tv Options Action CNBC October 3, 2014 5:30pm-6:01pm EDT
tonight, lift off. we'll tell you why tonight's bounce could be the end of a vicious rally for stocks. plus, do you think this is wild? wait till you see how much money options traders made on gopro this week and show you how you can do it too. and follow the money. >> "x" marks the spot. >> because serious traders are making massive bets on a little watch. we'll tell you what it is and how you can profit. "options action" begins right
now. welcome to the nasdaq market site, i'm melissa lee. energy stocks have gotten pum l pummeled but one of our traders has a bold call to make. dan, surprise, surprise, you're getting bullish on it. >> it's a bit contrarian. there was a ton of volatility here. two stocks, exxon and chevron, make up almost 30% of the weighting. this thing can't get out of the way. we started the week off with, you know, global growth concerns and therefore we've had this depressed crude price. to me you have a sector in the u.s. that's gone from one of the best performing in the beginning of the year to the worst performing. i don't think this is going to stay for too long. bottom line i think these stocks are cheap here and i do think it sets up for contrarian balance over the next one to two months.
>> certainly one of the reasons oil has been going down is the dollar is strengthening. one of the things also is we are, thanks to the lower gas prices, starting to see increase in demand for cars that consume more fuel. this is a good sign for most of the economy. it's a good sign for the automakers and a good sign for domestic gasoline demand. we actually made a bullish bet a while ago. that didn't work out so hot. one of the things that's important to remember is it's very easy to reach out and catch the falling knife. oftentimes the prices get depressed and can be depressed for a long period of time. there are at least some economic reasons domestically that can cause increase in demand. >> do you believe it has essentially bottomed but stabilized because we have seen a huge decline in huge oil in order for you to believe in energy stocks?
>> it seems the consensus was we were going to see it. the consensus is you got it right for a while. you bring up the point about the dollar. the dollar has overshot many people's short-term expectations. so if you think that would likely temper the dollar gain against other currencies, a bullish term near term would make sense. this is an options trading show. one of the things that's interesting, the top five holdings make up 40% of the waiting here. you wouldn't expect an etf to trade at a higher implied volatility. they're higher than a lot of its components right now and that's really what drew me. there's the one year chart of it. it's gone from 52-week lows to 52-week highs. >> why would that be? why would that happen, mike? >> why would you see this kind of spike in volatility? >> yeah. why would it be higher than its components? >> it would not be higher than a couple of them. if you're taking a look at some of the bigger ones, chevron and kpeks on, i would expect them to
be lower. it does include a number or more speculative types of names like drillers for example, the oil service index. now, granted they don't represent as large a percentage of it but these things aren't as correlated as you might think. there are other con state subsequents and th s -- const. they're not as correlated as you thirpg they would be. >> you're targeting exxon in your trade. >> i want to focus on those two big names. this is one way to do it. i want to say this. when the etf was trading at $88.30 today i wanted to play for two things, move up and evolve crush etf moves up. i bought the november 87/92/97 put butterfly. paid $1.50 for it here.
the strike that i own, i bought one of the november 87 calls for 360. that is in the money. i sold two of the november 92 calls at 115 each or 230 and i bought one of the november 97 calls for 27 cents. that is max risk. my max gain is 350 if my stock goes to the short strike, the 92. basically low 87 and above 97 i lose 1.50. i'd like it to have a gradual move higher and i don't need mad bumps. >> when they were elevated that's when you want to start taking a look at strategies where you get to sell, you know, more options. that's what he's looking to do here. it's interesting also the strike he's decided to cover will remember back in august xle was trading around 96 bucks. when you're thinking now and time of expiration, make sure to
give yourself time. they have been going in one direction. >> i just want to make one final point. again, options trading puts, we buy them, sell them. when you look at a butterfly, it's not as complicated. >> you buy the wings, you sell the guts. >> but you're going to do it with your online broker. don't be too scared by this. >> let's move on to a stock we don't talk much about but stocks they're finding very interesting but that would be tech giant h&r block. in fact, this week six times the average weekly options vacuum trade and they've traded higher, so what was behind this unusual tircht and how high could this thing go. mike khouw went over to the plasma to break it down. mike. >> this is really interesting. the activity picked up on tuesday when we saw big call
spreads trading. it looked like somebody was rolling out of an october 29 position into the november. normally that would be interesting when you don't see that much activity as far as options are concerned but that day got followed up on wednesday by a big buy of the january 32 calls. about 12.5 traded on those. and then again today we saw another 15,000 of these. if you just take a look over the course of this week, you can see. this is essentially the activity, the increase in call open interest in h&r block and take a look at this. shot right up. over 100,000 contracts traded overall. this is pretty interesting because this is a name we probably don't get all that excited about. tax preparation stocks but this has been pretty volatile. of course, the nice thing about tacks is they're inevitable. if we take a look right here
3rks 2 bucks is where we were seeing all of that activity out to january expiration. one other thing, next year could be very interesting for stock. the affordable care act has implications because people who don't get out there can pay a penalty and that's going to be a part of their tax return and the more complicated your tax return is the more likely you are to seek getting some help to get it done. >> dan nathan. >> it's really important. that open interest and increase in dauls. the stock had this big rally. to me you have to think what are some of the reasons for that. is this an lbo candidate? is this some of the stuff going on? that's a pretty hot thing. activists have been getting involved and unlock some share holder value. i don't know the company very well. mike laid out a very good reason for it going forward. but don't forget, activists are on the prowl right now. >> this is a perfect candidate
for an options trade right now, mike. >> yeah, and i'm going to follow along with it in january 32 calls were trading for about a buck and 22 cents. this was a stock that rose 5.5%. risking something on something that moved that amount seems like an expens inexpensive way follow a bullish bet. >> dan? >> i think it's an inexpensive way. this stock went from 34 to 30 down the last month after half. i don't know why that happens either. just because i see a lot of call buying i think you have to develop some sort of fundamental thesis and then have conviction
on it. >> the fact that the stock went down is exactly why calls are the right way to make a bet here. not overly expensive. oppenheimer said they were overover on it. >> got a question send send us a tweet @optionsaction. we've got to hottest news, video throughout the week and exclusive trades, so do check it out. here's what's coming up next. free your mind. >> because if you can't, you might be able to profit from what could be one of the greatest year-end rallies of all time. plus, talk about crazy. not that crazy. but gopro shares have hat another wild week and you'll never bet where some of the stock is going neck. that's when "options action" returns.
welcome back to "options action." let the me talk about the markets. crazy week. dan, what's on your mind? >> i think a the earnings growth we're going to see are clearly the result of low interest rates where companies are using cash to buy back stock and i don't think that's legitimate earnings growth. i think there's too many headwinds overseas. some of these global growth concerns that i think are going to be persistent for the next couple of quarters. >> mike? >> i think it's going to be a challenge. rising rates would pressure equity prices. that's a concern.
so when i take a look at this, you know, skeptical and then you add valuations that are probably a turn and a half above average. >> no surprise mike and dan are bearish. welcome to "options action," tom. good to see you. >> thanks, melissa. >> you put out a note saying we're setting up for a big rally. why is that? what do you see? >> it's really simple. number one, i thought we saw signs of a crescendo selling. it's actually a bullish shine. 92% of the time you rally from that point into the end of the year and second. there's a lot of fund managers trademark. >> can we do that though? we've seen them collapse. a lot of people are saying mid caps can be in trouble as well.
can we get that? >> that's a very good sign. we're going to have a move in the s&p over the next six months. >> before we had the mini correction. we've been highlighting the declining breath on the smaller capsize, but the larger capsize, it's been a smaller amount of companies doing a lot of the heavy lifting and the s&p was really not able to make a substantial run above 2,000 so i think to me with the qe ending next month, it's kind of what i was saying about the continuation of the rally here, i don't see the revenue growth coupled with thiz global growth concern that we're seeing in europe and also in the emerging markets. >> i mean it's a fair market. i think the market has been a little choppy week, you know. it's gotten investors nervous. but on the other hand i think it's setting up for what will be
a seasonably strong quarter. i know earnings are going to be a big question mark. u.s. investment spending is picking up. you really want to be focused on cyclicals. >> my question -- those -- i'm not expecting to see a lot of managers. is it if dock at the russell year to date the plate to get into it to add it going into the end of the year? >> when we think of data, i think one thing they're going to focus on is the gasoline dividend. that's going to boost growth in the next six months. people do like groups that have been working. tech and health care. i wouldn't be surprised if you see the russell get a nice lift. you're right. it's oversold.
the mid caps are going to look good. >> tom, we're going to leave it there. thank you for your time. >> thanks for your having me. >> tom lee. d dan, let's get to your trade here. >> if you agree with him and you do worry a little bit -- we have a chart of the s&p 500. it's been below it in two years. for me i think that's going to set up for a q1 disappointment. remember that late january, early february selloff that we had this year after the s&p rose 30%? i think we set up to do that and i think you want to use heightened index options prices to kind of set up for this trade. so when the s&p was there, i look at the december quarterly, march quarterly put spread. that basically corresponds with that one 1900 level in the s&p 500. what i really want to do is if you agree with tom and you think the s&p is going to inch up, you
want to sell the december and sell the other, if you get to year end and the etn i etf is a that, you look. maybe it will turn into a vertical put spread. >> you have a number of holidays coming up. i think that's a positive. i don't see anyone holding those things. they're going to keep those things on their sheets. i'm a little more interesting about the parts that have been underperforming and i'm a little unconvinced. >> coming up head, a big dive for gopro shares. we'll skurs th-- discuss that wn "options action" returns. g?góéjç
welcome back. after a scare on thursday the stock is up another 6% on the week and that's very good news for our friend mike and here's why. on "options action" it's how we trade to the max. risk less to make more and that's just what khouw and carter did. to spend less risk he bought the call for $6.82. the call gives you the right but not the obligation to buy the stock. so to make money mike needs gopro shares to rise above that strike price by more than the cost of the trade or above $89.20 by january expiration but it gets even better because if gopro shares do rise, that call
will increase in value faster than the stock, meaning more upside potential. >> what? >> dudes, it means more money in mike's pocket. >> excellent. >> and since the time of the trade gopro shares have continued their epic rise making mike and carter winners. they can't stop doing crazy stuff but between jumping off mountains and deep sea swimming, don't forget about the options trade. they still want to know the answer to one question. how can co- can khouw and carte more? carter is out sick and we wish him a speedy recovery. >> earlier this week the stock became essentially impossible to borough and at one point hit
almost $95. so i think what you can do is take the money and run on this one because this is great and very quick profit that we made here. at the worst case you could take some of those profits, roll them out a little bit. >> what do you think going into the holidays, they've got the new camera and everybody says it's going to be a gopro christmas. >> i have no interest in them and i never would and i think the barest entry for somebody with an apple or going really not very high. so i think if you're assigning some sort of media valuation, i don't think about it. remember the flip phones? i don't think these guys are going to be around in a few years. in some way, shape, or form. it's too fertile a ground for apple go after them. >> there are going to be these in stockings. the borrow costs are as high as it is in this case.
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>> what would you choose? what's a better vehicle? >> interestingly with oil prices where they are and the fact that ford has been beaten up, it's a little taking a sideways turn but i like ford right here because if prices do remain depressed, i think it's going to be good for the u.s. manufacturers particularly with them coming out with their best-selling vehicle, f-150. i think that's an interesting situation. general motors, i'm not quite as enthusiastic. >> you would prefer to go to automakers. >> yeah, for where we are right now. >> time for the final call. dan. >> yeah. i don't think we we're going to have this massive beta move in the large caps but if you are inclined to think we get back to the 2,000 and hold there, i like that s&p -- the spy put calendar they laid out for us. >> mike. >> yeah. i also like calendars. i might be inclined to do one of the russell though, iwm, which
is actually the sector which has been underperforming where greater volatility might be priced in. >> all right. looks lime our time has expired. i'm melissa lee. for more on "options action" check out our website and we're on "fast money" every day. we'll see my mission is simple, to make you money. there's always a bull market somewhere and i promise to help you find it. "mad money" starts now. i'm cramer. welcome to "mad money." other people trying to make friends, i'm just trying to make you a little money. call me or tweet me. so which is which? is the rest of the world going to bring down the united states with its stumbling,