tv Options Action CNBC December 23, 2016 5:30pm-6:01pm EST
live at the nasdaq market site on this christmas eve eve. the guys have some great trades for tonight. >> money will always be paper. but gold will always be gold! >> and gold is doing something it hasn't done since 1999. and a good signal your opportunity to buy. we'll explain. plus -- ♪ fire one of the hottest trump trades is about showing signs of pulling off. we'll give you the stock and tell you how you can profit. and -- the chinese stock market is getting crushed.
posting its worst month in a year. we'll tell you why it could get even worse. and how you can profit. the action begins right now. >> let's get right to it. with the trump rally on pause and the dow stuck below 20k, one hot sector showing signs of pulling off. let's get in the money right now. dan, you're looking at the industrials. >> yeah, so, mel, one -- right out of the gate, right after the election, one of the sectors that took off. the xli, the spdr industrial etf. what's interesting about the makeup of that etf, there is a lot of defense stocks, industrial stocks, like equipment stocks like caterpillar, and transport stocks. and the transport stocks have really been doing a lot of the heavy lifting. unp is up 30% of the year. fedex is up 30% of the year. u.p.s. is up 21%. but one thing that really caught my eye today is that general electric, which is the largest weighted component in the xli at about 10%, is only up about 2%
on the year. real massive underperformance. one of the reasons for that 55% of their sales come from overseas. and i think that's obviously something that came post election, too. and then there's just a couple other things that lead me to believe that industrial stocks early in the year could kind of retrace a bit of that move, possibly back to the breakout level. look at president-elect's talk on trade. i mean, that's something all of these stocks, at least some of these large defense names, boeing, that sort of thing, they could actually really have a tough time if we got into a trade war. that dollar strength that i just mentioned, and then some of the ways that the president-elect is using twitter to kind of negotiate defense budgets. i don't think any of this is particularly bullish for this sector. so i think you could probably play for a pullback back to that breakout level. >> mike -- sorry, carter. >> one of the things, there is this sort of thought, and dan, i think you're right on here. this would be an outperforming group. the truth is, after the first week, so you have monday, november 7th through to that friday, all of the
outperformance industrials was in the week of the election. so, in fact, from monday the 14th of november to right now, the second worst performing sector is industrials. industrials have been cooling off for weeks. and this is about to get worse, i would think. >> mike, what do you think? certainly a lot of headwinds and, of course, just the general run we have seen in this sector since the election. >> yeah, well, i mean, taking a look at some of the areas that have done really well, in that sector, and dan referenced one of them. the logistics companies, u.p.s., which we earlier highlighted as one of the best performing in this group, these are trading at pretty rich multiples. one thing to watch out for. the other thing i feel like this entire space is trading on every good thing that could possibly happen, and based on trump's comments, and none of the bad. and that's really not the way the real world works. so if you're sitting here and the only thing you have is optimism, you have to think that at some point investors will start waking up to the reality, and the reality is always a little bit less rose see. >> so dan, let's get the trade here. >> i just want to add one more point. over the last couple weeks, we
have had some murky guidance given from ge, honeywell, and united technologies, three large components. and fedex, which gave a decent outlook just this week, kind of gave a weak fiscal q2, so target the bulk of q4 earnings that come in the back half of january, early february. in the xli, when it was trading today at 63 bucks, you could look at the february ex pairration and buy the 63.59 put spread. selling one of the 59 puts at 35 cents, like i said. it cost a buck. that is your maximum risk. you could make up the $3 between 62 and 59. i like the risk/reward. option prices are fairly cheap. one thing i will say over the next week and a half, we are likely to continue to have a lot of sideways action, maybe things pick up in the new year. option prices that appear cheap can get cheaper in this time of year. so it makes sense to look to spread something like this. >> mike, what do you think of
the trade? >> i absolutely agree. we do want to look at spreading it, because, you know, in the situation like this, we don't have a big catalyst, probably, between now -- maybe even the inauguration, frankly, before things really take a move sharply one way or the other. this is one of the situations where you want to use spreads so you can take some of the decay from the options you're selling to offset that by the one you buy. >> in terms of the chart, dan is talking about, obviously a textbook breakout. there are false breakouts and one of the levels you're looking at, they were to check back to the point at which the breakout occurred. very likely. >> let's shift gears to gold. the precious metal losing its luster, its longest losing streak since 1999. this is a man who never loses his luster, cnbc's dom chu. hi, dom. >> well, melissa, the luster does require constant polishing. there is that. talk about a hot to not trade all in the same year.
i remember earlier doing these reports early in the year about the strong up side momentum in gold prices and gold mining stocks. things have reversed course. let's start with the gold prices. we ended 2015 around the 1050 mark, and it was off to the races. near $13.75 plus by midsummer. and at 30% jump led to an even crazier move in gold. take a look at the vanek. the ticker, gdx. it ended last year around $13.72. it got low in january, but mid july, well over $31 a share, 130% gain year-to-date. but since then, it's been downhill for both gold prices, which are 17% off their highs, and, of course, the miners' etf down nearly 40% from the highs. the silver lining for the gold trade is that we're still on track to close the year higher than it started, and if that were to happen, we would break a
three-year losing streak for gold prices. the strong up side move in the dollar has hurt gold, as has the lack of demand for that safe haven type investment. so, melissa, as we head into 2017, gold will certainly be a trade to watch. and i will say this. i am off next week, so melissa, guys, i just wanted to wish you guys all merry christmas, happy hanukkah and happy new year. >> same to you,dom. thank you so much. so could the gold slide present a golden opportunity? chart masters over at the smart board to break it down. >> i want to start with the superlatives. it's always fun to say best to worst. this was the worst weekly decline. but the best first half in 40 years. which superlative is more important? biggest first half in 40 years or worst weekly decline in 12? i would say it's the former. let's put this all in perspective. and then i have a superlative to end this sergeant here. i want to start with a couple reference points. gold versus the s&p. from not just random, from the exact market peak in october of
2007, the prior bull market. which line is ahead? the blue line. how about from the 2000 peak? which line is ahead? the blue line. and it's not even close. in fact, 20 years. they have done exactly the same thing. anyone who thinks -- and some people do, gold is not a part of a fort foal, they don't know what they're talking about. 20 years, gold and s&p. the opportunity now is, of course, since the bear market low, the exact low, march of 2009, we have this huge divergence. and so what i'm thinking now at this point, it's so hated down 12, big run, so forth, it's time to be contrarian. all right. here's the chart. if you wanted to draw a head and shoulders top, you certainly could. but many ways, it's -- it's
broken. it's subjective and we're getting back to where there is some support. so i'm thinking at this point, and yet even though -- this is the one-year chart, year-to-date. here is a superlative for you, 130 groups in the s&p. autos, computers, beverages. guess what the best-performing sector is this year? sub sector. top ten. copper. heavy trucks and machinery. construction materials. alarms and securities. keep going. up 47. metals and mining. that's like steel. semis, up 50. number one. number one. so despite all of this, the best single thing you could have done, picking stocks in the s&p, is to pick s&p 500 gold. >> so mike, what's your take on gld? you know, i don't think it is an investment, but obviously the dollar had a strong run.
and if the dollar weakens at all, always a positive for gold. i think we have talked about this already. and that is that going through the holiday, you probably want to use option strategies where you're selling something to help offset the cost of what you're buying. and i'm not interested in selling puts here, because i feel like i'm reaching out to catch that falling knife. i was looking at the february 108/114 call spread. you could spend $195 to buy that. so a little less than 2% of the price of gld right here to make your bullish bet. that's all you're risking. if it just trades sideways, a lot of the decay you're going to experience will be offset by the 114 you're selling. if you want to try to look at the situation to sell puts, you want to wait until it drops lower. >> you don't often trade gold, but what do you think of the structure of the trade? >> i went into this segment wanting to hate on it. but i'm mesmerized by carter's charting and some of his conclusions he drew. and i agree with that. i think this is probably a decent chance it goes back and round-trips that move.
but by the same token, i like the idea of mike defining his risk and getting very near the money protection. if you look at that chart, there were some reversals over the course of this year that saw counter trend moves to, you know, up 5, of% or something. i think that's what mike is trying to target here. i think that makes sense. early in the year, in q1, we saw a lot of people, especially in calls, reaching way out of the money. and buying out of the money call spreads. that worked. but if you were to do that during the down trend, you're throwing good money after bad. i like mike's strategies, and i think carter's charting makes sense. >> there is only one stock in the s&p 500, gold, sub -- it's newman. if you were to look at the xau, many dozen, it still is best-performer. >> all right. for everything "options action," check out our website, "options action".cnbc.com. we have videos and exclusive trades. while there, check out our super, duper cool, newsletter.
here's what's next. calling all "options action" fans. reach into your pocket, grab your phone and tweet us at "options action." if it's nice, we'll answer the question. >> logical. plus, mike coe, as you've never seen him before. giving you a christmas gift that could have you rethinking the spirit of christmas. that's when "options action" returns. hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart. well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at 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. ♪ beautiful tree. it's lit, the presents are wrapped, and the sleigh bells are ringing. it's not truly christmas until you put on your slippers, cuddle up by the fire and risk less while you make more. that's why we're offering you
this once in a lifetime opportunity. ♪ it's the most wonderful time of the year ♪ >> imagine. owning all of the world's greatest holiday songs. sung by the greatest voice of our time, mike coe. now, they are all together. in a once in a lifetime collection. "options action" presents: mike coe's holiday classics. experience the joy of the yuletide favorites, like "the covered call." >> still going to be better off than you would have been by just owning the stock. you keep that $1. >> the put spread. >> i think the way you want to play this is simply to go out to january. and look at the put spread. >> and that timeless classic, "the christmas tree." >> the trade i was looking at was the march 22, 2018 christmas
tree. >> but wait, there's more! octob act now and get the christmas version of mike's signature song, "historical valuation analysis." for free! >> it's actually trading at probably a 15% discount to its historical multiples on an enter price value basis. >> they're all here. together in this timeless collection. so pick up the phone now, and dial 1-800-risk-less. or order online at "options action".cnbc.com. special delivery charges may apply. >> before you rush to your phones out there, mike is actually going to serenade us with one of his christmas classificatio classics, the christmas tree trade. how does it work? >> a christmas tree is basically a spread trade where you're going to buy one option in a
long christmas tree and sell two other options of the same expiration but different strikes. typically, these are the types of trades you engage in when the premiums are high. sometimes if it's a lower conviction directional bet and also in situations where you think sharp moves are unlikely. and the one i was looking at here is caterpillar, looking at the january '93. you're going to sell one of the 89s and one effort 85s against it. the entire package will have a net debit of about 9 oh cents. that's less than 1% of the current price of caterpillar. clearly, this is a counter trend trade. this is one of the strongest performing stocks on the year. very hard for me to understand, though, when one considers, it's only about 10% off the its peak valuation despite revenues are down 30% and earnings down maybe 60 to 70%. so this is certainly looking a little bit expensive. hard to basically take that
counter trend trade. this is where you can do it at relatively low cost. >> dan, what do you think of this trade? >> as far as the strategy is concerned, a bit of a dull swim and really smart strategy under the right circumstances. i think it's really important to mention that mike said sometimes low conviction. here is the thing. you also have to think about it as high conviction. because you're selling a further down the money put. you're naked short a put. the stock were to blow through that lower put strike, you could give up the gains from the put spread and then suffer losses at a certain point. so at some point, you actually have to decide how convicted you are, and remember also this will take a bit of margin because you're selling that other out of the money put. >> caterpillar -- go ahead, mike. >> i just want to point out very quickly, it's not going to use up the margin that buying the stock or selling it short would. that's the first thing. the other thing is that in this case, it's got to go through that lower strike by at least as much as you made on the spread that you were long. in this case, the downside break was going to be just above 80 bucks. that's down quite a lot from
here. finally, caterpillar don't announce earnings until the 26th. this will expire before then. what will propel the stock to that level? hard to say. >> carter? >> this is the biggest trade there is. talking about a stock basically almost doubled off the low. yet the stock peaked in 2011. if you were to look through large cap assets in the s&p 500 and try to find stocks still below where they were in 2011, you would find not many. cat is a trading vehicle, but as an investment, not doing anything anybody in favors. >> bad news for chinese stocks. it's great news for one of dan's trades. who bet against chinese stock last -- chinese stock market last week? next, he'll show you how to make even more. stay tuned. ♪ guyhey nicole, happening here? this is my new alert system for whenever anything happens in the market. kid's a natural. but thinkorswim already lets you create custom alerts for all the things that are important to you.
hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart. well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade. welcome back to "options action." time for us to take a look back at some of our past trades. last week, dan saw trouble ahead for chinese markets.
>> i was trading 35.5, you could buy the february 35.31 put spread, paying $1 for that, buying one of 35 puts for $1.25, selling 31 puts at a quarter. >> china ease stocks have dropped even further. what's next? >> so i expect this index to continue to be choppy. i think it's important to remember the shanghai composite is down 12%, one of the worst-acting equity indexes in the world right now. i think that could be a source of some of the volatility if we were to see any in january and february, just like this past january and february. so i think you want to keep this on, and at some point, if we did have a sharp drop, i would look to kind of roll it out a little bit, and down. so rolling out in expiration and down a little bit takes something off the table, and keep -- keep the trade on. >> i'm with you, dan. this was a big week for shanghai, and we know the hang seng now down 20% from its peak.
it looks like bombs away. free to move lower. >> also lastly carter said to just sell nike into earnings. >> the recent underperformance. this suggests much more to go. >> turning 47.5, i don't know how that worked for you. down about 7% or so from where it was when i was looking at this earlier. >> well, the stock is flat since then. so carter, what do you see in the charts? >> meaning what's interesting is so -- as the stock is flat -- underperformer. new two-year relative performance low. nike looks heavy, news couldn't help it. want to stay short. >> so mike, you stick with that? >> yeah, i would. and i think the way to do that, because you -- the put spread is look to sell call spreads. not report their next earnings until after march expiration. probably look to february. sell call spreads to help offset the decay and keep the put spread on. >> dan? >> the stock trading close to $55 in the after market. down less than 52s right now. i think carter is spot on.
i would like to be constructive about the stock. next, your tweets and the final call from the options pits. hey gary, what are you doing? 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. hi, i'm frank. i take movantik for oic, opioid-induced constipation. had a bad back injury, my doctor prescribed opioids which helped with the chronic pain, but backed me up big-time. tried prunes, laxatives, still constipated...
had to talk to my doctor. she said, "how long you been holding this in?" (laughs) that was my movantik moment. my doctor told me that movantik is specifically designed for oic and can help you go more often. don't take movantik if you have a bowel blockage or a history of them. movantik may cause serious side effects, including symptoms of opioid withdrawal, severe stomach pain and/or diarrhea, and tears in the stomach or intestine. tell your doctor about any side effects and about medicines you take. movantik may interact with them causing side effects. why hold it in? have your movantik moment. talk to your doctor about opioid-induced constipation. if you can't afford your medication, astrazeneca may be able to help.
not only that, you can act on that opportunity with just one tap right from the alert. wow, i guess we don't need the kid anymore. custom alerts on thinkorswim. only at td ameritrade. the president and defense contractors? >> welcome back to "options action." this tweet just coming from lockheed martin's twitter feed eight minutes ago. the lockheed martin ceo just had a good conversation with the president-elect. she personally committed to drive down the cost of the f-35 and has a quote from marlin hoosen, the chairman, and said i give him my personal commitment to drive the cost down frifly. president-elect trump wants the best capability of our military at the lowest cost for taxpayers and we're ready to deliver. so, mike, what do you make of this? certainly lockheed martin has been hit for a couple days now on this concern that donald trump is basically twitter-shaming them into reducing costs. >> yeah, well, now it's
lockheed. before it was boeing. and then this is -- i don't know that this is really something we should be spending too much time trading about. but it's hard to see how it's a positive for any of these companies. and i think it goes right to what dan was saying at the top of the show. about industrials generally. all of these companies, if they are government contractors, seem to be vulnerable to twitter chats like this. which is kind of hard to imagine. >> drive down your cost means we'll eat it on the margins, is what that means. and they're all -- they're all under pressure and no indication they're going to be doing anything except be under more pressure. >> dan, would you invest in defense stocks at this point? i guess not, given your stance on the xli? >> this is a joke and total shakedown. >> this is supposed to be the pro business president-elect. to me -- listen, i don't mind any of -- you know, the idea of negotiating these big programs lower. but the way this stuff is appropriated, i don't think it happens over twitter in public. and i think lockheed's ceo has to do -- he has a fiduciary area responsibility. >> all right. let's get the final call here.
mike, kick it off. >> i like the christmas tree. i think that's the tree we're going to use. >> dan. >> yeah. the xli put spread in february. >> carter. >> gold. >> all right. looks like our time has expired. have a wonderful holiday holida weekend. we'll see you back here next friday. have a great weekend. my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain but to educate and teach. so call me at 1-800-743-cnbc or tweet me @jimcramer. every night i come out here and tell you what happened during the day, why it happened, and what you can do with the information. i i