tv Options Action CNBC October 31, 2015 6:00am-6:31am EDT
this this is options action. these guys are getting ready for the show. here's what's coming up. >> what are you going to do? charge me with smoking? >> we might because even though cigarette stocks are on fire one might be too hot and could set up a perfect options trade. we'll explain. plus looking to cash in on christmas. >> that's right. that's right. >> well we've got the one retailer that options traders see surging and we'll tell you how to profit. how would you like to protect share of facebook for free. >> i like it a lot. >> well, it's quite easy. we'll show you how to do it. the action starts right now.
>> let's get to it. retail had a rough year but option traders placed a big bet. a couple of them. on a number of names today. is this the area you want to be in right now? let's get in the money and find out. a lot of traders getting in on this holiday spirit early. >> we talked about it the last couple of months. there's been a rotation into beaten down stuff. we've seen rotation out of a lot of tech and bio tech and that sort of thing. we saw that into commodity names. maybe today is a start into a move of retailers. a theme throughout most of this year with oil low is that a lot of u.s. retailers would benefit. their consumers would benefit. they'd have more money to spend at retail stores and we haven't done it. they just want to make one last point. two stores get all of their sales from the u.s. kohl's and macys both up 3%. macy's was a buyer of 10,000 of the january calls tied to stock.
that was when it was $51. way out of the money there. somebody is looking out of the beaten down stock. >> why should we believe the consumer is going to be starting to spend gas savings or whatever money they have saved from energy at this point in time especially as we have gotten consumer spending numbers which were horrendous. personal income was flat? >> it's been remange basically flat although obviously lower gas prices does put more cash in the pockets of consumers and if they are going to spend, when would they be doing it? a lot of these stocks are cheap and a lot got punished from august until the present when most of the rest of the market recovered. if you take a look at the consumer discretionary sector on the whole that regained all of the losses. but the retail sector, the names within that, those stocks are all down more than 20%. so if there's any room to the upside this is the best place for it. >> that's the point. the sector is making new highs and yet retail within that is dragging to the point where you
can probably play for reversion. that's probably what's on your mind, yes? >> yes but the macy's trade got me thinking today. this was the one i saw in the market. a large, sizable out of money call purchase and there's potential catalyst. we know that activist investors are involved and these guy versus the potential to spin out real estate. the holdings could be worth more than their existing market cap. when you see those catalysts out there and implied volatility. the auction prices move the way they have, something is going on there. >> low commodity prices don't only help the consumers. it also helps these stores. if you're talking about kohl's and macy's and in order storm, low commodity prices could include their margins. >> you're also going after the single worst one. the stock is down 36% so the hope is from the highs that that performance will get you some sort of balance. >> and listen again this is
stock specific in macy's because there are catalysts and they said that this year was going to be an investment year. maybe 2016 is the year this stuff starts to pay out. i want to look to january expiration. when the stock is $51 you can buy the 52.5, 62.5 call spread buying one of the calls for $3.50. selling one of the january calls at $1. i break even between 55 and 62.5. i can make up to $7.50. i like the potential to play out over the next couple of months. >> for one thing it doesn't need to recover back to the highs we saw earlier in the year. it only needs to get halfway back to those levels. the other thing is you're looking to sell the options that you mentioned. institution went out and bought 10,000 of those today. it propelled the price of the options higher and even though options premiums are higher in
general looking at this spread in particular if they revert back to where they were, this trade is going to lose a single cent because you're selling the overpriced option. >> of all the retailers this and a few others but xrt is under performing and this is possibly the worst stock in that group which gives you a so bad it's good kind of set up. moved up 9% off the low already and you're going to make some money. >> what do you think is going to be the main catalyst through january expiration? it's going to be the next earnings report, right? >> they'll report in a couple of weeks. when you have sentiment this poor and the stock is so bad and the chart looks so bad and no one expecting much it won't take much to say you know what let's give these guys a shot. >> they have good commentary. >> if they don't the stock is going back down. that's why i defined my risk. i have participation and it's not going to take a lot and i could actually make a little
money. >> let's move on here to a smoking hot area of the market. reynolds america all widely beating the s&p 500 this year and this week these stocks all hit 52 week highs on the back of earnings but could they be a little too hot here. carter you have been a fan of one of these stocks you talked about which is domestic smoking. >> that's right. we are going to try to take the other side here on reynolds. let's look at the charts and see what we can find. this has an excessive strength. these are fairly low beta names and let's just look at the numbers. i started with fundamentals. sometimes that helps. i wanted to point out, priced to earnings, who's the most expensive? renls compared to phillip morris. the sector with which phillip and the s&p. okay. here we go. price to cash flow, who is the most expensive? reynolds compared to phillip morris, consumer staples, s&p.
price to sales, who's the most expensive? reynolds. let's keep going. how about yield. these are yield stocks. they must be defensive who has the most yield, reynolds. so here is a comparative chart. this shows how excessive this is. you have a stock up 52%. doubling the performance of one of its peers and then of course the sector in which can it's in. so a bit of excessive out performance. back a little longer. same picture. how much of a good thing before it's over? and then back to '99, 2000. you're talking about a performance that's double that of altria whichhich in-turn is triple that of the sector. that's enough. let's try to make it here. we bounced off this trend line
consistently, consistently, consistently and my thinking here is fade this. we trade around 48 and change. you can get a 10% drop. if you've got it, trim it, sell it. if you want to short sell, try this one. >> it's a convincing case but could there be a fundamental reason why reynolds would trade to such a huge premium to the others or no? do you think that's wrong? >> the only reason is they have gotten a little bit of a revenue boost recently. this is not a long-term secular trend. it's not a friend of tobacco companies. they were seeing declining revenues and most of the street slooking for this to level off and decline. this is not a growth sector. why is it trading at a premium to the rest of the s&p. i agree with this. when i'm take a look at this thing and a 10% decline, a good way to play something getting stretched at this point is to use options. i was looking specifically at the december 47.5, 45 put
spread. you can spare about 70 cents for that. this is going to pay a 40 cent dividend before expiration. this is a $40 stock. that 47.5 strike is pretty close to at the money and you're not risk a whole lot of the stock price. >> do you think cigarette stocks in general are overpriced at this point? >> kids, don't smoke. listen, two things. the chart is interesting. on three occasions this year alone the stock has had about 8.5% pull backs to the trend. they're targeting that support level and that trend. it's a smart trade when you think about it because a lot of the stocks that have gotten extended often pull back for no real particular reason. >> people talk about a crowded trade. this is a crowded trade. if you're long reduce exposure and short seller take a shot at it. >> are they all crowded, though? >> consumer staples are starting
to out perform the market but this is one of the most of all consumer stocks. >> part of the reason is there's been a chase back into the yield trade. some of the big bets we saw this week were people making bearish bets on the euro. bearish bets on the euro or bullish bets on the dollar could be bets where we're going to see a rate increase which is bad for the stocks. if you're going in for yield -- >> it's only 1.7%. it's below the s&p. yeah. >> got a question out there. send us a tweet t to @optionsaction. there's only one place to go. great articles, terrific educational videos and exclusive trades. so check it out. in the meantime, here's what's coming up next. >> you know what's cool. >> protecting your book shares for free. we'll show you how to do that with a simple trade. plus one of our traders made a bullish bet on twitter and even though the stock is down, he
hasn't lost any money. it's options and we'll show you how he did it when options action returns. t the td ameritrade trader offices. ahh... steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim? for all the confidence you need. td ameritrade. you got this.
here at td ameritrade, they work wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this. welcome welcome back to options action. we're toward the tail end of earnings season and tons of different types of earnings. media specifically. take a look at the copies out there this week. discovery communications, 21st
century fox, time warner disney all set to report but it's one new media company that's going to get all kinds of attention and that's going to be facebook that happens on wednesday. the reason why, facebook has been public all that long but this particular earnings report could factor in some volatility. now the options market is currently pricing in what could be a 6% move in facebook stock higher or lower on the heels of this particular earnings report. now it's important here because if facebook does somehow manage to get that kind of a market cap boost it might join rare territory for the likes of the $300 billion club. apple, alphabet, microsoft, facebook could be up there as well. watch facebook for sure. it is going to be a very important report and possibly a very volatile one. back to you guys. >> thank you. dan, taking a look at a strategy
that can protect shares of facebook for almost no cost. this may be crucial because today we saw a strange move in facebook. it was down 3% on the session. >> for no reason. he was talking about the other mega cap tech stocks that had nice moves since earnings. facebook has moved up in sympathy with microsoft, google, and amazon. so when you think about what's going on here, we have this earnings event next week. the stock moved on average about 3.25. but there's a 6% implied move. this is the one year chart of facebook that spent a lot of time consolidating here and broke out and it's been here. it was just at $85 about a month ago. we had this move and massive break out here. it was up in sympathy with these guys. it was important to remember spending was higher. the stock sold off initially here. have no idea what is going to happen here. the likelihood of a break out is low. which is one reason you may want to consider protecting gains in a stock like this that is up 30%
on the year. here's the other thing. when you think about it we have a month or two months left in the year you may not want to sell that stock and pay some taxes. that's why we'll look at the options market. we'll look at a structure we call a collar. these are the reasons you would do it. it's selling an upside call and using the proceeds to buy a downside put but there's three reasons i would consider it against the stock that's been a winner. this is creating a structure that would protect gains and allow you to participate with the upside. so the three things, you want upside participation and you want downside protection. you don't want to pay a lot for it or pay taxes. so the trade i was looking at today when facebook was 102.5. you can look at november, regular expiration and sell at $1.30. you could use that premium you're taking in from selling that call against 100 shares and buy the november 95 put for
$1.30. that cost you nothing. the stock has the potential of gains between 102.5 and then you have the potential for losses between 102.5 and the put strike that you are on but you are protected below the $95 put vievie strike. i want to participate on the upside. i know that i have some potential down side risk but i want disaster protection and that's a collar. >> it's interesting that the options market is affording you the opportunity to put this trade on for close to even. if you think about the odds that the stock could go back down to 87 versus getting up to say $120 which is where it would have to be, the fact that you put this on for even seems attractive to me. this is a situation, you still get to participate on 6 to 7% to the upside but if we see a move back, and bear in mind the stock is trading above average multiples, so any kind of a
disappointment and that danger is to the downside. that's why using options is a situation like this. you goat stay in your stock and have some of that upside but if we go back to those previous levels. >> it's the only way to do it. i moved 3% today. this thing is whipping around and breaking out from the 100 level. now it's falling back. bad action today. bad close. it's a jump ball. >> to that point the stock does move a lot. do you think there could be a risk that you get the stock called away? >> that's a great question. if you're long the stock and short the 110 call strike and you still don't want to be called away, you can cover that call. if the stock is above the call strike you'll be taking a loss but you still have the gains of the stock. what you have to think about is there's a risk-reward in every trade and every overlay trade. if it's well above your short strike you have to make a decision whether or not to take the loss on the short call. >> that would be an extraordinary level.
bulls make money, bears make money, pigs get slaughtered. i think a collar makes a lot of sense. >> up next, a miserable week for twitter shares but dan's bullish trade on the stock is doing fine. find out why when options action returns. what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim? for all the confidence you need. td ameritrade. you got this.
here at td ameritrade, they work wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this.
>> time for total recall. we pump up our trades. a few weeks ago dan made a bullish trade on twitter. the stock has fallen 8% but he hasn't lost much money. here's why. >> it's how we express ourselves in less than 140 characters. risk less to make more and that's what dan tried to do with his bet on twitter. he was long at $31 and looking for a way to get money back but buying more stock -- >> what are you crazy? >> no, he ain't. so to try to make back some of his cash he turned to the options market and bought the november 35 strike call for $1.10. now he needs twitter shares to rise above that by more than the cost of the trade or above 36.10 i was november expiration but spending $1.10. >> that's a lot of money. >> it sure is.
so to cut his costs he sold not one but two of the november 38 calls for a total and created by one by two call spread but he did something even better. he made profits come quicker and here's how. between the $1.10 on buying the lower strike call and the $1.10 on collecting the two higher strike calls dan was able to put his trade on for nothing. >> nothing? >> yeah, nothing. and instead of needing twitter shares to rise above $36.10 he can see profits if shares rise a penny above $35 by november expiration. of course nothing is for free and by selling those calls he not only capped his profits of the strike of the calls that he sold but he could also have the stock called away from him if shares rise to a $38 level and since the time of the trade twitter shares are down 5% leaving dan in a pickle. now options actions biggest fan. >> i'm not focused on it.
>> well, one of our biggest fans wants to know one thing. what will dan do now? >> so this is an interesting structure. it's almost like a leveraged overright. so the stock were to get going how would you manage it? >> we have a couple of years here and the results were disappointing but there's things going on here. one of the reasons where i did this and took my long stock position and thought if there was better than expected news the stock could pop back to the mid 30s and i have a trade that could actually just by trading options against my long stock position will give me the leverage. it hasn't happened. they're generally worthless. you have to let them expire. i'm not expecting a move above 35. >> you do need to consider strategies like this a stock like twitter. stocks that have not been out there that long, the price of options tends to dwindle overnight post ipo. this hasn't happened though because there's been questions
about their performance and who was going to lead the company. we're getting back where i think the stock once again becomes interesting. even doing these as we said one by two on the put spread side as well. >> it happens to be a dud. it's a bad chart. >> it will continue to be a dud? >> it looks that way. coming up next we got your tweets and the final call from the options pitts. i'm here at the td ameritrade trader offices. ahh... steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim?
this is not going to make new lows. if you're in it and hold long, hold longer. i'm thinking higher. >> if you're going to do that probably go out and buy january calls because the volatility price option is not that high. if the dollar strengthens that's bad for gold. >> next is a question, could one generate income on writing alcoa options? >> yeah. if you want to write it to zero. this thing is a disaster but i like the idea of a name you want to hold on to that has dave dend yie dividend yield. add a little yield to that holding. >> time for the final call. the last word from the options pitts. >> tobacco in general and ren reynolds in particular have great runs. take a shot. >> with the december spread in reynolds.
>> facebook i like collars for long stockholders in next weeks results. >> thank you for watching. check out our website options actions.cnbc.com. we'll see you here next friday. meantime, "mad money" is up next. >> announcer: the following is a paid program for the new t-fal optigrill plus, brought to you by groupe seb usa -- innovative ideas you can't live without. how do you like your steaks -- rare, medium, or well-done, but juicy? whether you love tender, juicy grilled chicken or mouthwatering grilled salmon, there's nothing quite like the taste of perfectly grilled food. but grilling it right is never easy, undercooking your meat can be dangerous, and overcooking makes it dry and rubbery. you never get it just the way you like it -- until now. introducing the new, improved t-fal optigrill plus, still the first and only patented indoor