tv Options Action CNBC October 5, 2014 6:00am-6:31am EDT
people first, then money, then things. now you stay safe. bye-bye. this is "options action." tonight, liftoff. we'll tell you why today's bounce could be the end of a vicious rally for stocks. plus, 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 watched name. 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. these are the traders here in
times square. tonight, a call to action because energy stocks have gotten pummeled. but one of our traders has a bold call to make. dan, surprise, surprise, you're getting bullish on energy. >> it's a bit contrarian. you think about the week we had across the globe in risk assets. there was a ton of volatility here. when you think about what oil has done and what the energy sector they're in the u.s. has done, the xle which is the energy select etf, two stocks, exxon and chevron, make up almost 30% of the weighting. this thing can't get out of the way. we know that. we know what's going on. crude. 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., the xle, 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.
it's not just an issue of weakness abroad. 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 about commodities is it's very easy to reach out and catch the falling knife. oftentimes the prices get depressed, more depressed and be depressed for a long period of time. there are at least some economic reasons domestically that can cause increase in demand. >> do you have to believe that crude has essentially -- i don't want to say 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 $80 crude. 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 view near term could make sense. one other point. this is an options trading show. one of the things about the xle, 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. the prices of xle options are 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. to me that sets up for an interesting defined risk options trade. >> why would that be? why would that happen, mike? >> why would you see this kind of spike in volatility? >> yeah. why would the eft's volatility 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, which are the integrated oils like chevron and exxon, 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. so that's one of the important things. there are other constituents that are volatile. the oil service names and some of the other components of energy, the refiners, are not as correlated to the integrates as you would think they would be. >> you're targeting exxon in your trade. >> i was actually looking at the xle. i really want to focus on those two big names, chevron and exxon. this is one way to do it. i want to say this. when the etf was trading at the near term, not playing for a massive move but for two things. a move up and also a crush when the etf moves up. when it was at $88.30 today, 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 caughts for 20 cents. that cost me a $1.50. that is max risk. my max gain is $3.50 if my stock goes to the short strike, the 92. basically low 87 and above 97 i lose that $1.50. i really like the chance for this thing to have a slow, gradual move higher, vol to come in, and i don't need a mad bump to make money on this trade. >> 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, and people watching the xle will remember back in august xle was trading around 96 bucks. when you're thinking now and between november expiration, give yourself a little leeway and make sure you're protecting yourself because this thing
really can move. and the commodities, whether going up or down, have been going in one direction. >> options trading, we buy and sell puts, when you look at a butterfly, it's not as complicated. i just laid out the legs there. >> you buy the wings, you sell the guts. >> exactly. you're going to do it, your online broker, they have a setting to do it. don't be too scared. it's a pretty simple structure. >> 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 and the stock has traded higher. so what was behind this unusual difference and how 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 a long october 29 call position into the november 32s. normally that would be interesting on a day when you don't see that much activity in this name typically as far as options are concerned. but that day got followed up on wednesday by a big buy of the january 32 calls. about 12,500 of those traded that day. yesterday, jan 32 calls. 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 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 lately. it's trading at about 15 times earnings. of course, the nice thing about taxes is they're inevitable which means that tax preparation services are also inevitable. if we take a look right here 32 bucks was essentially where
we were seeing all of that activity. out to january expiration. one other thing, next year could be very interesting for this 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 gets, the more likely you are to seek getting some help to get it done. >> dan nathan. h&r block. >> it's interesting. when you look at that call activity, the explosion of interest, and that's important. that open interest and increase in the calls. the stock had this big rally. to me you have to think what are some of the reasons for that. and you don't know. this stock has -- this company has 20% of their market company in cash. is this an lbo candidate? is that some of the stuff that's going on? that's a pretty hot thing. activists have been getting involved in stocks that they think they can kind of move the needle and unlock shareholder 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, mike. >> yeah, i think it's absolutely
perfect for it. and i'm just going to follow along with the activity. the january 32 calls were trading for about a $1.20 or so. that seems like a relatively inexpensive way to make a bet. this was a stock that rose 5.5%. risking something on something that moved that amount seems like an inexpensive way to make a bullish bet seems like an inexpensive way to make a bullish bet to me. >> would you agree with mike? >> i agree it's an inexpensive way to make a bullish bet. i know we spend a lot of time talking about it. unless you know who's doing what for what reasons, i just don't buy it. this stock also went from 34 down to 30 over the last month and a half. i don't know why that happened either. so that doesn't make me want to sell it when it was down at 30. and 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 and then you find out. >> the fact that the stock went down is exactly why calls are the right way to make a bet
here. not overly expensive. oppenheimer just reiterated they're overweight on it. there's some interesting catalysts here potentially coming up including earnings at the end of the year. >> got a question? send us a tweet @optionsaction. optionsaction.cnbc.com. 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. >> billy oe'sheen. >> not that crazy. but gopro shares have hat another wild week and you'll never bet where some of the stock is going next. that's when "options action" returns.
welcome back to "options action." let's talk about the markets' crazy week. dan, what worries you most? >> i think 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 they're lending to do it. 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? >> global growth certainly. i think a strengthening dollar for multinationals is 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, i mean, skeptical, and then you add valuations that are probably a turn and a half above average. >> no surprise mike and dan are bearish. tom lee is one of wall street's biggest bulls. he's from a boutique investment firm. welcome to "options action," tom. good to see you. >> thanks, melissa. >> in a note that you put out this morning, you say we're setting up for a big rally at the end of the year. why is that? what do you see? >> it's really simple. number one, i thought we saw signs of a crescendo selling. selling off in the first day of the quarter is actually a very bullish sign. 92% of the time you rally from that point into the end of the year. and second, there's a lot of fund managers trailing their benchmark. and it sets up for a pretty big beta chase. >> can we do that, though?
because we've seen small caps drag. a lot of people are saying mid caps are in trouble as well. can we get that year-end rally if we have trouble in the smalls and the mids? >> historically, because the russell has underperformed the s&p 1,000 basis points over the past six months, that's usually the end of a correction, not the saturday of a sellup. i think it confirms we'll have a big move in the s&p over the next six months. >> before this correction, we really saw a declining breath on the smaller cap side, but the large caps. it's been a smaller amount of companies doing a lot of the heavy lifting to me, and the s&p really was not able to make a substantial run above 2,000 so i think with the qe ending next month, it's kind of what i was saying about the skepticism of the continuation of the rally here, i don't see the revenue growth coupled with this global growth concern that we're seeing in europe and also in the emerging markets. >> i mean, it's a fair point.
i think the market has been a little choppy, weak, it's gotten investors nervous. but on the other hand i think it's setting up for what will be say seasonally strong fourth quarter. i know earnings are going to be a big question mark. i think the key here is that u.s. investment spending is picking up. it's going to favor the domestic cyclicals. you really want to be focused on domestic cyclicals as you think about fed hikes anyways. >> you know, my question would be, you were just alluding to the fact that the russell has obviously been relatively weak compared to the other big names. and those -- obviously i'm not expecting to see a lot of energies selling their strong names going into the end of the year, but is your suggestion, then, that those underperformers, essentially the dogs of the russell year to date are really the play to get into it and add beta going into the end of the year? >> i mean, when you think of beta, i think one theme is the gas lien d
gasoline dividend. that's going to boost growth. 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, too. >> tom, we're going to leave it there. thank you for your time. >> thanks for your having me. >> tom lee. fund strat global advisers. all right. dan, let's get to your trade here. >> well, listen. >> if you agree with him and you think that we do see this beta chase in the year end, but you do worry a little bit -- we have a chart of the s&p 500. the 200-day moving average. for me i think that's going to set up for a q1 disappointment. the higher we go in q4, i think we give it back. 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 today, when the s&p was at 196.65, i looked at the december quarterly, march quarterly 190
put spread. that basically corresponds with that one 1900 level in the s&p 500. if you agree with tom and you think the s&p is going to inch up, you want to sell the december 190 put at $3.40 and buy the march quarterly 190 put for $6.40. when you get to the year end and if the etf is above 190, then you look, you basically have financed -- basically half the purchase price of that longer-dated put. and then you're going to look to further finance it and maybe turn it into a vertical put spread. >> you have a number of holidays coming up. that probably is going to depress volatility. i think that's a positive. the names that have outperformed, i don't see anyone holding those things until the end of the year. 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 that people are going to step in and start buying them this year. >> coming up head, a big dive for gopro shares. we'll discuss that when "options action" returns.
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 with their bullish bet on gopro. mike was looking for an adventure. carter was, like, dude, i have just the thing. >> just ride the momentum. momentum is real. >> but just buying 100 shares of gopro, dude, i'm not that crazy, mike said. so to spend less and define his risk, mike bought the january 82 1/2 call for $6.70. now, a call gives you the right but not the obligation to buy a stock at a given price and time. 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. ♪ dream weaver >> now mike and carter can't stop doing crazy stuff, but between jumping off buildings, flying down mountains and deep sea swimming, guys, don't forget about the trade because "options action'" biggest fan want to know the answer to one question. how can kwuow and carter make more cash? carter is out sick. we wish him a speedy recovery. we hope to see him back here soon. meantime, mike, what are you doing with this trade? >> this is one of those trades we talked about it when we put it on. you have to keep a close eye on it because this is a really volatile stock. earlier this week it became essentially impossible to borrow. at one point it hit almost $95.
take the money and run because this is a great and quick profit we made here. at the worst case, you could take some of those profits, roll them up and out a little bit. but you've got to take some money off the table. >> what do you think about gopro especially going into the holidays. they've got the new camera. >> it's if youny, it's binary. i have no interest in them and i never would. i actually think the barriers to entry to somebody like an apple are not very high. i think if you're assigning some sort of media valuation to it, i don't see it. i also think the hardware thing, think about flip cameras that cisco bought. i don't think these guys will be around in a few years. i think in some way, shape or form. but to me, it's just too fertile a ground for the installed base of guys like apple to go after them. >> there is going to be a lot of these things in stockings, i'm sure, and i'm sure people who want to be long the stock. you would absolutely want to use options to do it. you can definitely get in at a better price. >> good point.
let's take a tweet here. marty writes -- agree with contrarian. but could be explosive move. why not just a risk reversal? risk reversal? >> i think that's a great idea. i swear when i was conceiving this trade i was pricing it up. it was interesting to me. i really wanted to do two things. not only a directional bet but also a decline in volatility. that and the money call fly achieves that goal but to be very frank on risk reversal, did one on chevron today using some of the similar inputs i use for the xle. >> what would you choose? what's a better vehicle? >> well, you know,
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. which they're teaming up with alcoa on. i think that's an interesting situation. general motors, i'm not quite as enthusiastic. >> so you would prefer for an oil trade to actually just go to automakers. >> yeah, for where we are right now. >> time for the final call. the last call from the options pits. dan. >> yeah. i don't think we we're going to have this massive beta move in the s&p 500 and the large caps but if you are inclined to think we get back to the 2,000 and hold there but you think we could have stormier clouds in the first quarter, i like the s&p 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.
in those near-dated options. >> 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 you back here next friday at 5:30. meantime "mad money" starts right now. >> the following program is brought to you by supple, the new, revolutionary health regeneration drink by supple, llc. >> hello, and welcome to the smart medicine show. i'm dr. monita poudyal, and we have a great show today. if you have pain or know someone that has pain - joint pain, back pain, bone pain, muscle pain, or if you suffer from arthritis, osteoarthritis, rheumatoid arthritis, fibromyalgia or even weakness or fatigue, then you need to stay with us for the next half hour. we're going to be discussing medical breakthroughs that can help you in