tv Options Action CNBC March 6, 2016 6:00am-6:31am EST
>> hey there, we're live at the nasdaq market site and look who is joining us tonight. >> that's right. >> one and only b.k. while the guys are getting ready and here's what's coming up on the show. >> and the butchery begins. >> you got that right, frank, because we're looking at some of the most hated stocks on wall street and telling you which ones you should trade or fade. plus, one of the market's leading indicators just did something remarkable. >> high-fiving a million angels. >> but could things be just a little too good to be true? we'll explain why you might want to stay out of the rally. and, well, that pretty much sums up the move in emerging markets lately. we'll tell you why some traders
are betting big bucks the space could continue to take off in a special report. the action begins right now. let's get right to it because stocks are at two-month high and the vix at a year-to-date low and high yield is surging. take a look at the hygf, up nearly 8% from its recent low as the high-yield market has seen record-breaking inflows this week. do you buy into this rally? let's get into the money right now. mike, what do you think? >> decided not to start it off with the big bear on the desk this time. >> motive. >> the entire reason that we had all the volatility in the markets since the beginning of the year has really been the high yield market, and this is a really good place to look if you think that the cracks are emerging underneath equities. the credit guys tend to see those first and, of course, there's a lot of things to see and obviously a lot of bankruptcies in the energy space and a lot of reason to be concerned but i do like high yield here and i'm not bearish of equities. >> you do. i feel like this is a monumental moment. >> look, the reason i've not
been that bearish is because when you buy stocks it's very easy to do that just taking a look at, okay, we'll have $200 worth of earnings in the s&p down from maybe 120 last year and when you buy stocks, you're buying cash flows for the next 5 to 10 years so what we're seeing right now, people buying high yield and equity, we're looking beyond. >> a lot of materials and a lot of energy-related names that were just massively levered. a lot of stocks up 10%, 20%, 30% in a day and 50% in the last couple of weeks and market cap of a couple billion and 8 billion in debt and earnings cut in half. really kind of a desperate sort of situation so we've had a couple situations, and saw this marathon oil and saw some capital raising and gone really well and a lot has to do with sentiment and investors are willing to take a little more risk in in some of the scenarios
and especially things that are like coiled springs. when you look at this rally in high yield, another thing we haven't mentioned, liquidity and that's something b.k. feels very strongly about when you think about the markets and particularly an instrument in the hyg. >> that's where a lot of those afford and we had an amount of debt and an amount of corporate debt has already doubled since 2008 and because of dodd/frank the amount of debt or balance sheet power for brokered dealers has been cut in half and when these things turn, they turn violently, and i don't think i don't think anything has changed. dan mentioned the deals out here. what do you think people will do with the newfound cash. >> the only capital to be deployed in the high-yield market is not bank balance sheets. these guys are net buyers. >> not even close. >> and i'm not going to deny that the commodity super cycle won't have more implosions, they will, and that's not what people are buying when they buy stocks.
you're buying the next ten years of what they can earn and i don't think we need to worry about energy exclusively. >> oil is up 10%, 9% and that's certainly helped change sentiment for this week, especially in high yields. >> sentiment is the a huge thing and when you think about all the fears, you know, a lot of fears have abated over the last month since february 10th here a little bit. listen, i think that this is a call in the near term on oil though, mike, so you can talk about buying cash flows for the next 5 to 10 years but if oil goes back down after the massive rally that it's had from 26 to 36, you know, again, we're going to start hearing about defaults and reorganizations and bankruptcies and we haven't had that massive flow yet and to me i think that the hyg because of liquidity issues and because of the dramatic shift in sentiment and the move in the etf it sets up for those looking for black swanny sort of trades.
it sets up as kind of an interesting countertrend trade and have a chart here. it's a couple years. look at the downtrend that the thing has been and draw the lines any way you like and that tells me you probably have another dollar or so in that thing and it sets up for a pretty decent short, maybe for a move back to a prior low of 75, but if things get really hairy and we go back towards lows i think you probably see something towards the credit crisis lows which were much lower. >> what's your trade? >> if you are inclined to think this way, let's see how it acts and see what the follow-through is, and today when the etf, hyg was $85, look out to june expiration and buy the 80/70 put spread for $2, max risk, 2.3% of the underlying price. buying one of the june puts for 2.25 and selling one of the 70 puts and 2.25, maybe do, maybe don't. the point is you're looking to say this is going to take a little while. probably want to try to help mitigate some of the potential if it starts to just kind of settle in here around 80 but i think this sets up as a decent
risk/reward a relatively amount of premium and the decay out of the money action is much higher and makes a lot of cents to do that spread. additionally, we do see that there are some ready buyers for the high-yield space down at the levels we previously saw which is one of the reason choosing the lower strike makes a lot of sense. i'm not sure if high yield has lot more room to the upside and just in terms of asymmetric risk owe reward to me the trade makes sense even though i don't necessarily think we'll see the whole world roll over. >> this trade, actually, what i like about this in this environment, a lot of what i've been doing is trading with options right. because we see these massive sentiment shifts and see this huge volatility, it's very difficult to have an outright short position in this market and if you do it via an options spread or anything like that, kind of a defined type risk strategy then you can weather
another point up. don't have to worry about it every day. >> you mentioned a black swanny sort of play, not for a black swanny sort of event? you're looking for lows? >> when i look out and look at option positions across a lot of different instruments where i can get bang for my buck, hyg prices are very cheap and i get very near the money participation here and if oil goes back towards 30, you'll have some of the fears very prevalent a few weeks ago back into the market and this thing will have at least a 7 handle on it. >> moving on to some of the most hated stocks on wall street that are gaining the market. freeport-mcmoran, one of the most unloved stocks in the s&p 500 and yet shares are up more than 40% in 2016, breaking it down, a man never any problem feeling the love, cnbc's dom chu. hey, dom. >> well, melissa, you guys are way too kind, appreciate all the support from the "options action" gang and now where there's the most hate or least amount of love, close to 50 members of the s&p 500 have short interest of 10% or higher and in this case we're defining
short interest as a number of shares short as a percentage of the total flow so we're going to kick it off with our hat tip to the "house of cards" season four premiere and netflix short interest is around 13% and that stock has risen 7% over the course of the past week. now, you've got some of the most beaten up energy stocks here as well, and if you look at shares of coal and gas company, consol energy and short interest there. 29% of flowed shares and 36% in the last week. offshore oil drillers like transocean, short interest there is 36%. its rallied 44% during that time. now, some of the most unloved stocks can catch a bid when short covering is a big part of the story, so some of the unloved names have been seeing a lot of love, melissa, as of late. back over to you guys. >> thanks so much, dom chu joining us at the stock exchange tonight. dom mentioned a short covering rally and once a lot of these shorts have been flushed out, appears that maybe a lot have with 40%, 50%, 60% gains, what's happens next?
>> that's the issue we're short. who cares who is buying and whether it's a short, a person covering or not, right? >> right. >> but when it pulls back, that short is probably not there. you take your long-term buyers tend to be very price sensitive and they are already there and that short is not there. probably long gone. the one that looks most vulnerable to me is freeport-mcmoran, right? we've had had a huge rally in this thing and here's the copper. the copper stocks in china are up 11%. you're starting to see potentially there's some manipulation there but nothing has changed on the supply, so why -- why should freeport-mcmoran go up, it shouldn't. so i'll be very careful getting into that one? >> any of these things worth a buy? >> the last couple of weeks, transports with one sector and materials two weeks ago, clearly wrong, but, you know, back to b.k.'s point, thanks for being here, buddy. >> thanks for having me. >> you take shots and define risk to a certain point and i've been wrong. these things have a tendency to go longer than you think that they will, but i'm not a buyer of them here because freeport is
a great example. this was a stock trading at 3.5 and now it's above 10 and that doesn't make a whole lot of sense. can you say, well, it didn't deserve to be down 80%. well, it kind of did, for a whole host of reasons. >> a lot of reasons why the stock deserved to be down there and the hard thing is how can you press shorts, even on rallies in names like freeport. a lot of the names that are in the commodity space are heavily levered. so when the stocks get cheap as a percentage of the total value of this business, even relatively small swings rip the equity in a huge way so i don't think that's necessarily where you want to try to take a short position. >> of these stocks, you're taking a look at netflix? >> i'm looking at netflix, a stock i've been skeptical for a long time based on valuation and part of my thesis here is when you compare the value of this against other media companies, it isn't like they necessarily have to have a lock on the space. if some other media companies decide what they are going to get with the program and get more innovative and try to go after the things netflix has been doing and they are early in the process, i don't know that
everything is going to be a huge success. the way to take short bets in these types of stocks, use options and define your risk, and the way i'm going to try to do it because volatility is high is sell an upside call spread, the one i was looking at, the april 101-10 call spread, collect about $4.10 by selling that. if the stock basically sits right here, you'll collect some money. if it drops obviously you'll keep that premium. we do capture earnings. if the stock even runs to the upper strike sometime between now and expiration, it's not going to go to the full $10. so it isn't like you're risk 6 to make 4678 the truth of the matter is you will, even if the stock rockets higher, you'll have an opportunity to cover this. you might lose the 4 bucks but this is a trade there. i kind of like the bearish bet in this one. >> you who thinks the markets will go lower? do you like this trade? >> i was looking at the fang, and this stock was up 3.5% and google and facebook were down and facebook and google on the week were flat which was kind of interesting to me. that will being said, a $43
billion market cap and netflix, a bit more squeezy here. the trade is kind of interesting to me because i think what mike is looking to do, just looking to sell volatility in a high volatility name that has the potential to possibly be pinned to $100 give or take a few bucks between now and earnings and at some point he'll take the trade-off for a couple of bucks. >> that's exact the idea. >> and the thing is if we get the stock to go lower, you'll have the opportunity while vol is high and a put spread and maybe you'll have the opportunity to put that on at the same time creating the incredibly flexible structure we call an iron condor and the idea is we're trying to collect some premium. >> i like gold condors. >> the iron ones. >> golden condor. >> in terms of netflix, right, i've been skeptical here. competition ultimately matters in this, right? they had a moat around their business, like warren buffett likes to say, they had a motor. it's not there anymore. competition is coming into this space. you want to be short. >> got a question out there send us a tweet.
check out the website optionsaction.cnbc.com, we've got the hottest options news, very hottest news. videos throughout the week and exclusive trades and even sign up for our newsletter. it's so neat-o. be sure to check it out. here's what's coming up next. ♪ there's always coca-cola >> traders have been drinking up shares of coke this year, and we'll tell you why the charts look poised for fresh new highs. plus -- ♪ let the good times roll >> don't look now but emerging marks are surging and according to some traders the good times are just getting started. more "options action" right after this. here at td ameritrade, they work hard. wow, that was random. random? no. it's all about understanding patterns. like the mail guy at 3:12pm every day or jerry getting dumped every third tuesday. jerry: every third tuesday. we have pattern recognition technology on any chart plus over 300 customizable studies to help you
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hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. td ameritrade. welcome back to "options action." a big week for emerging markets. seema mody is at headquarters with a look at what drove the stocks. hey, seema. >> hey, melissa. a strong week for emerging markets. the emerging market etf seeing its best week since december 2011 two in part to the rebound in oil prices, weakness in the dollar, encouraging news out of china. the bank announcing they are going to inject more liquidity and keep the yuan stable for now. the hang shang closed up by about 4%. the question on investor minds is whether this rally is sustainable. over the weekend china will unveil its updated growth forecast at the npc as well as
its plans around fiscal stimulus. science of further spending on industrials would be widely seen as a positive for the stocks and economy and the upcoming european central bank meeting on thursday could also lift sentiment if mario draghi cuts rates deeper into negative territory. strategists say that would make emerging market bonds more attractive as yields in europe and japan would likely fall. lastly, keep an eye on u.s. economic data if it continues to surprise to the up side and that results in the dollar strengthening. that could also spell trouble for emerging markets. melissa? >> seema, thank you. dan made it over to the smart board and you said options activity has actually exploded. >> it did, in the eem, the tracks, emerging markets and today it was actually looked like one trader was rolling out of a bullish position that he put on a few weeks ago in march expiration. options volume was 2.5 times average daily volume so the traders sold out of 140,000
march 33 calls and bought 100,00 of the april 33 stikes. that's $2 million in premium and breaks up at 3520 and 6.5% out of money and let me tell you something. we report it had on "fast money" when the trader bought the march calls way out of the money then and i didn't think it was a great chance to be in the money and they were. these aprils, looks like a far way away and who knows and i'll tell you who knows. when you look at the chart. there's a one-year chart of the eem and you can see the down trend here and it tracked amazingly and look at the breakout here. it's up 9%. like seema said on the week, up 18.5% or so from the january lows and now the stock is still down 25% on the year, so -- excuse me, from the 52-week highs and the massive breakout, sentiment shift, and as we're talking about the eem we're also having to talk about brazil. if all the factors that helped emerging market equities go up, certainly helped and look at the ewz, the brazilian was up last
last week it was left for dead and look at this downtrend that has been in. want to make one point about the $25 level. stopped at its 200-day moving average. look at how many times it's been rejected. an interesting one to keep an eye on next week an i've got to tell you, implied volatility, price of options in the ewz are pricing a lot of movement and very easy to make directional bets in this one. >> brazil is really fascinating. the bovespa is up 13% and what happened in the last day or so it was a corruption problem. >> they detained the former president? >> questioned him for hours. >> and what the market thought was that here comes regime change in brazil. things are going to get better. you know, i don't know if that's the case. i certainly would not be buying ewz brazil on levels like that. i think you fade it, if
anything. >> a lot of hints that this is just the beginning, that they are going to take it right into the existing government. frankly, that's a cathartic moment because if you have a corrupt system and they have been bleeding off the economic value, then you should hope that if you can correct that, that actually is the beginning of a turnaround. >> i was mentioning talking about the sentiment shift and you saw what happened with petrobras. they have a $10 billion loan and we know how much debt they have and a lot is dollar denominated and a lot of things went really well for the emerging markets or trades that were really beaten down over a very short period of time and when i look at the ewz chart, it makes me nervous to go 25% in you've trading days back to a level where it's failed a few times. >> i don't know. >> seema mentioned china very briefly and the nashville people's congress meets next week and there's a conspiracy theory out there that the chinese government will not
allow the shanghai composite to go down substantially during a week in which leader are meeting and it's just for show. >> certainly. what do you think they are going to say? they are going to say growth is great. we're going to support everything. maybe it's going to be a little weaker. transition is going fantastic, but they may not have that control. i'm not sure that fiscal stimulus would be that well received by the markets. >> take a look at how well consumers are doing there. mercedes had 20% growth that they just reported. when we began to seat beginning of our own credit crisis here, you didn't see that kind of activity and when you're trying to compare, are they having their own version of the kind of credit crisis we saw, you know, we are seeing some symptoms that maybe it's not as bad there. >> well, i think also in china this week there was news that was taken pretty well that they were actually going to cut capacity on a lot of the mal-invested sectors and that doesn't lend itself to fiscal stimulus. it seems a little curious and i expect to see the shanghai back at 2500. >> up next, coca-cola shares near all-time highs. we'll tell you why one of our
traders says it's about to see a major breakout. that's when "options action" returns. s here at the td ameritrade trader group, they work all the time. sup jj, working hard? working 24/7 on mobile trader, rated #1 trading app on the app store. it lets you trade stocks, options, futures... even advanced orders. and it offers more charts than a lot of other competitors do on desktop. you work so late. i guess you don't see your family very much? i see them all the time. did you finish your derivatives pricing model, honey? td ameritrade.
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a look back at some of our open trades. last month dan thought it might be time to get short industrials and specifically general electric. take a listen. >> today when the stock was about 2865, i looked out to may expiration and i'm targeting their april 22nd earnings event and you can really simply here just by the may 28 puts for $1.25, max risk, breaks even at 26.75 to the downside. >> since the time of the trade the stock is up more than 6%, so, dan, what do you do with this? >> actually, it's underperforming the market in that period if that makes -- >> yes. >> here's the things, back a month ago world looked like a very different place and to me at the time my bet was that the stock is going to break the up trend that it's held very well. showing very good relatively strength. at this point, listen, i think as a little bit of a rule, outright long premium
directional trades, oh, i think you really have to set a stop before you go into it. yes, the premium that i'm risk is my stop, but that doesn't make a whole heck of a lot of sense. don't want to see options premium go to zero and i usually use a 50% premium stop. >> also last month cohen carter said shares of coca-cola could surge to new highs. takes a listen. >> the all time high was 44.48, closed here at 43 and change and i think we'll actually manage that. regardless of what the market does, you want to be here rather than anywhere else. >> options are extremely cheap. april calls, that's the way to play it, no reason to do a spread here. >> carter is obviously not here. he wrote in and says he likes the charts. mike, what are you going to say? >> stick with the trade. not risking a lot of money. very little extrinsic premiums left and one of the stocks that's likely to hold is this one. >> up next, the final call so stay tuned. i'm here at the td ameritrade trader offices. steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data
you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. td ameritrade. yeah! ahh... you probably say it a million times a day. ahh... ahh! ahh... ahh! but at cigna, we want to help everyone say it once a year. say "ahh". >>ahh... cigna medical plans cover one hundred percent of your in-network annual checkup. so america, let's go. know. ahh! and take control of your health. cigna. together, all the way.
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steve, other than making i'm here atme move stuff,rade trader offices. what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. td ameritrade.
when you see irregularities you don't ask questions, you don't make excuses, you dent wait for more clarify. you sell, sell, sell. from now on can we see canny irregularities equals sell. final call time. b.k.? >> actually like dan's hyg trade. stick with that especially going into next woke. an awful lot of volatility? >> mike? >> call spreads, netflix. >> dan in. >> i like his call on my hyg call. >> looks like our time has expired. thanks for watching. i'm melissa lee. see you back here next friday for more "options action." have a great weekend. paid advertisement for the ninja coffee bar brewing system, presented by sofía vergara and mark rosen and brought to you by sharkninja. >> what's my favorite coffee drink? rich, hot coffee, iced coffee, cappuccino. i love them all. [ doorbell rings ] >> sofía! you stopped coming to the café. >> rand. we have to talk. >> but you loved my coffee. >> let's just say i found something better. ♪ >> can he make it rich? >> mm-hmm. >> hot and iced? >> ah! >> how about an iced layered latte? >> [ chuckles ]