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tv   Options Action  CNBC  November 3, 2018 6:00am-6:30am EDT

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we are live at the nasdaq market site after another wild week of the markets. while the guys are getting ready, here's what's coming up >> we have had very good discussions with china we're getting much closer to doing something. >> hopes of a trade deal giving chinese stocks a boost dan nathan warns it is really a fakeout. he's got the trade. plus -- materials and industrials have been on a tear. but the chart master says watch out. the moves could be nothing more than a bull trap and -- ♪ just when you thought it might be safe to get back into the
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tech trade, apple took down the markets today. but have no fear, mike khouw says there's one big name investors should be hiding out in he'll break it down. time to risk less and make more. the action begins right now. and we start with tech unraveling again today after apple's earnings the sector fell 2% in the session. now down nearly 10% from the highs just one month ago so with all of the tech turmoil is there anywhere safe to hide out in the sector? let's get to the chart master, carter worth what are you looking at? >> oracle, it's an old line name, maybe boring but in fact it's showing a key thing it is holding up when others are under pressure so just a simple table the numbers speak for themselves in the month of october of course the worst month in perhaps a decade or thereabouts one of the worst octobers since '09, oracle was down everything else, but compared to the s&p. compared to the tech sector and
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the russell 2000, that's an important thing. people were selling everything but sold less of this and that is the definition of relative strength so here's a chart. weekly bars, and it goes back to 2013-14. we have a couple set-ups here. one of them is of course this head and shoulder bottom but what we have now, i want to focus on this. is this wedge of course. and my hunch is we're going to get pretty good moves out of this formation now, let's talk about the relative performance this is that same chart and what has happened three or four times is that when this starts to improve, when this starts to improve, which it is starting to improve you then get both absolute and relative performance. so i think this sets up for the breakout absolute. i like the developmental action on relative. oracle here i want to be long. >> all right thanks for that, carter. well, the professor today is out
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in san francisco so mike, what's your trade on oracle >> yeah, so, you know, oracle is an interesting situation we have earnings coming up this is not a name that's done that spectacularly well coming out of earnings. it does move a decent bit, we have had a couple of disappointments, but the valuation here, this thing is trading 14 times forward earnings when you consider this has about 30% greater earnings than in 2013, to me, this seems like a situation where we can probably go along with carter's, you know, technical view on the upside the thing is, because we have had those sort of set backs after earnings, if i was willing to buy the stock i kind of want to give myself a little bit of a buffer and that's one of the reasons that i'm looking at a risk reversal. in this trade i'm looking out to january. i can sell the 44 strike puts. about a 10% discount to where the stock is currently trading for 75 cents use the proceeds to fund the purchase of a 52.5 call
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for the same amount of money net-net i'm not laying out a premium and if the stock does rally it will increase in value in the short term. on the flip side, if for some reason it does fall back and i'm forced to hold this to expiration, have the stock put to me, i'm going to end up owning it at 44 which looks like a level of support i'd like to go back to carter and see whether he agrees or not that's essentially where we saw that swoon in june and then recovered. i look at that line and think that's a level i would be thinking of getting long in the stock if i had to. >> swoon in june, 44 i mean, keep going that's exactly right perfect level. i mean, owning it there seems very reasonable. then with a little luck, it won't go there in the first place. it will break out. >> so, you know, listen, the charting if you didn't have the name oracle systems up there, i would say, wow, that looks like an interesting technical set-up. i agree, but when i think of it from the fundamental standpoint, i think of some of the things we have heard about enterprise
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software, i say i don't like it. okay then when i think of mike's trade, fine. you want to get long the stock at 44 i would say wait a month buy it at 44 and you're using that put to buy that call, 52.5, that seems like the level you'd be happy with if the stock got there. to me i don't love the risk/reward because i don't love the fundamental set-up but the technicals look interesting maybe in a slightly different market. >> you don't think it's there -- >> no. i think this is a company that has real serious issues with organic growth, specifically in the higher growth. >> right so the interesting thing -- all of that is a part of how buyers and sellers make a judgment. even day to day action, this tech was green today when tech was being murdered if there was someone buying because they think things are good or a collective judgment this is a better place to be than tech, i want to be with that. >> final word. >> this is still a company growing the earnings at a decent rate if you look at their cloud
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business that might be a fair point from dan basically they aren't quite as competitive against aws and maybe secondarily against microsoft. but that is an industry that has a secular tail wind. you don't have to be the best in breed to benefit from that there are other businesses in the database side that are sticky and the valuation is there. i think if you combine those things and we're sitting at situation where there's a loto vulnerability in tech generally but not as much in this one. >> let's move on to china. getting a boost today on hopes of a trade rally it rallied more than 5% this week for the best performance since mid february but dan said the breakout is looking more like a fakeout give us your trade. >> well, let's start with the chart. i have a two year chart it's had a 10% rally to this morning's opening and it failed at the down trend that's been in place in the january highs it bounced off of a support level. i will let carter speak to that
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afterwards that's where i started and then when i think of the messaging that went on, why did china's market rip overnight? some commentary that the president supposedly wanted to get a trade deal down and amin javers is saying his sources said not and then we had larry kudlow say no trade deal then the president -- it's a mess here's the thing i don't think we get any clarity over the next couple of weeks and in some ways i think there's potential for more volatility, no matter what happens in the midterms i don't think the chinese have a lot of leverage here and i think that puts pressure on the stock market over the next couple of weeks so i think the bounce gives you a good opportunity to kind of put a short trade on i like the idea of doing it with defined risk it is called "options action," that's what we call the show i think a good set-up, it got to 42, traded here. traded above 41 here i'm looking at the november expiration, two fridays from
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now. look out, buy the 41, 49 put spread and that breaks even down at 40, you can make up to 140 between 40and 39 to the downside. to me, this is a simple trade. you're risking 1.5% of the stock price. paying for a putback and above that i'm looking for 39 i only have two weeks for this thing to play out but i think if there's a couple bad headlines for a trade deal happening any time soon, this stock or this etf is back at 39 in two weeks >> this expiration is before the g20. >> yeah, november 16th i don't think it makes a whole heck of a lot of sense, november 30th that's why i'm looking at two weeks. >> this is a circumstance going on all over the u.s. market. so it's industrials that have bounced, autos and home builders, chemical names that's the only thing holding the market up as the key growth names continue to stall. bounces in bad patterns our
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bounces in bad stocks generally are right to be faded. >> look at the lines >> i think that might be a triangle of death. >> a triangle of death >> that's pre-2015 but we'll go with it. >> it's a major down trend it's very countermove, it works down to the point that you have the final. >> mike, do you like this trade? >> yeah, i do. first of all, we do have relatively high options premiums in here as a result of the fact that first of all, we have seen a 20% decline in fxi already this is barely catalyst driven that's what dan is looking at, basically if the elections come out and looks like the trade disputes could be prolonged then that's a situation that's definitely going to be weak for chinese stocks and for the emerging market more generally on the other hand, if it does look like, you know, they have to cave in on this, then i think you could actually get a pop
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that's one of the reasons why you want to use options if you're going to try to press a short after the declines we have seen. >> mike made a good point about the options premiums the etf is moving around not only are the price of options expensive but they're fair relative to how much it's moving around. you may say i'm risking one to make 2.2 if all things go the way i like, but i like that risk/reward given the movement that we have seen. option prices look fair. >> for everything "options action" check out the website. while you're there sign up for the newsletter like you died an went to options heaven need i say more? here is what's coming up next. oh, hey, kitty, kitty. >> caterpillar had the best week in two years but mike khouw and carter worth say watch out the industrial giant is about to scratch investors. plus, calling all "options action" fans reach into your pocket, grab
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your phone and tweet us your question @options action if it's nice we'll answer it on the air when "options action" returns. see that's funny, i thought you traded options. i'm not really a wall street guy. what's the hesitation? 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
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markets and dom chu is here to break it down. >> as the market looks to find some kind of footing after a dismal month of october, some of the hardest ones were the sectors. both the industrials and materials sectors have been underperforming in the market, but in this past week they have been relative outperformers. materials is posting a nice little bounce back you have chemical producer dow dupont up around 11% just this week alone then mining company new mont has gained around 8% one traders have been watching as being on the front lines when it comes to stock market reaction to the china trade developments and tariffs and whatnot. it's bouncing back as well among the big winners in the sector, a bounce back for united rentals up around 15% this week. construction equipment giant caterpillar which has a lot of business in china up around 10% for the week then you've got farm equipment
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maker deere up around 7% now, melissa, we have not reclaimed new highs. but they are bouncing and that's probably a step in the right direction. now can the bounces last is the question back over to you. >> thanks, dom have a great weekend despite the rally, carter says one of those names could be nothing more than a dead cat bounce he's back at the plasma to break it all down. >> so we'll look at caterpillar. what we know is that the stock market was able to rally this week because of heretofore very beaten down stocks from autos to housing to materials all of which ricochetted, 10, 15% in some instances those are not positive moves those are dead cat bounces, down 40 and 50% moving up 10 or 12, it doesn't change a thing. let's look at the material sector what we have is that circumstance yes, you have this sort of big ricochet, but it doesn't really change a circumstance that this is basically an asset that's peaked in january and has never
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made the new high with the market and now the issue is that having bounce, you're getting at some point back to where the bounce runs out of steam. could it go a little bit more, sure but the real risk is that after you get a dead cat bounce, the cat which is dead falls back down to the concrete let's go on to the next one. here is the xli. really the same circumstance, right? you can draw the line so many ways was it a double top, of course it was is this a plunge it's a big one. but is the ricochet basically getting to where the overhead supply, meaning all ofthis represents people who purchase the stock whose cost basis is higher once it was sitting down here once you ricochet back they become interested sellers. they want their money back having lost it and then the cat can fall back and lie dead on the ground speaking of cats, here's a cat
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we have a big ricochet it almost reached 30 it felled this little gap that was left behind on the plunge. this is also basically the same principle. this is where a lot of supply is my hunch is after this ricochet cat fails. could they bounce another day or two, sure. but this is a case where i'd take the money and run. >> mike, what's the trade? >> yeah, so i think we'll take a look at selling a call spread here and the reason that we'll look at doing this, number one, for what carter was outlining right there that we'll be running into resistance here, options are quite expensive despite the fact that one of the catalysts that makes them go higher earnings already took place on the 28th of october so this is a situation where we want to sell those expensive options. of course, that improves our probability of profit if we're short options because basically in the stock does nothing or moves in our favorite direction we have to collect the premium but the downside of selling
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options you can take on some risks. by taking on a call spread you can limit the amount of risks we're taking and specifically the trade i was looking at was the december 130, 135 call spread at the time i was looking at this, you could collect about $1.65 which is approximately one third of the distance between the strikes. and the idea here is that it's going to hold below 130 by at least the amount of premium that we're collecting now that gives us about 5% cushion to the upside and if we take a look at the probabilities that i was talking about earlier, there's about a 36% chance that caterpillar could be above that 130 strike on expiration at about a 25% chance that it gets up to the 135 call we're buying to protect our upside let's think about that for a second basically what's going on here is if there's a 36% chance that it's going to get to 130 that means there's a 64% chance it does not get there that's basically the probability that we could collect all of the
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premium that we're getting on this trade by expiration if we hold it that long. of course we can see since there's a one in four chance that it gets up to the 135 level that's not really important except that the stock was in fact sharply higher than it is right now earlier this year. so if we somehow got something that would propel fxi higher or propel cat higher we're capping the amount of risk we take. >> dan what i like about this trade, you're leaning on the levels that carter identified that breakdown level at 130 should be some pretty interesting resistance if the stock gets above it briefly, there's no reason to panic because you're actually short the call spread. it's not like you're just short a call here. mike's probabilities make a lot of sense so it wouldn't take much for that stock to come back in below that 130 level so you'll have a profit that being said, if it can't get above 130, and the market climate remains kind of volatile this thing is going back and
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test that 112 over the next couple of -- >> that's the hope this is just a dead cat bounce, a ricochet and something beaten up it's back to a level where two things happen. those who are trapped above having seen some of their money return and take it and then two, those who bought just three or four days ago brilliantly or dumb luck, they start to sell into the bounce. supply is here. >> michael, last word? >> yeah, one quick point i would say, you know, if for example, this thing does manage to hold up the valuation isn't overly expensive that can create a level of support at lower levels and this is more of a resistance story than a bottom falls out story which is the reason that i'm looking at selling a call spread rather than buying what are some of the expensive puts right now. still ahead, mcdonald's one of the best performing dow stocks in the last month and the charts are pointing to more gains. we'll explain. plus, got a question for one of the traders of course you do send us a tweet and if it's nice
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we'll read it later in the show. we're live at the nasdaq live in times square much more "options action" after this what do you look for when you trade? 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. ♪
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welcome back to "options action." time to look back at some of the open trades. last month, carter and mike said that mcdonald's shares were about to heat up. >> since 2011, mcdonald's is up 60%. the market is up about 120%. half the performance i think that's the opportunity mcdonald's underperforming looking like it will come to life. >> what i was looking at was the december 1, 65 puts. you can sell them for about $4.25. >> well, they were right shares of the fast food giant up more than 5% since the time of the trade. so mike, what do you do with mcdonald's now >> you know, a question that probably a lot of people have is when you sell an option like this and basically the stockha gone in your direction and it's diminished in value significantly, that thing is worth about $1.50 now which means we collected two-thirds of the premium and has been collected and we could close the trade out. what's the probability though that that option is going to
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expire right now the options markets are implying there's probably less than a 20% chance that mcdonald's falls below that strike however, because we have already taken in most of the money because i feel like the market is wobbly here i'm inclined to take my profits and move on. >> carter? >> i think that's right. we were in for a tactical reason and that result has been achieved independent of this trade, does one want to be in mcdonald's versus other areas of the market it's a very defensive name, it acts well. it was up in october that alone says it all. >> dan said big tech was heading into trouble. >> the qqq could set up as a good head if you're trying to wait it out until the end of the year or hold on to the names look out to november expiration. november 173 put spread could be bought for $3. >> well, that nasdaq 100 etf is down 2% since the time of the trade, so dan, how are you trading right now? >> it's about apple and amazon,
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stick with this trade. i think it's a small winner on monday when it touched 160 it was worth a lot more but i think this is what you want to have on for the next couple of weeks because i think we see lower lows. >> there are risk in the qqq's because there are big names to come apart as so many have. >> tweets and final call up next on "options action." i don't know what's going on. i've done all sorts of research, 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. ♪
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i'm not really a, i thought wall street guy.ns. what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that.
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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." now to take the tweets is it stupid to buy naked options as a way to play earnings because implied volatility contracts after that? >> you need to get long premiums into the earnings direction, magnitude of the move and timing and it's hard to make money like that over time. >> mike khouw? >> when stocks hit resistance, sell credit spreads? >> carter? >> oracle on the long side
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cap on the short side. >> dan >> i expect the chinese equities to continue to be volatile i like november's put spreads. >> that does it for us on "options action. see you next friday at 5:30 p.m. don't go anywhere. "mad money" with jim cramer starts right now the following is a sponsored program paid for by my pillow do you find yourself sleeping too hot or too cold, not getting the support you need to help relieve painful pressure points or struggling just to get comfortable? then get ready for a revolutionary, new sleep experience. introducing the my pillow mattress topper, the next generation in sleep innovation from the company that brought you the world's most comfortable pillow. [applause]

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