tv Options Action CNBC December 25, 2016 6:00am-6:31am EST
we're live at the nasdaq market site on this christmas eve eve. here's what's coming up on the show. >> machine will always be paper. but gold will always be gold! >> and gold's doing something it hasn't done since 1999. and it could signal your opportunity to buy. we'll explain. plus -- one of the hottest trump trades is about showing signs of cooling 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. 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 20 k, one hot sector showing signs of cooling off. dan, looking at the industrials? >> mel, it was one of the -- right out of the gate, right after the election, it was one of the sectors that took off. i want to look at the xli, the spider industrial etf. what's interesting about the makeup of that etf, there's a lot of defense stocks, there's a lot of industrial stocks like equipment stocks, cater pill letter, and transport stocks. transport stocks have been doing a lot of the heavy lifting. unp up 30% on the year, fed ex up, u.p.s. up. general electric, which is the largest weighted component in the xli at about 10%, is only up about 2% on the year. it's real mass of underportland.
55% of their sales come from overseas and i think that's obviously something that came post-election too. then 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 that 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. 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. i think you could probably play for a pull-back to back to that breakout level. >> i was going to say, one of the things that there is some sort of thought, dan, i think you're right, this has been an outperforming group. the truth is the after the first week, monday, november 7th, to friday, all the outperformance was in the week of the election.
from monday the 14th of november to 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? there are a lot of headwinds and then of course just the general run we've seen in this sector since the election. >> taking a look at some of the areas that have done really well, that are in that sector, the lodge sticks companies like u.p.s. which we have earlier highlighted as one of the best performing in this group, these are trading at rich multiples at this point. so that's one thing to watch out for. the other thing i feel like this space has been trading on every good thing that could possibly happen to them based on trump's comments and none of the bad and that's 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 at some point investors are going to start waking up to the reality. the reality is always a little bit less rosie. >> dan, let's get the trade here. >> so i want to add one more point. the last couple of weeks we've had murky guidance given from
ge, honeywell, and united technologies. fed ex gave a weak fiscal q2. i think you want to target the bulk of q4 earnings that are going to come in the back half of january, early february in the xli, when it's trading at $63, look at the february expiration to buy the 63.59 put spread, paying $1 for that, buy for $1.35, selling one of the 59 puts at 35 cents. it cost a buck. that is your max risk between 63 and 62. and you can make up the $3 between 62 and 59. i like the risk/reward. option prices are fairly cheap. the one thing i will say over the next week ask 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 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 want to look at spreading it.
in a situation like this, we don't have a big catalyst between now, maybe even the inauguration, before things really take a move sharply one way or the other. this is one of those situations where you definitely want to use spreads so you can take some of the decay from the option our selling to offset that which you're experiencing. >> in terms of the the chart, it's a textbook breakout, but not all breakouts follow through, there are false breakouts. i think one of the levels you are looking at would look pack to the point where the breakout occurred very likely. >> gold losing its luster, posted its longest losing streak since 1999. cnbc's com chu, hi. >> the luster requires polishing. talk about a hot to not trade, all in the same year. earlier doing a lot of the these reports early in the year about the strong upside momentum in gold prices and of course gold mining stocks. but things have reversed course and in a big way.
let's start with gold prices. we ended 2015 around the 10.50 mark for gold prices, it was off to the races. near 13.75 plus by midsummer. and that 30% jump led to an even crazier move higher in gold mining stocks. take a look at the gold miners etf, the ticker gdx. last year 13.72, got as low as 12.40 at the january lows. but by mid-july, well over $31 a share, that's 130% gain year to date. but since then it's been downhill for both gold prices which are 17% off their highs and the miners etf, down nearly 40% from those highs. the silver lining for the gold trade is that we're still on track to close the year higher than it started. if that were to happen we would break a three-year losing streak for gold prices. the strong upside move in the dollar has hurt gold as has the lack of demand for that safe
haven type investment. as we head into 2017, gold will certainly be a trade to watch. and i will say that. i am off next week. so melissa, guys, i want to wish you all merry christmas, happy hanukkah, happy new year. >> same to you, thanks so much. constitute gold slide present a golden opportunity? >> i want to start with the superlative. it's always fun to say best or worst. for instance, this was the worst weekly decline in 12 years. yet the first half the year was the best first half in 40 years. which superlative is more important? biggest first half in 40 years, worst weekly decline in 12? i'd say the former. in perspective, a super la live to end this segment. i want to start with a couple reference points. gold versus the s&p. from not just randall, from the exact market peak in october of 2007, the prior bull market. which line's ahead? the blue line.
how about from the 2000 peak? which line's ahead? the blue line. and it's not even close. in fact, 20 years, they have done exactly the same thing. anyone who thinks, some people do, that gold's not a part of a portfolio, they don't know what they're talking about. 20 years, gold and s&p. now the opportunity now is that of course since the bear market low, the exact low, march of 2009, we have this huge divergence. so what i'm thinking now at this point is it's so heated, down 12 a week, a big run, it's time to maybe be contrarian. all right. here's the chart. if you wanted to draw head and shoulders top you certainly could. but many ways it's broken. it's meta subjective. we're getting back to where there is some support. so i'm thinking at this point,
this is the one-year chart year to date, even though it's done all this, here's a superlative, there are 130 sub initiative groups in the s&p. autos, computers, beverages. guess what the best-performing subsector is this year? top ten. copper. heavy trucks and machinery. construction materials. alarms and securities. keep going. up 47. metals and mining, that's like steel. semis, we know that's up 50. number one, number one. despite all this, the best single thing you could have done, picking stock in the s&p, is pick s&p 500 gold. >> what's your take on gld? >> i don't think of it as an investment. obviously the dollar has had a strong run. if the dollar weakens that's going to be a positive for gold. i think we've 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. i'm not interested in selling puts here. because i feel like i'm reaching out to catch that falling knife. looking at the february 108-114 call spread, $1.95 to buy that, less than 2% of the price of gld to make your bullish bet. if it just trades sideways a lot of deet kay yow experience in the 108 will be offset by the 114 you're selling. if you want to try to look at the situation to sell puts, you're probably going to want to wait until the drops a little lower. >> you don't often trade gold but what do you think of the structure of the trade? >> i went into the segment wanting to hate on it but i'm mesmerized by carter's charting and some of his conclusions that he drew. i agree with that. i think there's probably a decent chance it goes back and round trips that move where he thinks that's supported. 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 chafs there
were some reversals that saw counter trend moves to up 5%, sister% or something. i think that's what mike is trying to target and that made sense. earlier in the year, q1, a lot of people 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 strategy and i think carter's charting makes a lot of sense. >> there is only one stock in the s&p 500 in gold, newmont. if you're looking at xau, which has many dozen, it's still its best performer. >> for everything "options action," check out optionsaction.cnbc.com, the hottest options news, exclusive trades. check out our super duper newsletter. so what are you waiting for? here's what's coming up next. calling up a "pgs ons action" fans. reach into your pocket. grab your phone. and tweet us. if it's nice, we'll answer the
question. plus mike khouw 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.
get your mind out of the gutter. mornings are for coffee and contemplation. that was a really profound observation. you got a mean case of the detox blues. don't start a war you know you're going to lose. finally you can now find all of netflix in the same place as all your other entertainment. on xfinity x1. 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. the sleigh bells are ringing.
but it's not truly christmas until you put on your slippers, cuddle up by the fire, and risk less while you make more. we're offering you this once in a lifetime opportunity. ♪ it's the most wonderful time of the year ♪ man jen owning all the world's greatest holiday songs. sung by the greatest voice of our time, mike khouw. now they are all together in a once in a lifetime collection. "options action" presents khouw's holiday classics part "d" eux. "covered call." >> you're going to be better off than you would have been just opening the stock because you keep that dollar. >> the "put spread." >> the way that you want did play this is simply to go out to january and look at the put
spread, spend 65 cents for that -- >> and the timeless classic "christmas tree." >> the march 22, 2018, christmas tree. >> but wait, there's more. 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 a price value basis, on a price to earnings basis. >> they're all year, together in this timeless collection. so pick up the phone now and dial 1-800-risk-less. or order online at optionsaction.cnbc.com. special delivery charges may apply. >> before you rush to the phones, mike's actually going to serenade us with one of his christmas classics, "the christmas tree trade."
what is it, how does it work? >> 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. and typically these are the types of trades you're going to gain in when the options premiums are relatively high. sometimes if it's a lower conviction directional bet, also in situations where you think sharp moves are unlikely, and specifically the one that i was looking at here is in caterpillar, looking at the january '93 89 85 put christmas tree. buy the christmas tree strike puts and sell one of the 89, 85s against it, a net debit of 90 cents, less than 1% of the curt price of caterpillar. this is a counter trend trade, one of the strongest-performing stocks on the year. very hard to understand when one considers it's only about 10% off its peak valuation despite the fact that revenues are down
40% 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 a way you can do it at relatively low cost. >> what do you think of this trade? >> as far as the tragedy is concerned it's a but of adult swim, a smart strategy under the right circumstances. it's important to mention, sometimes low conviction. you also have to think about it as high conviction. because you're selling a further down the money put. your naked short a put. your worst-case scenario is the stock were to blow through that low or put strike, outgive up the gains from the put spread and suffer losses at a certain point. at some point you have to decide how convicted you are. remember this will take a bit of margin because you're selling that other most of the money put. >> caterpillar the -- >> i want to point out, it's not going to use up the margin buying the stock or selling it short would. 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 guy bucks. that's down quite a lot. caterpillar don't announce earnings until the 26th. this is going to expire before then. what would propel the stock below that level? hard to say. >> we're talking about a stock that's almost doubled off the low, and yet the stock peaked in 2011. if you were to look through large-cap assets and find stocks below where they were in 2011, you'll find not many. cat's a trading vehicle but as an investment it's not doing anybody any favors. >> bad news for chinese stocks. great news for one of dan's trades. who bet against chinese stock market last week? coming up next, he'll show you how to make even more. ♪ 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. shhh. alerts on anything at all? 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.
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. time to take a look back on some of our past trades. last week dan saw trouble ahead for chinese markets. >> trading 35.5, you could buy the february 35-31 put spread,
pay $1 for that, $1.25, selling one of the feb 31 puts at a quarter. >> chinese stocks have dropped further putting dan in a pretty good position. what's next? >> yes, 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. 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. i think you want to keep this on. at some point if we did have a sharp drop i would look kind of roll it out a little bit and down. so rolling out in expiration and down a little bit, take something off the table, and keep the trade on. >> i'm with you, dan. this was a big week for shanghai. we know the hang seng was down 20% from its peak. it looks like bombs away. >> last week, cohen carter said
to just sell nike. >> massive outperformance long-term and recent underperformance, this suggests much more to go. >> turning 47.5, i don't know how that worked for you, down 7% from when are it was when i was looking at this earlier. >> the stock is flat since then what do you see in the charts? >> what's interesting is as the stocks flat, market up, a two-year relative performance low. mike looks like it's heavy, want to stay short. >> mike, stick with that? >> i would, the way to do that is look to sell call spread. you're not going to report next earnings until after march expiration but hook to february and keep the put spread on. >> this stock was trading close to $55 in the after market after that report. it's down less than 52 right now. i think carter's spot-on. i like to be constructive about the stock. near term the price action is so poor. up 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.
♪ 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. shhh. alerts on anything at all? 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. this tweet from lockheed martin's twitter feed eight minutes ago, the ceo had a good conversation with the president-elect, she personally committed to drive down the costs of the f-35 and it has a quote from marilyn hughes, the chairman and president and ceo of lockheed martin saying, i had a very good conversation, i gave him my personal commitment to drive the cost down aggressively. i know president-elect trump wants the very best capability for our military at the lowest cost for taxpayers and we're ready to deliver." so mike, what do you make of this? lockheed martin has been hit a couple days now on this concern that donald trump is twitter shaming them into reducing cost. >> now lockheed, before it was boeing. i don't know that this is something we should spend some
much time trading about but it's hard to see it's a positive for any of these companies. industrials generally, all these companies if they are government contractors seem to be vulnerable to twitter chats like this which is hard to imagine. >> drive down your costs means, we'll eat it the margins is what that means. they're all under pressure, there's no indication they're going to be doing anything but being under more pressure. >> dan, would you invest in defense stocks at this point? i guess not given your stance overall in the xli? >> no this is a joke. it's a total shakedown. this is supposed to leave the pro business president-elect. to me -- i don't mind the idea of negotiating these big programs lower, but the way this stuff is appropriated, i don't think it happens over twitter and public. i think lockheed's ceo has to -- has a fa do you remembfiduciary responsibility. >> i like the christmas tree, that's the trade we're going to use. >> yeah, the xli put spread.
>> gold. >> all right, looks like our time is expired. have a wonderful holiday weekend. happy christ-nkkah, have a great weekend. on today's special paid presentation for cindy crawford's new meaningful beauty ultra, brought to you by guthy-renker, you'll discover the secrets to not only aging gracefully, but beautifully while looking your absolute best every step of the way. i think my philosophy on aging is really more my philosophy on living, which is just do it well, take care of yourself. it's about celebrating where you are and being the best you that you can be in that moment. then it's not aging, you're just living. (female narrator) in the next few minutes, some of the world's most inspiring women will share with you the secrets to looking as young on the outside