tv Options Action CNBC October 1, 2016 6:00am-6:31am EDT
hey, there. did anything happen in the markets today? a wild day, a wild week, a wild quarter comes to an end. our guys are going to make some sense of it all getting ready for the show. here's what's coming up. >> your bank. you, ceo, chairman, violent -- basically for me, on top of what's basically been a criminal enterprise. >> talk about criminal. we have a way to buy shares of wells fargo for under 2 bucks. we'll explain. plus, worried about deutsche bank? >> now is the time! >> we have a trade that can make money if the market goes up or down. we'll show you how to profit. and -- ♪ come on baby light my fire >> crude has been on fire this
week but something in the charts suggest the rally might be over. the action begins right now. ♪ let's get right to it because there was one trade that crushed it this quarter and that was tech logging its best quarter in almost two years. will this hot trade stay hot and what are some of the names you can still buy? let's get in the money and find out right now. and dan surprisingly has become a bit of an optimist of late. >> i think it has something to do with the calendar and something with what's going on. i think it has -- you think about some of the m & a, i know you guys have been bullish on semis, but $200 billion worth of deals. and this week, the big news was that qualcomm is considering making a purchase of mxpi, a company that bought free scale last year for $12 billion. one of the reasons they're doing it, the other piece of news, microsoft is reorganizing their
artificial intelligence division, and that was the news this week. so there is a lot of stuff that people who had been stuck on this pc and smartphone supply chain are now thinking about the next 20 years. and i think microsoft -- i think you guys will agree -- is kind of repositioning itself a little bit. >> tech is not just about mobile handsets and not just about p.c.s. you have the ceo of volvo coming out this week in detroit and saying that he expects to have self-driving cars in five years, what they call level four, fully autonomous vehicles. you have a secular shift going on in the economy, even if it the economy is weak. this is one of the areas we are bound to see a lot of exciting things happening. so i mean, plenty of room. >> and there are definitely yield chasers to some extent. some of the old line tech names are offering yields you would otherwise get in the utility or staple, yet the valuations on a microsoft are -- i mean, getting long on really big tech in general. i'm not sure that's what you're saying. >> the charts don't look good right now, carter? >> here's the issue.
we know it's been a while but the biggest waiting in the market at 21%, 22%, but semis are themselves a bit steep, tore some extent if one is thinking there is more m and a or consolidation, how much of that is priced in now because not all of them are going to consolidate. >> the greater -- >> what about this notion that microsoft on december 31st, 1999, do you remember that, y2k, made an all-time high, basically 5997. trading at 57.5 right now. come on, the thing is going to trade 60 at some point. when they report on october 20th, if they were able to beat and raise the stock is going to break out and make a new all-time high. option premiums are pretty cheap. i'm not particularly bullish on microsoft. you know, microsoft is trading 20 times this year's earnings. that's a ten-year high. the yield had something to do with it. it has underperformed, up 4% of the year, versus the nasdaq up 6. i do not like the deal they just paid $26 billion for. >> so are you bullish microsoft?
>> i would rather take a shot, targeting the earnings event, okay, that they're going to be able to beat and raise and the stock is going to break out, make a bullet for 60. here's the thing, i would want to do it with defined risk. if approximate i was long stock. here's the thing, i would want to do it with defined risk. if approximate i was long stotm. here's the thing, i would want to do it with defined risk. if approximate i was long stock, i might consider the trade into earnings. because i want to define my risk better. the stock on average has moved 7% over the last four quarters. so listen, here's the trade, very simply, look out to the october expiration. the company's going report day before that, okay? the october 57.5 calls when the stock is trading at 57.5 today, are offered at $1.45. that's 2.3% of the underlying stock price. i just told you, the stock has moved 7%. that's a pretty reasonable, defined risk way to play. the next three weeks and an earnings event. if i'm wrong, i'm wrong. i think the stock -- i'm not willing to make a bear earn bet. >> i agree with this. when the options premiums are low, as an options trader, keep it simple and own premium.
in this case, just owning calls or puts, especially in what happened this week is really the easiest way to make directional bets in stocks right now. >> for what it's worth, if there are any guidelines that come out, one of the best things you can look at is the prior quarter, and there was that gap, there was fairly good option, so this fairly tight range -- >> no. there are new businesses though. that's one thing i will say. are lower margin businesses, steering towards utility. you don't like the linkedin deal, i kind of do. you have to differentiate your product. the cloud services, they have to get people basically built on to their platform -- >> here's the thing. we're not going to know anything about linkedin. obviously we want to know the cloud revenue. they have to keep growing. but salesforce.com, one of the major competitors right now, issued billions that were below expectations. the enterprise software market could be soft. my bet here is that people -- investors may be looking beyond it a little bit. you have crm that trades at 60 times earnings. microsoft at 20. they have got some momentum it to their back.
this is a good defined risk way, again, to possibly replace. long into potentially volatile, and i have one more thing. this is a chart for you. i think the stock has really good support, 56, 57. and the high -- 52-week high. look at that thing. obviously there is risk down to 54. the 200-day moving average. but if they have good news, the stock is going to 60. >> look, that's not the bottom line, or is that the moving average? >> no. that's the moving average. >> there you go. but the reality is are you playing for this tight range to be resolved up, not down? if it goes the way last quarter, you will get that. presumptively. >> right. let's move on from tech to financials. a brutal week for wells fargo. ceo john stumpf grilled on capitol hill by the house financial services committee. take a listen. >> if somebody walked into wells fargo tomorrow and robbed your bank of defrauded your bank and then after they're caught they say, well, i'm sorry, i'm going
to take full responsibility, would you allow the person just to walk out after robbing your bank because he's sorry that he robbed your bank? after he took the money already? >> i have come to the conclusion that wells fargo should be broken up. it's too big to manage. mr. chairman, i'm going to be talking with you and the members of the committee who showed their outrage here today. i'm moving forward to break up wells fargo bank. >> wow. >> i'll show you outrage. that's an outrageous thing to say. >> or talking outside your core competency. >> let's move on from politics. despite the rhetoric, the chart master says the bank might be so bad it is actually good. so what are you looking at? >> this is the antithesis. something is down so far. let's look at the charts. buying weakness in principle is the worst thing you can do. things are weak for a reason. it's like saying, oh, i think chipotle is going to be okay. well, nobody is going to the store, it's not okay.
or fossil watch, people aren't buying watches. but anyway. there must be something wrong. they've got a little problem with their shadow accounts, right, and opening up. but here's the thing that sort of appeals to my eye. you have the bank index itself of which wells fargo is a big piece. and then wells fargo. and this spread is starting to become optically something that appeals to me. i want to show you something on a two-year basis. tight. keep in mind, if you didn't have an orange line doing this, the blue line would actually be higher. the orange has kept the blue line from going higher. that appeals to me, i think perhaps, perhaps it's so bad it's good. everyone knows the news. look what we just heard from those esteemed congressmen and women. so third chart. this is the same chart as this. these are the two lines absolute. and then this is held as a constant. this is the bank index as though it didn't move and showing you the relative performance.
you're making shocking five-year relative lows. and literally, it's a free-fall, right? so it was outperforming and now -- okay. here's the chart. five years -- now we've got ten versus not the bank index, but the market. so here's wells. there's the s&p. again, that optics is starting to say, you know what? i want to maybe play for mean reversion that perhaps it's so bad it's good. so there is your daily chart and what i think you have here is the real prospects of a triple bottom. and i want to make the bet you get some sort of throwback here that perhaps the news is priced in on an intermediate basis. >> what do you think, mike? >> well, first of all, wells fargo is an inexpensive stock. it is not as inexpensive as other big bangs like citi and bank of america. expensive or inexpensive, depending how you look at as jpmorgan. they're the only ones that have seen positive revenues and before you jump on me and say that's because they have been opening up false accounts, this
is a company that has close to $90 billion a year in revenues. so the false accounts didn't really have much to do with the fact they have seen top line revenue growth for each of the last three years of 3 to 4% while all of the other big banks have seen declines of like amounts. so if you are going to try to do the risky thing, which is to catch the falling knife, there are some fundamental reasons why you might want to do it here. >> how would you do it? >> very simply. we already articulated at the beginning of the show, options premiums are cheap. keep it simple, folks. i'm just looking out to december, buying the 45 strike call for $1.45, so you're spending a relatively small amount relative to the price of the stock. this is a situation where the stock price could continue to decline. if people recognize the value here and don't believe congresswoman waters that this thing is going to be broken up. she has no authority to do that, by the way. then there is some possibility for a bounce. maybe a sharp one. >> you know, we all love carter's work, of course. the chart work was very convincing, carter. >> it was? >> yeah, it was.
in today's session when financials were up so sharply, wells fargo underperformed. >> right. so that's -- sort of made the opening remarks that buying weakness is literally the dumbest -- that's what we all do. it's a four-letter word. think about what's cheap. oh, my gosh, i must really love it at 7. i love it at 2. that's a dangerous game. that's why you don't see that kind of gain. at least that's my history. >> it's a rich history of cheap stocks that got cheaper. >> exactly. >> but taking a little bet here. >> first of all, i'm sorry to say this. i don't -- i disagree with your charting. i think the stock is going to be up 40 before it's 48. fundamental news flow. >> interpretive. you can't disagree or agree. there are three bottoms. the question is, does it break or hold? >> to mel's point, who my go-to chartist when you're not around, she is saying it showed atrocious strength. below the last two lows. and so to me, there is one headline away from trading at 41. >> it's why it's -- why i'm calling it so bad. >> stumpf gets stumped when he goes to the hill, and if he's
not going to be there for a week, that alone could be the reason the stock could actually take your breath here. >> you've got to know the rules to break the rules. >> yeah. >> the rules are don't buy weak stocks but i know that. i'm going to break the rules here. >> but the trade -- i actually think if you're going to do that, you're going to break rules. that's why you do that. listen. i wasn't pounding the table on microsoft before. but 2.3% of the underlying stock price makes sense. buy a call spread on this one. because premiums are high, relative to other names in the bank -- or banking sector. >> but here's the thing. if the stock sells off a little bit and you want to sell some premium, it will be higher than you can sell a downside put and then sell it and discount it to where all the banks are trading. >> fair enough. >> got a question out there, send a tweet to @optionsaction and check out our website options firstname.lastname@example.org. and check out our super duper cool newsletter. it's like the "war and peace" of
derivatives. here's what else is coming up. >> what's the matter, pop? >> i'm confused. >> well, have we got the trade for you, because we'll show you how to make money if stocks go up or down. plus, here's what trards think could happen to one dow stock. we'll tell you what it is, and how you can profit, 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.
oh hey john, i'm connecting our brains so we can share our amazing trading knowledge. that's a great idea, but why don't you just go to thinkorswim's chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders? i know. your brain told my brain before you told my face. mmm, blueberry? tap into the knowledge of other traders on thinkorswim. only at td ameritrade. welcome back to "options action."
it's been a wild week for the markets. if you don't know where stocks are heading next, don't worry. dan is over at the smart board with a call to action for a volatile market. what are you looking at, dan? >> yeah. so let's just look at the s&p wire and what the options market, it relates to the etf that tracks the s&p 500 is predicting for movement. you hear us talk about the implied move all of the time and i just want to talk about what we're doing a little bit. we're looking at the at the money straddle and what is an at the money straddle? let's go through the straddle playbook a little bit and that will help you understand how we think about these. a straddle is the call premium plus the put premium of an underlying security in the same expiration of the same strike. you put it together and if it's at the money, then that is basically the amount of money that somebody is willing to bet that stock could move up or down during that time period between that and the expiration. why would you use a straddle? let's say you wanted to buy an implied move, wanted to buy movement in the underlying? you would do that if maybe you had conviction that there was going to be volatility but you weren't sure on direction.
that way if you were long on call and a put at the money, if the underlying were to go up a lot, you should be able to make money if it clears the premium you paid for it, or if it were to go down a lot in the same capacity. and when would you do it? you generally try to do this when options prices are cheap. because when you're buying expensive vol, it's that much harder on a directional basis to make money. so i just want to kind of go over an example here, and the s.p.y. today whelp it was trading at $2.17, the october $2.17 straddle, the call premium plus the put premium, $2.50. each one cost about $2.25. and what's really important when you think about this is that that $5 in premium, if you were to buy the implied move and the s&p 500 through the s.p.y. options, you would need to move
2.22 to make money or below $2.12 to make money. when you look at the chart and what's going on here, we know it's been consolidating a little bit. if you were to buy the 2.17 straddle in october, you need that move to 2.22, that would be an uncharted territory, so to speak. but on the down side, look where 2.12 is at the breakout level from july, right at the up trend kind of in place. and one of the things that's really important to think about this, options market-maker hes are pretty good at pricing this stuff here. so the main point, i want to make about this strategy here, it's a real tough way to make money. but if you are convicted on direction, and you think the straddle is cheap, it's not pricing enough movement relative to what the events that you think are in that time period, then you buy the call, or you buy the put. because then those are relatively cheap, and it's much easier to make money in that capacity. but if you get the direction wrong, you're out of luck. >> so whaes's interesting is we've had two trades so far tonight. simply buying premium and volatility is low. so when do you decide that going
the simple route is better than doing a straddle? >> so a straddle is actually still a relatively simple route, because buying a call is about it's going to go up. buying a put it's going to go down. buying both is a bet it could do either. but it has to do it by at least as much as you spent. i think it could. why? earnings season will kick off before october expiration. alcoa the start of the earnings season. that's going to happen before the expiration. october is historically a fairly volatile month. you put those things together, add in maybe an election, and suddenly you have a situation where it's hard to imagine the market is going to be that range-bound. here's the thing, folks. most of you probably already own stocks, what does that mean? you're already making the up side bet. so is a less expensive way to play would be to just buy that put. now you've got your straddle on. >> so, carter, what do you see in the charts for the s&p in general? >> same thing. what we know is we had that very tight range. 43 moving more than 1%.
and then it was resolved down. came in for labor day, straight down. now we've climbed back to the scene of the crime where we collapsed. we're back to where there is overhead supply, interested sellers. i think we stay in the range but regardless of that, it's about asymmetry. there's so much more downside risk in my opinion than upside reward. >> and is how much are you spending to make that downside bet? >> i know, that's the craziest thing. when you look at it -- i often start looking at the straddle for something like that. just to get a sense. what is the market implying over this period of time? this was kind of a volatile week, we started moving around. we had election stuff with the debate. we had deutsche bank, and we had some earnings noise. and we're going to have all of that again in october. and that's why i think if you are convicted, spy options look really cheap. if you're willing to pick a direction. >> you were talking about how the market is shaking everything off. the rocky balboa. i don't know, but another hard blow, maybe it doesn't stay up there. >> up next, one sector that soared this week and took everyone by surprise. we'll tell you what it is and
why there could be more room to run. that's next. much more "options action" still ahead. i'm here at the td ameritrade trader offices. opgzs action is sponsored by think or swim sponsored by td ameritrade. rm 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.
oh hey john, i'm connecting our brains so we can share our amazing trading knowledge. that's a great idea, but why don't you just go to thinkorswim's chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders? i know. your brain told my brain before you told my face. mmm, blueberry? tap into the knowledge of other traders on thinkorswim. only at td ameritrade. action." time for an upside call. dan talked about nike last week ahead of its earnings report.
take a listen. >> i just want to look out to a put spread in october expiration. you could buy the october 55, 50 put spread, paying $1.25 that is your max risk. >> pretty good call, dan. nick nike sure took a dive this week. will it keep falling from here? what do you do? >> i think so. it kind of held today, down about 3 bucks since the trade was put on here. the futures orders weren't particularly great. this is where it was almost a double at its lows yesterday. sometimes directional trades take half off. i'm going to keep this on a tight leash. i don't want a winner going to a loser. up next, carter said to bathe in energy stocks. take a listen. >> i'm going to make the bet we're going lower, lower, lower. i want to sell energy and i want
to do xle as the vehicle. >> december 67.50 put spread. spend $2 and buy for 2.7 0. >> energy was the best up 5%. but there is still time in this trade. carter, what you do say? >> obviously we have a little bit of force, acts of god, an opec thing, and it's over. here's the question. this is to be determined, right? was the action in crude really that bullish? this is the first time they have gotten their act together in eight years. i'm hopeful that over time this still works. >> these types of promises of production cuts haven't really borne much fruit historically. and let's not forget, it's the first time they got their act together and other producers in the region have brought incremental production. has anybody forgotten. just iran alone is more than the daily production cut they were talking about. actually talked a little bit i actually talked during the week about selling upside call spreads to make up for the money we may have lost already. next, "final call" from the options pits.
>> announcer: "options action" is sponsored by think or swim by td ameritrade. 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.
oh hey john, i'm connecting our brains so we can share our amazing trading knowledge. that's a great idea, but why don't you just go to thinkorswim's chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders? i know. your brain told my brain before you told my face. mmm, blueberry? tap into the knowledge of other traders on thinkorswim. only at td ameritrade.
let's get a tweet in. dan callahan asks us, how do you know when options premiums are high? is professor co. >> two ways, one is hard, one is easy. the hard way is implied volatility versus realized volatility. let's leave that out for now. think of what dan showed us earlier, the price of the straddle. take a look at the straddle, the call and the put, and see how much the two of them together are as a percentage of the stock price. if it's 5% of the stock price, is that low? depends on the stock. if it's mylan, a stock that moves around a lot, that might be very cheap. but if it's procter & gamble, a stock that doesn't move very much, 5% might be quite a lot. it depends on the underlying stock, but just add up the premium of the straddle and compare it. >> class is dismissed. time for the final call. last word from the options pit. carter. >> contrarian, wells fargo so bad, it's good. buy. >> december 45 call is the cheap way to make a post bet there. >> dan?
>> microsoft a good stock alternative. >> all right. looks like our time has expired. i'm melissa lee. thank you for watching. check out our website, email@example.com. have a terrific weekend. but stay tuned. "mad money" with jim cramer starts right now. the following is a paid presentation for the bissell pet hair eraser vacuum. got a four legged family member? get a bissell. got a fun loving feline? get a bissell. got a furry, four season shedding, food scattering, furniture hugging friend? if you said yes, you need to get the bissell pet hair eraser vacuum. bissell is an american company, creating cleaning innovations that make your life easier for 140 years. and now we bring you the pet hair eraser, our first vacuum engineered from the ground up, specifically for pet families. in fact, it has some of the most innovative pet features ever