tv Options Action CNBC January 17, 2016 6:00am-6:31am EST
don't settle for u-verse. x1 from xfinity will change the way you experience tv. i have been all over the world for cnbc, but i have never been here, hosting "options action." the guys are getting ready for the show. while they are doing that here's what's coming up [ screaming ] >> that's sums up how traders feel, but if you're worried about more losses, relax. we'll tell you how to still protect your portfolio. plus -- >> off with their heads. >> that's what investors have done to shares of disney but the stock may have found a bottom and we'll tell you what the bulls are looking at. and -- including the price of walmart stock, which continues to tumble after the
retailer announced massive closings. and, it could have major implications for the economy. the action starts right now. >> let's get right to it. tough day if you're long. the s&p hitting the lowest level since 2014 on a chaotic expiration friday. the vix touched 31. is it too late to buy protection? we'll let you know. dan, let's start with you, what if viewers are long. what should they do? >> i think that today i thought the sell-off was fairly orderly. i didn't think it was panicky, it looks bad and maybe you own stuff that outperformed last year and from the last five years, we get counter trend rallies. in the last five years we had a handful of 10% sell-offs but knew they would come back. now the sent. has turned and you'll get an opportunity to take profits and stuff you've owned for a while,
probably in the next couple of weeks or so if you want to reduce exposure or reuse the opportunities put on expression, if you're looking at what's going on in the futures, there was more panic there and mike can speak to that. >> i'll let you go first. let's hear from the technician. >> i think the key is what you do after this kind of thing has happened, meaning, do you sit there and try to say, i'll play for a bounce today and try to catch it off the bottom again? that implies two things, basi basically you're not running real money and have perfect timing or dexterity. we're getting news and prices are going down and presumptively it's not going to fix itself and go up. >> keeping the index up was a handful of really strong stocks. for a long time that included names like disney, starbucks, apple, you name it. all of these supported everything else when there was weakness underneath. now we're seeing that there's concern about those stories. individual stories are turning
bad and that's bringing the rest of the market with it. some people can say can they hold up when the market is acting weak? i would say one of the reasons is those strong names are places where people now identified risk. >> i want to listen to what carter said back in september and last week on "fast money". >> we have generally declining prices with almost no sectors in uptrends. we're in a bear market. >> the presumption is minimum 1800 and lower from there. >> so how much worse could it get? >> it can get worse. let's look at charts and try to figure this out. you know, look, either you're prepared for it or you're not. it's not too late to take some measures. here's the real thing i think that is important. if you were to take the russell 3,000, 98% of the investable capital in the united states and not so much the index down 11%, 12%, look at the internals, you're talking about 76% of the stocks are down 60% or more. and it goes on from here, down
18%, basically this has been unfolding for the better part of 18 months. 25%. half of the stocks in the index, 1600, are down or more. it's not about just the index weakness now. this has been unfolding for the better part of two years. let's look at this another way, the column here is the number of stocks that have had made -- look at this, down over two years. you've made no results, no progress. s&p 500 or any index you want, look at these numbers. this didn't just happen in the last two weeks. this has been going on for months. it's now coming out at the index level. so let's try to figure out -- it goes on and on, almost repeating themselves. unchanged or worse over two years, not just in the last ten sessions. >> there's a chart, you can draw a lot of lines a lot of different ways. one of the things you can say,
that has a fairly head and shoulders top. you want to play for the bounce. that was six or seven sessions. this bounce doesn't matter. we have all of the elements of the top, whether you call it head and shoulders top or just say it's a break in trend and this is a well defined friend and it's a well-defined break. where might we be headed? 1800 is the minimum. this is the channel the market has been in the entire bull face since march of '09, just to get down to the bottom, perfectly normal would be high 1700s and 1800 plus/minus. what's more likely, that's only a 16% drawdown peak to trough. what's more likely is this, this is your entire bull market since ronald reagan took office. we touched this bottom line in the recession, 1987 crash, financial crisis low. even if we just stay in the top quadrant, still the top quadrant and to get down, we're only here, getting back into reality,
to come into the bottom still the top quadrant, you're talking a move back to these prior peaks which is a very reasonable thing, that would be about 1575. we remain sellers. >> that is pretty scary, dan. do you think stocks can go that low? >> i do. but i think you have to be tactical about using hedges and long premium hedges. we know what happened to prices that gotten bid up during the sell-off this year. you want to be careful about pressing a low like this. one of the things that to me, i try to look around and look for other ways to play it. if you think equities are going down or global economy is going into a recession, the only safe haven trade that ever existed during the last ten years has been u.s. treasuries for all intents and purposes. we have a chart of the last eight year, look what the 20-year bond etf did during the financial crisis and did during the 2011, 2012 sovereign debt crisis, making a series of higher highs and higher lows.
that is an uptrend and it is my belief the fed will not be raising rates again any time soon. i think you can use the tlt options in particular as a tactical hedge against a long portfolio of large cap u.s. stocks that you own. there's a big reason for this, if you did get one of those spikes, to me, i think you have the opportunity to stay in some of your stocks but have exposure to something people will flock to. the trade simply today, when the etf and tlt was 125. you look out to april exploration, there's a fed meeting after expiration, but the probability of a fed hike in april has gotten clobbered. you can sell put at 1.70 when it was at 1.25 and unise the proceeds. between 1.20 earn 1.30, you don't make or lose and you have a sort of asymmetric playoff if you have -- i want to make one
really quick point. the tlt will not crash lower in this environment. you do not have the risk as you would in a single stock or maybe -- >> that's why doing a risk reversal rather than simply buying an outright call which would be a natural inclination, you would think treasuries wore a safe haven but volatility is higher and raises options premium. the risk of seeing risk free rates in this environment is essentially zero, which is the reason selling the 1.20 put in particular, there's almost no chance we'll drop below that level between now and april meeting and it's going to expire right before that. this is definitely an intelligent way to try to take a hedged position and take advantage of the facts. >> what could be the catalyst for next week as we head into earns season. sima is back with what we can expect next week. >> melissa -- michelle, earnings will be a large part of the market discussion next week. we'll hear from morgan stanley, ibm and netflix on tuesday.
goldman's on wednesday, verizon and starbucks and american express on thursday and general electric will close out the week on friday. and the options market is expecting huge moves out of some of these stocks. let's start with financials, bank of america and goldman sachs, a 4 to 5% in either direction but the real volatility can come when two of the hottest stocks of 2015 report, we're talking about netflix, always a big mover on earnings, expected to see 13% move on tuesday afternoon. and then there's starbucks, pricing in an expected 4% move. how it plays out remains to be seen. back to you. >> yes, it does. thank you. the names of reported earnings so far have gotten off to a very rough start. intel down 7% since they reported on thursday. citigroup and jp morgan also falling despite earning. are earnings going to be able to save stockstocks?
does it even matter? >> i think it definitely matters. the earnings if they are going to reported don't matter. what matters is the forward guidance and the visibility companies have and matters most importantly how honest management are going to be about the factors. if they are trying to put lipstick on a pig, don't buy those dips, that's my personal opinion. >> dollar strength for the multinationals if you have combining that with the weaker economies abroad, it's hard to see how you can be optimistic, that was the guidance ha hurt intel and going to hurt other names. i take a look at this and see a lot of names that are still trading at very high valuation. one of the names mentioned was starbucks -- >> you're trading that, right? >> the name i'm looking at. it's implying a move of about 4%. right now it's trading 30 times the next 12 month estimated earnings, above the historical average, it has continued to deliver. what is the risk to the upside
though? what are we really expecting, they are going to come out and blow the doors off somehow. 13.3% of revenues came from china. we could get a really great number from them in that area but the upside risk has got to be -- >> very simply, i'm looking out to february, you can look at the 55-50 put spread. the stock is 57 so it may be lesson monday. you could spend a dollar for the $5 spread. you're going to get the opportunity to number one, play earnings, which is coming next week but number two, if we continue to see weakness, dan alluded to the fact we could see a little lift in the market but then proceed a little lower, going to have time to play this out. >> also manages earnings perfectly. last 12 quarters they matched or beat by a penny. there's not going to be a big surprise. the stock is a winner but there is where there's risk in the market, the high flyers that haven't had an adjustment to the multiple. it could get worse like disney got worse and nike and so forth.
>> this was a mania stock, up 50% last year and when they reported the last quarter in late october they talked about weak margins in china and the stock was down a few percent and they bought it. we're not in that market environment and that's why i give it to you, there's your trade, right? >> that's exactly right. we're going to capture that possibility, there's very little news that do cause a sharp news to the downside, maybe more likely. but this also captures market weakness if that takes it lower. >> if you have a question, send us a tweet at options action. if it's nice, we might read it later on in the show. the nasty ones will not be read. for everything "options action", only one place to go optionsaction.com, articles and trade and it's like you died and went to options heaven. in the meantime, here's what's coming up next -- >> the force is with you, young skywalker. >> you are not a jedi yet. >> disney may have the force, but concerns about espn are
weighing on the stock. but some traders think a bottom is in. we'll tell you what they are looking at. plus, walmart just did something that could signal a major slowdown in the economy. we'll tell you what that is and how it could impact your portfolio when "options action" returns. i'm here at the td ameritrade trader offices. 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 and 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. td ameritrade.
brighter. bigger. it's gotten thinner. even curvier. but what's next? for all binge watchers. movie geeks. sports freaks. x1 from xfinity will change the way you experience tv. herthey work hard.ade, wow, that was random. random? no. it's all about understanding patterns. like the mail guy at 3:12pm every day or jerry getting dumped every third tuesday. jerry: 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. td ameritrade.
welcome back to "options action", despite record breaking numbers at the box office, the force of disney's "star wars" hasn't been enough to boost the stock which got downgraded and trading near the august flash crash lows. julia? we're having trouble with julia's mike, we'll see if we can get that fixed. >> can i tell you what she was going to say? >> last weekend saw the "star wars" movie for the third time. >> you liked it that much? >> your kids pushed you to do it? >> that's what i was going to say. >> i haven't seen it. >> i have seen it one of my sons and wife have seen it twice already. >> it's that sort of thing. >> hasn't move the stock. >> it's an absolute blockbuster but the weakness you're seeing in disney is unrelated to one particular hit. what it is related to is espn.
>> one, two, three, four -- >> keep going until we're sure. basically the story, this is the most stable portion of their business and people thought this was just going to grow perpetually because basically sports was the one must see television and now -- >> even at the overall market we're not selling off disney would be down less or? >> this is a third of the business, marquis media company in cable is espn, other than cnbc. >> the drop with espn news, wasn't anything to do with star wars. >> what's the trade? >> this is one of those situations we're getting right down to a level at which the stock has bounced in the crash. the flash crash 18 months ago, this was sort of the level. we are getting down to a point where this is trading at a discount, one of the best names that's been around is trading at a discount to the broad market and we're seeing what looks like perhaps a short term washout to me and at the same time that that's happening, options
premiums are going through the roof. what i was looking at was simply selling the february 92.5 put, collect 3.25 when i was looking at it. you'll get long in the stock, below $90 if it is put to you. if it drifts lower or goes higher you'll make 3.5% in one month. to me that seems like an attractive -- >> if the s&p itself is down only 11% from the 52-week high, this is down twice that and cheaper price. you would rather put your money here than something yet to have the beating this already had. >> we could have made this argument that stocks like this overshot on the upside. stories were so well loved and they kept on going higher and higher. every piece of bad news was dismissed. until now it's a pile-on. to me, i think that a, it's definitely going to 90. tas the 52-week low and when you look at that, it's just broken that long term uptrend.
the next real massive support is 80 bucks or low 80s. the only thing -- about put -- >> it's a trend line. >> what i'm saying though -- sentiment you can let it ride. >> i'll agree for the moment and say here's what's going to happen. if i end up getting long in the stock at over 89 bucks, that means you're saying there's probably what, 11 or 12% risk to the downside from there? and then at the same time that's going on, we'll see continued -- >> when you have the optionalty to sell puts on a day when the market is blowing up to the downside and getting paid for that risk -- >> you're going to get paid because you can sell calls against the stock anyway, looking at 80 at the low. >> you would have a peak to trough drawdown of 28%. versus the s&p that's down 11. that is a decent price, goes a little bit lower to start to take action on disney. >> if you're going to start dipping your toe in water, this is a way to do it and get paid. >> i want to dip and wait until
i see an eight handle on it, how's that? >> we'll talk another big name, walmart shares tumbling after the company announced it will close 250 stores and that could spell more trouble for the broader economy. we'll explain why after the break. i'm here at the td ameritrade trader offices. 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 and 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. td ameritrade.
herthey work hard.ade, wow, that was random. random? no. it's all about understanding patterns. like the mail guy at 3:12pm every day or jerry getting dumped every third tuesday. jerry: 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. td ameritrade.
welcome back to "options action." time for the upside call when we look at winning trades. dan made a bearish bet on walmart. take a listen. >> i priced it up, the stock fell out of bed at the end of the day as the market did but when the stock was 64.60 you could look out to february expiration, the day they report earnings in the morning and you could have bought the 65 put in february for about $2.20. your break even is at $62.80. >> shares fell 2% today after it announced it's going to close 250 of its stores. good call, dan. >> not really. to be fair you could have thrown a dart at any stock last friday and you would have had a few percent gains. >> but i'm giving you a pat on the back. >> what i did today, i paid 2.20 for these february 65 puts worth
almost $4 today. i rolled it down and this is a really important concept, a lot of activity we saw today in the options market was rolling out of prior positions, taking money off the table and monday tiesing those hedges but staying in the game. i closed the 65 puts in february and bought the 60.57 put spread for a fraction of the earnings and now i can't lose and still have the bearish exposure. >> last week coe and carter said shares of caterpillar could tumble as well. what are you doing now? >> let it ride. >> i don't see any reason to think it's going to bounce back now. we're talking about multiples, it's cheap for a reason. the market is telling you that the trouble actually lies ahead, not behind for this company. and with that in mind, the put spread is up money but we stay with it. >> all right. >> anything you want to add there? >> stick with it. >> got it. coming up next, your tweets and the final call from the options pits.
i'm here at the td ameritrade trader offices. 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 and 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. td ameritrade.
herthey work hard.ade, wow, that was random. random? no. it's all about understanding patterns. like the mail guy at 3:12pm every day or jerry getting dumped every third tuesday. jerry: 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.
td ameritrade. let's take a tweet here on "options action." if you want to buy a strangle on the spy, how far out of the money would you choose? >> this is where i'm going to tell you right now, i don't want to buy a strangle on the spy. this is what you don't want to do after you see a spike in volatility and market had really sharp moves is the kind of knee jerk reaction, i've got to buy puts now or buy a strangle to capture the movement, you're going to pay up for that. the break evens will be much higher and you'll get punished. the best thing you can do is look to spreads or put spreads on the downside or call spreads to the upside. wait for a counter cycleal move. >> sell it so you can define your mix, probably the best trade on the board right now if things settle down a little bit.
be careful with directional long premium trades that benefit after volumes have moved like this. >> i would rather sell right now and that's -- expect a lot of this and more. >> it reverts to the mean, we're way above the mean right now. don't buy. >> a quick programming note, cnbc will be live on monday from 6:00 a.m. to noon eastern time for a markets in turmoil special coverage. the final word from the options pit. carter? >> how about tread with caution i'll take it. >> i'll sell the elevated premium. looking at the 92.5 puts. >> and i think you want to be tactical with hedges, don't want to do them too frequently. there's a lot of ways to win
wi with. >> guys had has been great to be with you on this crazy day. let's see what the markets bring next week. u.s. markets closed on monday but we'll cover what's going on overseas. options action, our time has expired. go to optionsaction.cnbc. >> announcer: the following is a paid presentation for derm exclusive instant anti-aging, brought to you by beachbody. >> hi, everybody. i'm deborah norville. and i've got breaking news from the world of skincare. this time, there's a celebrity twist. keep watching. you are not gonna want to miss this. [ cheers and applause ] >> announcer: if you don't like the face staring back at you in the mirror... >> my skin was sagging. really heavy bags under my eyes. >> announcer: ...if age, sun, stress, and life have robbed you of smooth, young-looking skin... >> i don't want to go and get injections, but i thought that was the only choice i had. >> announcer: ...now there's a doctor-approved way to look up to 10 years younger in just