative chart since the march '09 low of small cap versus the s&p. i'm going to toggle back and forth and then let's mark up the charts. there's the same time frame but in this instance small cap, s&p and then all emerging markets. there's just small cap and s&p. you have this spread which is just as wide as at any other time. basically this is starting to break. here we go. take a look at the comparative. this is emerging markets. small cap and u.s. equities don't have anything to do with emerging markets. they're going to influence these small cap names. here is the iwm itself. what you'll see is the orderly nature of these pullbacks. this is 12%. the next one a little shallower, down six. down six, down only five, down only five, then four, then four. and today if you add in today we are on this line.
already down five or six. this is where the break finally occurs. a major trend and in principle a major break in trend. long-term chart is also very instructive. you can name your patterns anything you want. if you can't to call it a cup and handle, it surely was that, wasn't it? if you want to call this a well-defined top, it surely was that. either way, this breakout is now mature. that's the steep uncorrected nature of this move. we believe it's over and we believe it's going to break trend. sell the russells. sell the iwm. >> carter had me at heretofore. he makes a pretty convincing case, mike. this is a barometer of risk and market. >> this is the more speculative place you'll see in the market. it's smaller companies. when we talk about the s&p, we often talk about valuations. that becomes harder when you look at the russell because of the speculative nature. the numbers get a little bit harder to comprehend. we're talking about an index that's probably trading close to 40 times earnings. this typically does trade at a premium to the broader market.
right now think about it on a price to sales basis. 1.2 times sales, this is about as high as it has gotten at any point over the course of the last decade or so. when we think about valuation, that is another way to think about whether or not things are stretched. i have to agree that it does look stretched. despite the pullback, despite the fact that scott high lighted the fact that options are a little bit more expensive than they were, i think the way to play this is to simply buy a longer dated put and look for opportunities to spread. >> what is the exact spread? >> specifically the one i'm looking at is the june 110s. when i was looking at these, they were $4.40. we'll take a look at the open on monday. what you're look to go do here is give yourself some time for this to play out. give yourself an opportunity to spread in much the same way as many of the bearish trends over the course of the last couple of weeks. >> much like i didn't put the google on today, i don't think you want to press opening or closes like today. we've had two down days now. the s&p is down 3%. iwm is down.
i think up want to let the market breathe. we may open down ten handles, 2% i don't know. that's certainly something you don't want to press. the market will bounce. every bounce got bought of any magnitude of 3 to 5%. i'm not saying it will be the same this year. >> these are growth names. right now people aren't looking for growth names, they're looking for protection. in iwm, two puts traded for every call. the call volume was 2 times average. that might be what you expect. as mike points out, the options are relatively -- they're still fairly priced so you should be buying. >> got a question out there, send us a tweet at cnbc options. @cnbcoptions. scott has a great tip on managing a trade. in addition to scott you'll find educational material and trader blogs. here's what's coming up next. who's buying all those ebay calls? >> i don't pay retail. >> maybe not, carl, but many people think it's you and we'll
explain why. why do traders wonder about apple's returns on monday? we'll tell you 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. ♪ ♪
[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. i listen to shareholders all the time but the most important thing i and our team needs to do is capitalize on the opportunities. innovating and executing. >> that was ebay ceo john donohoe talking about activist
investor carl icahn. curiously enough the announcement was preceded by progressive buying. rumor has it he does watch "options action." dan's at the plaza breaking this mystery down. dan. >> let's see if this is as much of a mystery here. this is interesting because the stock for 2013 underperformed its internet peers. it was stuck between 50 and $58 for all year. there was a thing that got nailed back in november and there was a really interesting purchase. this was at the lows of the year. somebody looked out to july and they bought 50,000 of the july 62 half 65 call spreads not for a heck of a lot of premium. it was interesting that that call spread makes money above the all-time highs in the stock. then we had the stock. just as you know, there were rumors back then that carl icahn was looking at the company. then as we got into november there was a couple jan 24 purchases in november and in december.
jan 24 this today's expiration, 50,000 call options also bought. and then again on jan 14th there was 32,000 of the 52 1/2 february calls bought right here all really targeting those last three buys in really good size targeting this earnings call, okay, that just went the other day. and in total 159,000 call options were bought. 17 1/2 million dollars in premium. that's sizeable. that's a big player. here's the chart that's interesting. as the stock languished between 50 and 55, options open interest would flat line like this. all of a sudden we see this huge spike of interest. it obviously has to do with the big call purchases. to me, let's think about this. was carl icahn looking to buy calls for the earnings for the q4 earnings call where he thought maybe his proxy statement would get involved or his name would be involved? i don't think he was there on the short dated stuff. could he have been involved on the july stuff that's way out of the money because he knows that for him to do what he's going to
do is going to take some time? yes, this could be him. >> mike, what do you think? >> i absolutely agree he's not the type that will buy short dated upside calls into a number. he's an activist investor. what they typically do is they look to participate and they need time obviously for their activities to propel the stock higher. that's not going to happen on an earnings call. it will take a little bit of time. he wouldn't necessarily do that. the longer dated stuff, it's possible although i would actually be surprised to see him sell an up side call against it. take a look at everything he's been involved in historically, including names like netflix. he doesn't give away the up side so readily. when he gets involved with things it's because he thinks there is a tremendous amount of up side. that's the conviction he has an an investor. that structure surprises me. >> carter? >> chronic underperformers over the last year, super cap name. 70 billion. it didn't play well. it's still not acting well.
we would stay away from it. >> all right. that's plain and simple. coming up next, $25 billion. that's how much traders are betting apple will gain or lose in market cap when reports earnings this monday so why so much? we'll explain when "options action" returns. [ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim from td ameritrade.
it's a unique situation for me. i think this company is one of the great no-brainers of all time. i don't know if i'm right, but i will say this, that this is more of a really a philosophical question for me. from a financial point of view, some people will scoff at me, i'm almost better off hoping they don't do it because i can buy more stock. that's my whole point. >> that, of course, is carl icahn saying apple is a no-brainer. the anatomical superlative is becoming a favorite joining in the ranks of netflix, ebay and herbalife. all of which have obtained
no-brainer status. will apple earnings make the tech giant a head scratcher. carter is back breaking down this riddle. carter. >> three charts. one of the rules is when you do approach a trend line you want to respond to it perfectly. it bounces to the penny. it bounces to the penny. and here again, just recently, it ricochetted nicely. this is the one-year chart. take a look at this same circumstance. here's our line on the five-year chart. what's important is a perfect double bottom. now keep this same chart and take a look at how this has happened. not only is it a double bottom, if you take the high, 705, take the low, 385, a 50% retracement is 545. that is exactly where we are now. retracements that typically get back that far on a perfect trend line typically go a little further. we think you have about 615 in this stock. we would stay long if you're long, get long if you're not. >> that's not bad. dan, what do you say? >> i would agree. the option has a 5% move on the earnings. i think the earnings are not that eventful. i think the quarter is fine. i think the guidance with china
mobile launching will be okay. i think carl icahn's involvement should buoy the stock. i don't see it going straight to 600 on this report alone. february 28th they have their shareholder meeting. this is what i want to set up for. today when the stock was 550 i bought the january 31st, next week, march 575 call calendar and i paid $8 for that. really what i want to do is i want the stock to move towards that strike next week. if it's below 575, okay, then i own the march. 575 call for $8 and then i have a whole heck of a lot of options. 575 call for $8 and then i have a whole heck of a lot of options. a whole heck of a lot of optionsoptions. >> it's interesting because in a lot of places and options are relatively cheap on apple especially from a historical perspective. now there's a little bit of debt. i think dan is right. the law of large numbers can keep a lid on it. there's a lot of big holders and potential liquidation that can happen there. you were talking about where you could ring the register and take money out of the atm. apple is one of those stocks. you have the activist stuff keeping it up from the bottom. it's easy to see it.
>> the new product might help apple but earnings are not going to really help apple. we like these trades. we like calendars because you get the math working for you. it's not going to get up to 575 because of earnings. it hasn't been up there in how long? quite a while. we like these trades because they get the math working. >> our thanks of course to carten braxenworth. coming up, there is a nuclear index making its way through wall street. we'll tell you about it when we come back. [ 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
[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. no, that is not the vx. that is the voldex. it is an alternative volatility index up for a couple of months. get this, it was created by our very own scott nation. scott, tell us about this. >> that's right. we cleared a very big regulatory hurdle this week. when they're talking about how expensive options are, they're generally talking about at the
option money as opposed to the vx which measures essentially every option that's ever been listed. we focus on at the money options and we do it with spy. the s&p etf most liquid traded options in the world and so we think it's a better way to measure how expensive s&p options are. >> is the intent to have an etf tied to this index? >> the regulatory hurdle we cleared was to have derivatives traded on it hopefully this quarter. >> tune in for that. time for the final call. last from the options pit. scott? >> this week's extra is when to take profits in your vertical spreads. >> dan? >> i don't think you want to press a market like this. look for an opportunity to put out your shorts. >> mike? >> we have a lot of short bets to look at the spreads. >> i'm melissa lee. thanks so much for watching. for more "options action", go to our website. check out our daily segment, inside "fast money."
meantime, have a great weekend. we'll see you back here next friday at 5:30 eastern. don't go anywhere. "mad money" with jim cramer is up next. >> female announcer: the following is a paid presentation for the new zumba incredible results system featuring the new zumba rizer brought to you by zumba fitness. >> zu-- zu-- zumba! [ cheers and applause ] [ cheering intensifies ] [ latin music plays ] >> male announcer: get ready, because the number-one branded fitness program in the world is better than ever. that's right. we've taken zumba to the next level.