tv Options Action CNBC July 14, 2019 6:00am-6:31am EDT
hello, everyone. the guys here getting ready behind me. you know, hey, look, guy there sticking around for the big show here's what's coming up. >> a record number of people just watched "stranger things". >> a good thing, right >> well, dan nathan thinks so and he'll tell you how to get in on the drama plus -- ♪ oil and energy stocks are surging. and mike coe thinks there is more room to run he'll explain what's about to stark a major rally. and how you can cash in.
and -- ♪ there it is >> that's right, "options action" fans, the dream team is back mike coe and guy adami will tell you the one tech stock they think is about to break out. it's time to risk less and make more >> let's get right to it netflix is on deck for earnings next week. it is up 40% this year, most of those gains came in january. the stock is still 10% from its all time high and the options market has been flying a 6% move in either direction. dan thinks new highs are in play. >> not right now this is one that it is not a trade stock. it is not one that has, you know, adverse effects of strong dollar that sort of thing but it is a stock that has a lot of unusually positive sentiment, we know there is a lot of investors that have valuation concerns with this and one thing that got me thinking about this name into earnings next week, they started off putting out a tweet talking
about how many people in the first four days of "stranger things" season three that i think over 41 million people watched it in the first four days, that's the six-day chart since basically this -- since this news has been out there, and it closed dead on the lows of the week, really kind of odd, down 2%, the stock had a big run over the last month and a half or so, keeping pace with the nasdaq a little bit. you think about that implied move, 6.5% after earnings next week, that is basically shy of the 4%, moved on average over the last four quarters the long term average the stock moved 12%. very, very volatile. the way i think about this is this, right now, investors are not expecting a lot of net ads coming from the u.s. this is a company that the back half of this year starting with the strength of "stranger things," they have a lot of reasons why people buy this thing. that chart tells you for whatever reason, since january, this thing has been range bound between 335 and 385.
i suspect it will continue to be range bound after earnings i think that this thing could set up for a nice long trade into the fall as we get through some of the volatility that i expect this summer and so how do we do this this is an options show here i don't want to be naked long calls. implied volatility to me, it sets up pretty nicely to do a call calendar, i'm selling a short dated out of the money call next week and buying a longer weighted one, longer dated one in september specifically you would do this if you thought into august, into september, this stock could move back toward the pryor highs. the stock was trading at 374, sell the july next week 400 call at 4 bucks and use the proceeds to help finance the purchase of the september 400 call for $12 that costs you $8. that's the max risk. that's a little over 2% of the stock price. the implied move in this thing would be up to $400 or down to
about $350 that's just a one day move i like the risk/reward if it continues to consolidate, then i have the september long dated call that i own for, i don't know, a third less than what i would have if i just went out and bought it. >> no question certainly that their programming is popular i hear from my wife, i hear from my kids "stranger things" is the only thing anyone is talking about this week. i can see that the fascination with netflix's stock is a little harder for me to get my arms around. this is a company that doesn't have any free cash flow. not forecast to have free cash flow so it is not something i would reach out and by the shares. if you look at the way the stock behaved since the beginning of the year, the range has been quite a tight one. you're looking at selling these 400 strike call options, you're making a good bet in terms of probability. not a high probability that will breakthrough the level, we haven't seen it in six months
time i don't know why this would be the catalyst even if it did happen, all in, spending 8 bucks on this thing, that's a little over 2% of the current stock price. these are the kinds of high probability bets you should be making as a part of an investment process using options, whether it is a netflix or another -- you don't have to love the stock to love this particular trade. >> what do you think, guy? >> within the next six months, traded down to 250, that's where it bottomed out. it was probably early december we have gotten it all back i think the smart trade is to probably take some money off the table. into earnings on wednesday i'm still in the camp that this thing retests that high from last year. everything that mike says is 100% correct in terms of balance sheet, in terms of cap, all of those things however, look at the move disney had over the last three or four months when the stock is from 115 to 143 hasn't given anything back a lot of that is attempting to cut into netflix netflix until today, at least, hasn't flinched.
i think that's telling you something into earnings. though the smart thing to do is take money off the table, i do think that things rally post earnings. >> competition and the announcements about shows they'll bring back, services and pricing. those can be catalysts for the other ones >> they can be i think that's one of the reasons why this stock is consolidate the way it has over the last few months, money flowed into the other ones they're not going get massive results anytime soon they told us, they gave us long-term guidance for their targets on subscriber and profitability. but in the meantime, netflix may have a bit of a runway, they put those price increases earlier in the year they have a lot of original content and the way i see it, that's the only reason why you're in netflix, the original content, we know disney is taking away, we any a lot of the stuff is back to warner and all that sort of stuff longer term, this is a more challenge story. in the meantime, it may have -- >> one final thing i would like to say about the options trade that is that, you know, buy
rights are one of the most popular things, buy stocks, sell calls against it in situations where you think there is risk to the stock, though, this is a better trade to do, actually, buying longer dated calls, you're mitigating the risk, but receiving a lot of the benefits you do from put sales or buy -- >> netflix is not the only stock on fire. energy stocks, the best performing sector in the last month. many names letting up and seeing double digit rallies, oil prices climb and tropical storm barry set to make landfall this weekend, which could drive prices even higher mike says the group has more to run. what do you see, mike? >> earlier this week, we highlighted the trade we saw in the xle. saw very large call spread risk reversal, someone trading 55, 64, 75 out in december this was basically a way for them it take a look at the lower end of the range and upper end of the range we have seen in xle than the hurricane there is other potential catalysts, a lot of energy companies reporting earnings in the next several weeks. i think it is interesting when i look at that trade, though
i gave it some thought when you have earnings, a lot of the names that are reporting, some are not implying very big moves. what that tells us is the price is relatively low. xle, high for an index, given all the catalysts, given the hurricane, to me, i actually think they're fairly reasonably priced if you give yourself enough time to let your trade play out so basically either betting that energy is actually finally get something traction, traction that hasn't had basically for a year we have seen nothing but lower prices whether it is oil, whether it is the hurricane, whether it is earnings, any one of those things could give additional upside what you do is go out to december, the 65 calls, $2.75. i don't think you need to complicate this by either selling some downside puts to help finance it or selling some upside calls either. the reason being that this is more of a trend type trade f it continues, you can look for ways to monetize or lock in some of
the profits. but, of course, this is a heavily levered group, we are basically otherwise oversupplied with oil in the long run and i think when you consider that, that's the yun sidownside risk. >> it is interesting, choosing the 65 strike, if you look back to q4 last year, when xle broke down, from 65 to 55, like a straight line, and november and december story time period and earlier this year, 65 to the downside, after a bounce, it went down about 10%. that's an important level. it gets back above that and what i like about the trade is, like you said, keeping it simple, risking about 4% for near the money participation that gives him a lot of time for this thing to play out. and i just say this, we say this all the time this is the trade if it doesn't -- just sits here, goes down a little bit, up a little bit, thing starts to tank, you got to think about where you stop this call it will be the -- it gets greater as you get closer to december at some point, you got to put a
stop on it. >> as a percentage of the options premium, near dated options start evaporating more quickly. here we're looking at six month option, maybe less basically three months in, you'll start seeing that rate of delay. if the thesis hasn't played out by then, a good chance that we have the trade wrong and that be with a time to take a look at opportunities to take your profits or losses, whatever they may be at that point. >> are we allowed to say theta bleed? >> there you go, buddy. >> only on this show only on this show will those words come out of anybody's lips. >> so if you look for two names, we do that thing over as we know when i'm over by what dan said, sometimes we walk to the plasma, and we do something called the power pitch and did it with devin energy, i lost like 75, 25 if you look at august 6th earnings, that's sitting up
rather well. the big integrated oil name i continue to like against $60, so the risk reward here is very good, conocophillips, the cheapest of the big three, that sets up well into earnings. >> for everything options action, check out our website. while there, check out our super cool newsletter, so cool, you won't need air conditioning this weekend. what are you waiting for here's what's coming up next twitter is taking flight this month and guy adami and mike coe will tell you how to catch the ride for less than a buck plus, calling all options action fans, reach into your pocket, grab your phone and tweet us your question at optionsaction. if it is nice, we'll answer it on air when "options action" returns. ♪
eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade welcome back to "options action". check out snap, feeling extra popular this week, getting a bit of a bounce from an upgrade at goldman sachs this morning and now up almost 3% since monday. but another social stock, that coe and guy think it is about to spread his wings and fly you know what that means >> it is a twitter tag team. >> that's right. time for "options action" tag team. >> i didn't know i was supposed to tell you that. >> guy. >> to be clear, by the way, when
micron, i picked the stock, i picked the stock, mike picks the option if it is wrong, it is on me. number one number two, this is one i think we will get right and it is twitter. why is that? for years i was screaming, get away from this active user stuff, don't use that metric, it is wrong google doesn't use it. twitter shouldn't use it what happened? in february they took their medicine yes, the stock went lower, traded down to 29 but somewhat off to the races since they took their medicine in february, i think it works for them going forward number two, ad sales growth. you are talking 20% ad sales growth that's a very reasonable number. it makes a lot of sense. last thing, i think you are coming into an earnings release where people under estimated the power of twitter july 26th, so i like it in earnings. let's throw up the chart, earl, as we say, slide it. you can see what i'm talking
about. here was the flush back in february when it traded lower, and it sort of effectively has been off to the races ever since. yes, it has tapered off, but i think it is just building a base, getting set to make the next new high. but with that, i'm going to tag my man, mike, and he is going to give you the options play. >> well, let's take a look here because obviously he highlighted the fact we have earnings coming up when you have earnings coming up, we have a catalyst we obviously like to work with that, but one of the first things that we usually get in a situation like this is higher implied volatility twitter is already a pretty high implied high options priced stock to begin with. with the earnings catalyst it is even higher. one other thing we don't always talk about but i think we do want to here, try to match the moves of the strikes that you are choosing to the maturity of the trade that you're looking at so how long is the trade i'm looking at -- i was going out to september in this case i am looking -- let's clear that out so we don't have those things. i'm looking at the 33, 38, 43 call spread risk reversal.
sell the 33 puts at a buck buy calls at 255 and sell against it you are spending $0.65 for the trade. we expect the two wing options to decay more rapidly here between now and september. notice the strikes i have chosen, 33 and 43. this will expire in just under 80 days. if we look at a chart of twitter, the one he was just highlighting, so let's look at the strikes we are selling we are selling this 33 strike and selling 43 strike. okay look how long we have been within that range. so basically we're saying these are, you know, relatively range, even if it breaks out the chances that it violates the 43 call that we sold or the 33 put that we sold is relatively low that's what i mean by matching the strikes for the maturity >> all right thanks, guys, for that come on back over. >> it is risk less, make more. that's the show. >> wow! come back over to the desk, please. >> coming over. >> i want to get dan's take on this whole thing
>> yeah, i like the -- i mean, listen, twitter has been a stock that's been really gappy over the last few years meaning they have massive gaps in earnings, up and down. it tells me they get something like guy said in february, they took their medicine, had a big gap down then they changed, you know -- now this goes back up. so i mean i don't actually selling a put in a name like this unless you are prepared to buy this lower at mike's short put strike on bad news and so generally, you know, we like to buy stocks on good news. unless you are averaging into a story and you have a longer time horizon, but, you know, your fundamental case, fine, it is great. you know, your trade idea, fantastic. you know, you could just buy a call spread not have the down side risk. but i hate the thing has been public five or six years and has the massive gaps they do a good job forecasting their own business >> it is a good point. you would say, you know, chances are the thing does gap down, is that the time you want to buy it it is not just a question of whether you want to buy it or whether you wish you had or had not, but at the level at which
you will be buying it. you will be buying essentially at $33, excluding the premium of the trade we just laid out that's the put you're short, the level you will buy the stock, a discount at where it is trading right now. when you think about the incremental risk being short that putt, it is the risk of being long on the stock at 43 you are adding to the equation, not at the risk you are buying where it closed today. >> typically when dan goes on one of though diatribes he ends by saying, knock yourself out. he didn't do it today. just saying. >> walmart is beating the market so far this year we will tell you why big box news is good for one of our traders. there's much more "options action" right after this (indistinguishable muttering) that was awful. why are you so good at this? "options action" is sponsored by sink or swim by td ameritrade
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what do you look for i want free access to research. yep, td ameritrade's got that. free access to every platform. yeah, that too. i don't want any trade minimums. yeah, i totally agree, they don't have any of those. i want to know what i'm paying upfront. yes, absolutely. do you just say yes to everything? hm. well i say no to kale. mm. yeah, they say if you blanch it it's better, but that seems like a lot of work. no hidden fees. no platform fees. no trade minimums. and yes, it's all at one low price. td ameritrade. ♪ welcome back to "options action". time to take a look back at some of our open trades two months ago khouw and carter bet walmart could be a big box breakout >> we put this to the prior high, that's 106.21. we are right on the bottom i think at a minimum you make that move, that would be about four to five bucks from here,
and then ultimately with a little luck, some backing and filling, and then a real breakout. >> i was looking at the july 100 calls, they were trading at about 375 when i was looking at them. >> well, that stock is up 15% since the trade, so, mike, what do you do? >> so the stock is up 16% or so. the options trade is up about 300% we paid 3.75 for these, you could sell them for about 14.50 right now and that's what you do we got the trade right these things are deep in money and not much reason to hang on to the trade we will get carter back to talk about going forward. >> what do you think of walmart? >> i keep on channelling -- >> you are wearing the tie which carter would wear. >> thank you what i would say and probably would say then, in valuation walmart is expensive but appears to break out to the upside this is similar to what costco has done over the last month, month and a half i agree you take money off the
table, but given the take we have, might be able to squeeze more out of the trade. you take half off the table and maybe let the last run. >> i take a little issue cramer had that faang thing. and then i had the maga thing and cramer is coming back with this watch thing you know what watch is now >> yeah, walmart. >> walmart, target, costco and home depot, the big box things they're all breaking out this was first to go and it is interesting at this stage of the game because they're all pretty constructive and all have actually some premium value. >> you want cheap calls on expensive stock so you have to roll this trade if you are staying long. >> on the same day in june, dan predicted staples could become unstapled. >> we have a weakening economy here, and if we don't have any real resolution to the trade situation the back half of the year won't be great. you will have cyclical names going lower. i don't believe you have stocks of consumer staples anticipating
whatever they're anticipating going higher from here you could buy the august 197 half put spread paying $2 for that. >> proctor & gamble up 2% since then dan, with about a month left in the trade what do you do >> this is a good example. the stock was 112 1/2 or something and now closing up 25% on the year. everything i said i still agree with but i'm wrong on direction here the options trade was the 110.97 half put spread. it cost $2 at the time and now is worth about $1. back to our earlier conversation about setting premium stocks you have to manage risk. if you let it go longer, the highest probability will be 100% loser if you don't get it moved back to me you have to think about taking a loss at 50% of the premium you spent. >> what is your take >> i don't see what people see in proctor & gamble. 9% eps growth. it is crazy compared to where they have been historically and
crazy compared to the s&p. i don't get it i mean i get it at a certain level, but this stock is way ahead of its skis. they report on the 30th. again, everything dan said is right, the stock just moved higher with the broader tape i think the trade is still in play up next, your tweets and the final call "options action" is sponsored by think or swim by td ameritrade read earnings reports, looked at chart patterns. i've even built my own historic trading model. and you're still not sure if you want to make the trade? exactly. sounds like a case of analysis paralysis. is there a cure? td ameritrade's trade desk. they can help gut check your strategies and answer all your toughest questions. sounds perfect. see, your stress level was here and i got you down to here, i've done my job. call for a strategy gut check with td ameritrade. ♪
hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade welcome back time to take your tweets first fan asks, what are your thoughts on a calendar spread strategy with boeing i chose the 375 strike, selling july 26th, buying august 16th. mike. >> i like it so they're going to be reporting on the 24th and it is implying an above average move. that is the expiration you want to sell, the 26th. i like the 375 strike you chose as well because it averages about 3% move. that's about what you are looking at on the upside good trade. >> time for the final call guy adami. >> i want to say what an honor it is to be part of the "oa" group again. i look forward to earnings next week, potentially to derail a market that's way ahead of itself in my opinion.
>> mike khouw. >> xle, if you want to make a bullish bet keep it simple december '65 calls work. >> dan. >> netflix, i don't think expectations are that hot. >> i do like call calendars. >> we'll see you back here next friday stay tuned "mad money" is up next the following program is a paid commercial presentation for total gym fitness. [music] everybody work out. feel the energy. build a better body. the best you can be. another body easy as 123. oh. ahh. better body as easy as 123 with total gym. i feel fabulous and when you