tv Options Action CNBC May 29, 2016 6:00am-6:31am EDT
hi there, we're live from a hot and sultry nasdaq market site. so hot the guys need a moment to cool down. here's what's coming up on the show. ♪ from a bubbling crude, oil that is, black gold ♪ >> opec crude may be tunnelling up. what has some traders bearish. here's mcdonald's plans to increase sales. ♪ quarter pounder filet-o-fish mag nuggets ♪ ♪ a garden or a chicken salad >> why combos are the latest craze for the golden arches and how you can profit. how would you like to buy apple and spent nutting?
>> nutting? >> nothing. we'll show you now. the action begins right now. the s&p just had its best week in three months. flirting with all-time highs once again. if you missed the rally, what are the names and sectors you can play for catchup? let's get in the money and find out. dan is taking a look at an offense/defense kind of trade. >> health care stocks are pretty interesting. you had an interesting conversation about biotech stocks. there's some issues with valuation and there's poor relative strength. if you go upstream to big pharma stocks there's reasonable valuations and valuations relative to growth that look pretty healthy, there's also very constructive technical setups that i think carter would speak to. so i want to look at the xlv. this is what we're going to talking about. exhibit the xbi. the xlv is the health care select, the top five johnson & johnson, bristol-myers, merck, things that act very well. i think there's potential for
some of the other names to play a little bit of catch-up, amgen, bio jen, some of the stocks off their 52-week highs versus ones i just mentioned that are a few% from their 50-week highs. >> how much of a weight is biotech? >> that's what's interesting. traditionally -- the key is traditionally this is a defensive area of the market. biotech has skewed up a that. in terms of what's really important here, if the top is the big pharma names, devices act well, health care fa sill tiz act well, managed care, u in h. you need a little bit of play from some of the big biotech names. >> some of those companies, if you're looking at what the valuations look like, those are the cheaper names in the group. the big cap names, the johnsons and johnsons, gileads and like that trading in the mid teens and have much more growth potential. from my perspective, they don't
present a great deal of risk to the group but they do offer a good potential tail wind. >> is part of your premise biotech has found some sort of floor? >> could be. i think it's really interesting. we've been talking for seems like a year about some of the regulatory issues. we know it's a tough political environment. we know there's been hiccups that have been driving a lot of the strength that before it topped out -- it's important to remember, the xpi is down 37% from its all-time highs. that xlv we're talking about, which is obviously very heavy pharma is only down 8.5%. i think we're speaking the same language. we don't need the xbi, we don't need a lot of biotech to go on a massive rant. we need it to start performing better. the ones that are acting well perform to break out. a trade very specifically in the xlv, when you look at implied volatility, the price of options is very cheap. that makes sense for a host of
reasons. you could look out to july expiration, the xlv with the stock trading at 71. just by the july 71 calls paying $1.55 for those, breaks even at 72.25. that $1.25 is your max risk. you get a move back toward the highs in the xlv, 5%, 7%, that sort of movement. if you think the s&p's going to break out i think you're going to have a lot of lagguard sectors. >> thermo scientific announcing that acquisition, both stocks performing well. i take a look at this and like the trade. it's a good way to make a directional bet, not taking a lot of risk, taking advantage of cheap options. >> if there's momentum in the market, money is always looking for the next thing. banks, energy, certain industrials. this is the kind of thing the money is waiting to find something. it will go here. >> the last thing that you said is that if you think the s&p's going to break out. your commentary doesn't indicate
to me that you believe that's going to be the case. >> yeah, here's the thing. we're going to know soon. what i need to see in the s&p 500 is really establish a new range above those prior highs. that would be somewhere above 2,100. really the s&p needs to make a new high from that may 2015 high. >> if you think there's downside risk but you are concerned for potential of a breakout, calls are the way to play it. options prices are cheap. i think tim was making that point earlier. if you want to play for breakout, long calls. >> all right. moving on here, crude breaking $50 a barrel this week for the first time in eight months. with the crucial opec meeting next week the chart master says now might be the time to take some profits. >> crude, we're below where we were a month ago in s&p 500 energy, that is to say the stocks discounted this move. we have a situation, this has caught up. so i want to look at a few things. there's a lot of rules of symmetry in markets. and let's look at a few charts
here. so optically symmetrical. you could draw your lines this the way. the double bottom. these various matches. literally symmetry this way. symmetry this way. symmetry this way. 69 sections down. 72 sessions back. right back to sort of where you have this almost perfect "v." "v" bottoms are very rare. if you get one you still get corrections typically. if this symmetry were to persist, i think what one can expect is a lot of backing and filling or that would be to mirror this, or some backing away to mirror this. if that were to happen i think a reasonable price objective is you come down to your moving average. it comes back quite well in tests as to what measures trend. so i'm thinking into the low 40s. and we're here at 48, 49. it's not mysterious that it stopped at 50 and has started to struggle. let's move on to something that is a little unusual. over the weekend when i was
working on it, exxonmobil -- which i have here as compared to the entire s&p 500 energy sector. orange. the entire s&p 500 energy sector equal weighted to eliminate the effect of chevron exxon. then all energy stocks in the russell 3000, 160 of them, equally weighted. these have dipped. down on the month. yet exxon has continued on its own. another way to juxtapose this. exxon versus major other integrated. bp, royal dutch, totale, all dip organize correcting and exxon unto itself. to me this is the face of fear. it's generalists getting into a trade who maybe just have to be exposed. so i want to look at a long-term chart. this is s&p 500 and s&p 500 earnings over the last 30-plus years going back to just before the '87 crash. look at the same chart for exxon and its earnings. market and its earnings.
exxon and its earnings. even when we bottomed before, exxon turned up as earnings turned up. this time it's turned up but earnings have not. so my eye, i think what you're going to get is a check back to your moving average. this bottom panel shows you in the last five years, every time we've gotten more than 10% the earned average is where you back off. we want to take profits in exxon if you were smart enough to buy it, right ball calls, try it on the short side, something. >> exxon is the best managed, lowest funding costs, lowest lifting costs, manage their cap x. a company since 2011 has seen its profits fall by half. earnings fallen by more than 70%. valuation down 15% from its all-time high. that doesn't seem to line up. i agree, crude is going to do whatever it's going to do and it always goes farther and faster than you think it will, up and down. right now you can take advantage of setting up by selling the july 92, 92.5 call spread,
collect 1.10 by selling 90 calls for 2.10, collect that money if the stock stays here, even if it rises a little bit. obviously if it falls back. this is wait to collect some premium. even if it just remains range bound. the upside does look limited. >> is it time to take profits? we've been talking about this rotation happening in the markets. is energy one of nose rthose rotations? >> there's something interesting going on. carter wants to play for a pullback. mike wants to sell cheap options to play for a consolidation. and there's a little bit of a divergence in thinking from what i can tell here. i actually think from a technical standpoint if you just took all the other mumbo jumbo out, yeah, i can see that. what carter's take is and what mike's saying is, i actually probably see the stock up or down a buck or two over the period of time that you're choosing. and that's actually a pretty good thing. sometimes selling cheap volatility, cheap options, is the right trade because this stock may be battling 90 bucks -- >> selling relatively cheap options, collecting pretty good
relationships of the spread. the other issue is i think the equity markets to me, i haven't been as bearish as many. i do expect us to get a rate increase. that should be hurtful to commodity prices, inclusive of crude. this is the way to play sideways. >> we know equity markets discount -- >> by the way, we're showing you a live shot of spacex rocket launch, happening right now. again, spacex. we're going to go to break right now. got a question out there, only one place to go, options action on cnbc.com. sign up for the award-winning newsletter. we're over 100,000 right now. in the meantime, as you take a look at spacex's rocket launch happening right now, here's what's coming up. ♪ it's a good time for the great taste ♪ >> that was cheesy but something is happening with mcdonald's menu and it could send the stock
higher. we'll explain. calling all "options action" fans. we're taking your tweets. before you start your holiday tweet us @optionsaction and maybe we'll read it on air. 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." memorial day travel is on track to hit record highs and fast food chains are pulling out all the stops making your "options
action" debut is susan li. >> we spent the day off the new jersey turnpike, vince lombardi plaza, families are well on their way to their memorial day weekend holidays. stopping by vince lombardi for a break on their journey. also to grab a bite to eat. i have seen lineups at the fast food offers including burger king. let me show you what you can get for $4 at burger king. this is what they call the 5 for $4 menu. as you can see you can get a lot. so burger king has the 5 for $4, mcdonald's the mcpick 2, wendy's, combo value meals are bringing in 100 million extra meals sold so far in 2016, up 20% from 2015. in fact, it's so popular now that 1 in every 3 visits is to take advantage of these deals. that's really helping the likes
of mcdonalds and burger king. mcdonald's has recorded pretty impressive comp sales up over 5%. also burger king saw sales in the month of april up over 4%. it makes you wonder at those companies that don't have these bundles options. they're rethinking that too. starbucks, they're thinking we need to bundle our products and meals. they're offering an $8 power lunch. a sandwich, salad, and ethos water. you have tgif offering this $12 dine and drink menu that offers an entree and appetizer. economically what's it say about the health of consumer spending in the u.s. if they're opting for cheaper options, value options? >> we're slowly moving away from the dollar price point. a lot of the things that we've seen are 2 for $2, 4 for $4. that ultimately raises the average check size. and so i think that you can start to see these meals proliferate over a longer period of time. i expect to see them out there
for some time. >> yeah, so melissa, that's story from vince lombardi. >> what was in that $5 combo extravaganza you had? >> okay, so you got two chocolate chip cookies, a bacon double cheese burger, some fries, a large coke, and what else? that was about it. i think that's all you need, right? >> that's plenty. >> i can't eat any more than that. >> susan li at vince lombardi pla plaza. carter what are you watching? >> this has been a great winner, which it was not for a while. maybe too much of a good thing. wow, 1974 to 2016. mcdonalds in blue, the s&p. so i wanted to zero in on recent activity. what we know is this was a very fallow security. and it underperformed in '12, '13, '14, '15. then classic charting, it broke out. so here's the range. there's the breakout.
now, an old-fashioned term, something is a measured move. the width of the range, 85 to 105, $20, tack on 20 to the top. so if you add 20 on to 105, right, you get roughly 130. i want to show you exactly where the stock stops. hits its head. this is key. stock market's gone straight up for four, five, six sessions. mcdonald's not participating, relative strength very poor. we've broken our trend line. we think this is too much of a good thing. maybe they priced in all-day breakfast. you've got to have good profits. if you're a short seller go after on the short side. >> that's baked into the cake. i think the only thing in the high-growth markets, that's the question mark. we've seen flat revenues for five years. people are more optimistic. what i would do is use the fact that options are relatively cheap, buy the august 120, 115 put spread, that will cost
$1.30, a cheap way to make a bearish bet on this one. >> these guys actually have been kind of all over this. they were all over the breakout when it broke out last year. trying to call a top is one thing at the very tippy top. the thing that is broken trend. i would make one point. when sales topped out there were $28 billion, there are expected to be $24.5 billion. sell as much as you want at one, two dollar price points. i think this all-day breakfast thing is in. >> apple has added over $50 billion in market cap. dan has found a way to make just a little bit more. he'll explain 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.
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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. it's been a terrific run for apple, freight news for one of our traders. here's why. "options action" it's how we trade like tech titans. risk less to make more. that's what dan tried to do with his bullish bet on apple. dan thought apple was about to bounce back, that 100 shares would cost $9,000. to spin less dan bought the october 100 strike call for 250.
to make money dan needs apple shares to rise above $100 above the cost of the call by october expiration. but spending $250 just to bet on apple? >> i can't! >> relax. no need to get worked up. to spend even less, dan sold the october 80 strike put for 250 and created his risk reversal. he did something even better. he made making money easier and here's how. between the 250 he spent on the 100 strike call and the 250 he collected on the 80 strike put, dan was able to put on his trade for nothing. >> nothing? >> that's right. nothing. now dan can see profits of apple shares are just one penny above $100 by october expiration. of course, nothing is for free. in this case there is a tradeoff. dan sold that put, he could now be obligated to buy the stock for $80. even if it falls well below that level. but since the time of the trade,
apple shares are up more than 11%, making dan a big winner. and "options action" fans are flooding itunes and they only want to know what will dan to next? let's get the answer to that right now. >> the most important point from a risk standpoint is that you're naked short a downside put, that's way out of the money, the put sold at 250 can be covered for 85 cents. i think you do that and this is a riskless trade, other than the difference between what you paid for the october 100 call which was 250, now that that's trading for about $6. you have some promises, you have some optionality, no pun intended here. but the thing is you could take the profit, if you thought the stock was going to have continued gains you could look to turn it into a vertical call spread, sell the 110 call in october and have on the 100, 110 call spread, sell that for $2.35, locking in some of those gains too. you don't have any risks to the
downside. if you're really optimistic you could sell a higher strike call also. there's some stuff to do there. >> talking about catch-up trades at the top of the show, this is a catch-up trade? >> you're into the gap of late may. that would carry to 105 to fill the whole thing. >> i think getting -- working range counter here is probably the best thing to do. i think we've had quite a run off the bottom. i actually like selling puts in apple. i like selling around the 90, 92.5 strike. if it does pull back you'd lay into that. >> what do we know about $90? berkshire hathaway, that was the level they announced it. that's really important. psychologically i think people are going to have 90. that was also the 2014 breakout level. i would make one point. i think, and we said this toward weeks ago, the company did not buy shares in accelerated stock buyback in the march quarter. that's what was likely going on. they're the buyer, it looks like 90's a good level, maybe sell that 90 put against that call.
>> up next the "final call." 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 to get your tweets. is uvxy a bad way to purchase volatility? if you're in this game long how long a waiting period before selling? >> if you are in this trade the wrong way the one thing you don't want to do is wait before selling. this like a lot of other etps that are based on futures, they have something called a roll cost, they tend to decay away. a good short-term bet, not a long one. >> put options in rig july 10 strike puts. >> you're looking at july, 10 puts, the stocks around 10 bucks, close at a dollar, 10% of the stock price to have the right to sell it at $10 in six weeks or something like that. doesn't seem like a great
risk/reward. earnings aren't until july 31st. depends on your catalyst but this is probably not the best way to do it. >> how do the charts look? >> speaking about energy stock that hasn't bounced, that's a tell. everything in energy's come to life, this hasn't. stay away from it. >> you know, this is one of the areas that hasn't seen a comeback. it's going to be awhile before we see offshore drilling in particular. >> time for the "final call." >> exxon up 36% off its low. take profits. mcdonald's starting to roll. do something there too. >> i don't know which way crude is going but i do know that exxon is grossly overpriced even at levels higher than the ones we currently have now. revenue's down more tan half from their peak. i'd be a seller in exxon. >> just quickly on that point, listen, we're in this period now where volatility could get a lot cheaper and trades like mike was talking about make a lot of sense. that said xlv, calls are as
cheap as they are and you have a directional view, that's one way to play it to find yours. >> you're watching "options action." check out the website, optionsaction.cn optionsaction.cnbc.com. "mad money" with jim cramer is up next. >> announcer: the following is a paid presentation from worx. [ dramatic music plays ] nothing offends these members of the mount parnassus garden club like a neglected lawn. and they're here to do something about it. [ clicks ] their weapon of choice -- the all-new worx gt 2.0... the next-generation lithium-battery-powered two-in-one trimmer and edger that means business.