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tv   Options Action  CNBC  December 29, 2013 6:00am-6:31am EST

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season, and may you know that i love you all very, very much. bye-bye. ♪ this is "options action." tonight, bullion bounceback. >> little cube you put in hot water to make soup. >> not the cubes in your soup. we're talking about gold could be the best trade in 2014. we'll explain why. plus, a contest with no winner. >> i believe education such as in south africa and in iraq, everywhere such as. >> which one of these stocks has had the most ridiculous run in 2013? we'll explain why the answer could make you money. and sick of the rally? >> i think i'm going to throw up. >> well, if you have to be a
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bear, we'll tell you the surprising sector you want to get short in 2014. the action starts right now. ♪ live from the nasdaq market site in new york's times square, i'm dominic chu in for melissa lee. "options action" here coming to you from all over the country. texas, florida, chicago. if you think it was a quiet day for stocks, then think again. check out what's going on with twitter, down 13% on the day. a victim of a slew of downgrades and perhaps a collective bout of investor sanity. but it had some company. take a look at the reversal in 3d systems selling off violently after new record highs. and tesla lower on the day as well. now despite today's action, those names are still higher on the week begging the question, have they topped out? and could they simply be the most ridiculous stocks of 2013? so let's get in the money and find out.
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mike, are investors waking up to reality? and which of these is the silliest stock you've ever seen? >> i don't know. i think maybe you have to sort of pick your own version of crazy when you look at any one of these three stocks. every single one of them has an interesting and exciting story. so tesla, building the best electric cars, 3d printing a very exciting new technology. and twitter as the newcomer, after facebook seems like the social media stock of the day. but every single one of these has an incredible valuation problem, looking at twitter first is the most expensive stock at a $40 billion valuation. a stock -- it's bigger than kraft. it's bigger than deere. that doesn't mean anything by itself, but then look at the kind of revenues these companies are doing and it's incredible. look at tesla, $20 billion valuation, it's priced as if it's the size of porsche, a company that does 150,000 unit sales per year globally. but tesla does less than one-tenth of that number.
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3d at about a $10 billion valuation, here again, this is a stock that's revenues are about half a billion dollars. so all of them, the valuation to me just seems incredible. twitter, obviously, demonstrating the kind of craziness that can happen. we saw a huge volume day, now we're seeing big selloff. i think that some of these other stocks, you could see very similar things happening very soon. and for me, i think the one i'm looking at is 3d printing. >> how about this, does this scare you, brian. that the types of action that we've been seeing from these kinds of stocks, the mo-mo ones. >> when you see the level of volatility in some of these, it's definitely scary to be an investor. if you're pushing money all in on one of these names you're ludicrous. talk about twitter, which had a lot of fear built in the options market before today's fall. people basically using protection, getting out there to protect stock positions into the end of the year. we saw that selloff come. certainly, there's a lot of nervousness, but what is interesting about all three names, you could actually tie all three together and have an
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industrial revolution on our hands. i think that's why you're seeing the valuations you're seeing, think about it. twitter, you go ahead, you view what would be a tesla. you pick out your parts, you pick out your parts, you pick out the car you like. you send that to the 3d printing specialist in your area and it prints out your tesla car, literally. you put all three guys together, i think there's a reason the valuations are higher. there is high expectations on what these guys can actually accomplish. i think all three are in their very little infancy of what they can do going forward in the future. >> way too optimistic, i have to say. >> two of these are like each other. and then one is very different. i don't think that anybody doubts that in ten years, most people will have a 3d printer in their home. most people will probably have some sort of electric car in their home. that means that 3d printing and tesla might do very well. twitter on the other hand is an entirely different thing. nobody needs it. it's a neat little service, but they don't know how they will make money. so i think that the craziest
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one, at least right now, is twitter. now, interestingly, all of these, all three of these names, saw more calls than puts today. that includes twitter. even though twitter option volume in total was four times average. and even though the stock -- the technical term is it got crushed. >> mike, let's go to you here. what's the thought? what's the word here on twitter? what has you the most either excited or skeptical about this trade? >> well, as far as twitter is concerned, i think the thing that would get me nervous about any of these stocks is very high short interest. and actually, that last gasp of enthusiasm, that scott was just referencing, with all of the call buying. the 3d printing is the one we really don't know who the winner in this space is going to be. i don't think anybody is going to be printing their cars any time soon. actually it's the 3d printing that is probably the place to express your bearish bets, take advantage of the fact that people are out there buying all these calls, bidding them up. what you want to do, look for opportunity to sell them. i'm interested in selling a call spread on 3d.
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the thing is, getting naked short one of these is obviously taking your life in your hands, selling naked calls, same thing. i'll sell a call spread. specifically, i'm looking at the february 90, 95 call spread. sell the february 90s for $7.40, and cover my upside risk buying 95s at 5.40. the difference is the credit i receive, $2, that's the most i can make. i'm capping that risk at the total value of the spread, $5. 40% of the distance between the strikes is what we look to collect when we try to sell upside call spreads. i think that's probably the play in 3d. >> got you. mike, that's the play there. selling call spreads overall. so that's the way you do it. that's probably one of the most ridiculous trades in terms of the overall picture for these three companies. you talk about the trades involved here, shorting them is one way to of course play those particular stocks. so that's it. let's go here to the best performers of 2013, to the worst performers of 2013. and one of those trades is gold. traders are seeing signs of potential hope here.
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seema mody is back at headquarters in engelwood cliffs with more on that. >> thanks, dom. to say it's been a bad year for bouillon would be a massive understatement. gold isn't just suffering its first losing year since 2000 with a 28% decline. 2013 is looking to be the single worst year for gold since 1981. here's where it gets complicated. over the past month, bond yields have surged which should be bad news for gold, but the yellow medal holds the key, is this a sign the worst is over? that's the question investors everywhere will be asking as they allocate assets for the new year. dom? >> thanks so much for that. so let's talk about this. could there be a bottom in there for gold somewhere? let's call to the charts with carter braxton worth. this has been a tricky one, the gold trade overall, carter. but you have to say the downside has been there, and the trend has been intact pretty much. >> that's right.
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seema just referred to something that's very important, the key technical level. let's look at it. you have here a two year chart of the gld. what's important of course is that in this current downdraft woo we have come down to the low six months ago and held it to the penny. and that's an important development at an important level. now, if you step back and look at this again. here is this again, what i would call a double bottom. the action that is happening. and the presumption is we throw back, just as we did here. and we will move nicely, i.e., we bounce. we would take a contrarian view and be getting long the single worst thing of the past 12 months. >> carter, i like that. i haven't found a lot of people who wanted to be bullish in any way, shape or form on gold. so let's go out to the traders here. brian, you have been bearish long term on this gold trade. what's your view, and what's the trade here? >> well, if you look at long term, if you're the active trader kind of person out there right now, you look at where unemployment is going right now. it's getting better.
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we see a drop below 7%, that could be bad for gold. and look, the volatility in the market right now is low. when you talk about a vix around 12 or 13, there's not much fear out there. what do people want to do? they want to own stocks. they want to have actual equity in something. not own a piece of metal that doesn't have a whole lot of industrial use out there. that's why you see selling in gold. long term there is negativity. carter makes great points on the technical levels, seema talked about the $1,200 level in gold. right now you could see that bounce higher. i still hold gld in my position. what i want to do is sort of replace that stock with the call spread. that way it reduces my overall exposure to gold. listen, i'm an investment advisor. i want to allocate something to inflation risks. this is a way to do it. especially in the time, when you're in this bearish type market with gld. >> got you. so what's the -- so the trade is with the call spread. do you do it on the gld? is that the trade? >> yes. correct. dom, basically what i'm looking at, the march 122 call, looking to purchase that, while at the
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same time selling the march 128 call. i did this today. i basically sold out all my stock. this is how i'll get exposure to the upside. i paid 1.25 for this call spread. what this does, if gld trades above 123.25, that's my break even all the way up to 128, where i would be called away. if gld moves right away tomorrow or the next day, whatever, that call spread will increase in value. so i'll get benefit there. but 123.25 is the break even on this trade. i'm extending this out to march to give myself some time for this trade to possibly pay off if gold moves higher. >> mike khouw, what do you think? do you play the upside, cap it with call spread, buy it, so your risk is defined? >> this is absolutely the way you'll make a bullish play, if you're going to make one in gold. if you want to know what a long-term secular bear market looks like, take a look at what's been happening in gold. even in a bear market, you can frequently see short or intermediate term pops. and gold is particularly well suited to the call spread, that
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brian is recommending because very often, those way out of the money calls ask in equities could be inexpensive. in commodities, sometimes they have more premium. that makes the math work a whole lot better, when you purchase call spread verticals to make bullish bets in commodities. if you make a bullish play in gld, this is giving you a good amount of time for it to play out. you're taking advantage of the dynamics of options prices in commodities here. >> got you. how about this, scott nations. it seems like everybody is more bullish, what do you think? >> well, i hate gold in general. but brian makes the point he's doing this as stock replacement. and that's better than owning gld outright or gold outright. i would actually be short the market. but if you have to be long a little bit, being long brian's call spread much better than being long gld. >> got you. guys, thanks so much. let's wrap it up with a little stocks versus options. if you want to get long, 100 shares of the gld, it will cost you about 12 grand. so mike's call is call spread offers a 4 to 1 payout and
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defines his risk to just 1.25. so that's the play there. so, if you have a question, send us a tweet @cnbcoptions. we'll answer it in our next 101 web extra tonight. scott has a bearish trade on gold. in addition to scott you'll find great trader blogs, educational materials, so do check it out. and here's what's coming up next. ♪ >> talk about hell on wheels. ford crashing while gm makes new highs. we'll tell you why divergent paths could set up the trade of a lifetime. plus, it's the sector that's led the market for five straight years, but it could be the best short idea for 2014. we'll tell you what it is when "options action" returns. ♪ [ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap...
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of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade.
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who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame.
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♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim from td ameritrade. we're back. time for the upside call, where we show you how to manage winning trades. a couple weeks back, mike khouw and carter made a bullish bet on gm shares that have rallied 10%, but they made 12 times that and here's how. on "options action," it's how we drive profits. risk less, so we can make more. and that's just what khouw and carter did with their bullish bet. carter thought gm shares were about to hit the gas. >> honestly, we're out of gas.
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>> it's ride or die, mike thought. but just buying the stock, 100 shares, could set you back around $4,000. so spend less, mike instead bought the january 39 strike call for $1.25. now, to make money, mike needs gm to rise above that strike price by more than $1.25 he spent, or above $40.25 by january expiration. but 1.25 -- >> prices that are insane. >> so to cut his costs, mike sold the january 42 strike call for 40 cents, and created his call spread. but he did something even better. he made making money easier, and here's how. between the 1.25 he spent buying that lower strike call, and the 40 cents he collected selling that higher strike call, mike cut the total cost of his trade down to 85 cents. and now instead of mike needing shares of gm to rise above the
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$40.25 level to make money, he see profits if gm rises above the 39.$39.85 by january expiration. >> okay. let's run. >> but remember, there is a tradeoff here. by selling that higher strike call, mike has capped profits to the difference between the strike of the call he bought, and the strike of the call he sold. and since the time of the trade, shares of gm are up more than 7%, making this trade a winner. and now, "options action's" biggest fans just want to know one thing, what will mike and carter do now? before we get to that. let's see how much money was made here. had you bought gm at the time of this trade, you would have earned about 10%. the stock. but mike's call spread cost $85, and at one point today could be sold for 185. that's a return of 120%. so mike, what are you doing with this trade here?
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>> well, you know, one of the things -- one of the reasons we got into this, gm was cheap relative to ford. that still remains true. this trade, the risk/reward isn't as good as originally. what i would be inclined to do, get a pop back up to where the stock was, actually, when you referenced that $1.85. i'd take my profits and roll up and out. give myself more time for this to play out. targeting about $42. >> carter, you spotted this trade. would you stick with gm? >> we like it a lot. not only is the absolute result the happy thing, but the stock compared to ford, compared to honda, compared to toyota, this acts very, very well. we would stay long in general motors. >> brian, i have a question for you because we have been talking about these rumblings, these rumors, that gm or ford might be interested in taking on a tesla, perhaps with an acquisition. what do you think? is there even any kind of shot in heck, that that would happen? >> pretty tough scenario to happen for two reasons. we showed the short interest,
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basically in tesla, and 40% out there is shorting the stock, it's hard for a company to come in and say, well, i really like the valuation here. if 40% of the shares are outstanding and other people out there think it's overvalued. number two, tesla sells out, they diminish their name. it's cool the tesla name has innovation itself. you think of the electric car, the name of tesla. you sell that to gm. now you sort of diminish the value. then put on top of that, you have a ceo that's a billionaire, basically, going to sell out his ego to a big player like gm. i doubt that happens. i probably think that eli musk wants to see this through. >> there's the take on gm versus anybody buying out tesla. thanks for that. up next, this chart is history in the making because the consumer discretionary sector has beaten the market for the past six years in a row. which no sector has ever done before. we'll tell you why you shouldn't bet on seven for seven, that's when "options action" returns. [ indistinct shouting ]
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♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ [ indistinct shouting ]
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♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪
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it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ welcome back to "options action." i'm seema mody. it's been a strong market, but not all sectors are created equal.
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while the s&p is up 29% in 2013. the top performing consumer discretionary sector has rallied an incredible 40%. compare that to the weakest of the ten sectors, telecom services, those stocks up less than 10%. and here's what makes a discretionary run all more impressive. the sector is up, get this, over 220% over the past five years. double the broader market's rally. the question now, will consumer discretionary stocks continue to lead in 2014? dom. >> well, that is the question, seema. thanks for that update. let's find out. over to carter braxton worth. this sector has had a record run. why are you betting against it now, carter? >> a couple things, we'll look at the charts. conceptually there's the problem the sector is just completed a record sixth year of outperformance compared to the market. no sector has done that going back to the 1980s. look at the year to date performance, not only is it the single best of the ten. it's again has done better than the market.
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a sixth year in a row. not likely to persist. now, take a look at some visuals. i'll roll through these quickly. this is a two-year chart. and you're talking about very, very serious outperformance. how about if we step back to five. you're talking about a double. so one of the parts that comprises the whole is outperforming the whole by two to one. now, take a look at this long-term chart. this is where the correlation, which has been quite good, and it all has started to break down. is this priced for perfection? we would say yes. big names in the group are actually starting to not act well. things like target and so forth. anyway, here's the xly, the etf that is the way to track this sector. and what's important here is that you have a well defined trend that you respond to the top or bottom. of course, what we've done now is blown out the top. that's the problem. and we think that this comes back to life. we're looking for a 10% selloff here. now, just a tip of the hat to
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the funny mentals. this is price to sales. we are above the 1999 high. this is price to cash flow. we are right at its all time high. this is price to book. we are at or just below all-time high. expensive valuation. year to date the best performer. buy, sell or hold. we sell. >> carter, way to rain on the consumer parade here. how about this, scott, what's the trade for consumer discretionary stocks? >> the interesting thing here is xly options are very cheap, cheaper than in two years. so we don't have to be too cute here. carter is bearish, options are cheap. we want to buy a put. in xly earlier today against stock at 66.25, we could buy the february 66 strike put for 1.20, that's our max risk. it means our downside break even is 64.80. we see xly below that level at february expiration. this is a very inexpensive way
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to make an intelligent bearish bet while defining risk. >> so brian, how about this? is buying cheap insurance for the downside the way to go? >> yeah. i think if you're tactical, it definitely is. you look at the level of volatility in the market. option prices are cheap. that's what scott talked about, that's why he's buying a put. in terms of the consumer discretionary, the reason for the bull market is historically low interest rates. i believe actually until the ten-year interest rates get above 3.5 closer to 4, that's where you see cracking in xly and consumer discretionary. that should affect the consumer in general. so maybe you want to wait before buying this put. but certainly, being able to get a cheap option while volatility is cheap is definitely the way to find protection and tactically insure your portfolio. >> there's the trade. thank you, guys. up next, the final call from the options pits. ♪ [ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap...
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of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade.
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who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim from td ameritrade. time now for the final call. the last words from the options pits. scott nations, over to you. >> define risk in 3d systems.
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>> brian. >> lots of bullish activity in gm. stay long call spreads. >> carter braxton worth? >> be contrarian, pick up gold. >> looks like our time is expired for "options action" today. i'm dominic chu. go to our website. omtdionsaction.cnbc.com and check out our daily segment. have a nice weekend, guys. >> announcer: the following is paid presentation for focus t25, brought to you by beachbody. >> [ echoing ] it's about time. the number-one people have for not working out is they don't have time. >> i have four kids. >> i work 60, 70 hours a week. >> i don't want to work out for no hour. are you kidding me? i don't have the time. >> announcer: no time to work out? no problem. introducing focus t25, the breakthrough in-home fitness program guaranteed over an hour's results in only 25

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