tv Options Action CNBC November 4, 2018 6:00am-6:31am EST
we are live at the nasdaq market site after a wild week for the markets. guy's here getting ready behind me wheel they're doing that, here is what's coming up. >> we've had very good discussion was china we're getting much closer to doing something. >> hopes of a trade deal giving chinese talks a boost. dan nathan warns the breakout is really a fakeout he has the trade plus materials and industrials have been on a tear. but the chart master says watch out, the moves could be nothing than a bull trap and ♪ just when you thought it might be safe to get back into the
tech trade, apple took down the markets today. but have no fear, mike khouw says there is one big name investors should be hiding out in he will break it town. it's 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 falling 2% on the session now down 10% from the highs a month ago. with all the tech turmoil is there anywhere safe to hide out in the sector? let's get to the chart master. carter worth at the plasma what are you look being at. >> oracle, an old line name, maybe boring but it's 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 there abouts, one of the worst octobers in 2009 oracle was down almost everything was compared to the s&p, compared to
the tech sector, the russell 2000, that's an important thing, which is to say people were selling everything, but they sold a little less of this and that is the definition of relative strength. so here is a chart weekly bars and it goes back to 2013-14. we have a couple of setups one of course is the head and shoulders bottom but what we have now -- focus on this -- is this wedge of course. and my hunch is that we are going to get a pretty good move 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 is just starting to improve, you then get both absolute and relative performance. so i think this sets up for the breakout absolute. and i like the developmental action on a relative oracle here -- i want to be long. >> all right thanks for that carter the professor today is out in
san francisco. so, mike, what's your trade on oracle. >> you know, oracle is an interesting situation. we have earnings coming up it's not a name that has done that spectacularly well. it does move a decent bit and we have have ace intimidates pop it's trading 14 times forward and you consider it has 30% greater earnings than it did in 2015 at about the same valuation. to me this seems a situation where we can go long with carter's technical view on the upside the thing is because we have the setbacks after earnings if i was buying the stock i kind of want to give myself a buffer that's one of the reasons i look at a risk reversal. in this trade specifically i look out to january. i could sell the 44 strike puts that's about a 10% discount to where the the stock is currently trading for 75 cents use the proceeds to fund the purchase of a 52.5 call for same amount of money.
net-net not laying out a premium. and the idea is if this stock rallies, it increases in value in the short term. on the flip side if for reason it falls back -- and i am forced to hold to expiration, have the stock put to me i end up owning at 44 which looks like a level of support i'd like to go back to carter and see if he agrees but that's where we saw the swoon in june and then recovered. and so to me i look at that and i think that would be a level i'd be thinking about getting long the stock if i had to >> swoon in june, 44, just keep going. that's exactly right pvc level process. meaning owning it there seems reasonable and with a little luck -- and that's the bet it's not going there in the first prays going to break out. >> listen, the charting if you didn't have the name oracle systems up there i would say wow that looks like an interesting technical setup.
i grow the relative strength or whatever but thinking about a fundamental standpoint pb thinking about competitors tinges we heard about enterprise software i don't like it thinking about mike's trade, fine, you want to get long the stock at 44 i'd say wait a month you may get a chance to buy at 44 had. and you use that put to buy the call 52.5 that seems like the level you'd be happy with if the stock got there. i don't love the risk reward because i don't love the fundamental setup but the technicals are interesting maybe in a slightly different market. >> you don't think the enterprise funding will be there and this is an fx headwind >> this is a company has real sowers issue was organic growth >> right, the interesting thing and all of that is how buyers and sells sellers ma make a judgment even day to day this stock was green today when tech was being murdered if the collective judgment this is a better place to be i want to go with that. >> mike, final word. >> look this is still a company growing the earnings at a decent rate and look at their cloud business
that might be a fair point from dan. basically they aren't as competitive against aws and maybe secondarily against microsoft. but that is an industry that has a secular tailwind you don't have to be the best in breed to benefit from that and there are other businesses in the data base side are sticky and the valuation is there i think you combine all of those things and actually we probably are sitting in a situation where there is a lot of vulnerability in tech generally but maybe not as much in this one. >> now let's move to china getting a boost today on hopes of a trade deal. the fxi large cap china etf rallying more than 5% this week for the best performance since february but dan says it looks like a fakeout. give us your trade. >> start with the chart. i have a two-year chart and it's had a 10% rally to this morning's open and failed it right at the downtrend that's in place from the january highs it bounced off what i think is
an interesting support level i'll let carter speak to that stuff afterwards that's where i started then thinking about the messaging that went on why did china's market rip overnight? there was commentary that supposedly the president wanted a trade deal and eamon javers before the market opens says his says say not. and then we had the national economic advisers come on scott's show at noon and say no trade deal it's a mess. so here is the thing i don't think we get any clarity over the next couple of weeks. and in some ways i think there is potential for more volatility no matter what happens in the mid-terms. i don't think the chinese have a lot of leverage here and i think that puts pressure on the stock market in the next couple weeks there. the bounce the last couple weeks gives you a good opportunity to put a short trade on i like the idea of with the defined rick "options action" here that's what we call the show. listen, i think a good setup today got to 42 failed here traded a little above or closed a little above 41 today. the trade i like at is in november expiration, two fridays from now you look out
buy the 41-39 put spread paying 60 cents for that. breaks even down and who makes up to 1.40 and 39 to the downside to me, listen this is a simple trade risk about 1.% of the stock price the next two weeks playing for pullback back towards the bounce level obviously above that i'm looking for 39 i only have two weeks for this thing to play out. but i think if there is a couple of bad headlines for a trade deal happening any time soon in stock or in etf is back at 39 in two weeks. >> the expiration is before the g20. >> yes, november 16th. i don't think it makes a lot of sense to game that november 30th. that's why i look out two weeks. >> this is a circumstance in the fxi and going all over the u.s. market the bounces were from the beaten down names industrials bounced autos. home builders, chemical names that's the only thing holding the market up has the key growth names continue to stall. bounces in bad patterns or bounces in bad stocks generally are right to be faded.
that's exactly. >> you like my lines. >> i look at those lines that might be a triangle of death. >> it can be. >> a triangle of death. >> that's pretty 2015 we'll go with it. >> it's that bad. >> well, we used to laugh about the triangle of death. the issue is this. it's a major downtrend very uniform the countertrend move and the ricochet and it all works to the point where you have the final pew. >> mike, you like this trade. >> yeah with, 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 20% decline if fxi already the other thing is this is fairly catalyst driven that's what dan is looking at into the election basically if the elections come out and it looks like the trade disputes basically could be prolonged that's a situation that's definitely going to be weak for chinese stocks and frankly for the emerging markets more generally which depends heavily on it.
on the other hand if it looks like they are going to have to cave in on this, then i think you could get a pop. and that's one of the reasons you use option f2 you press a short after the declines we have seen. >> mike just made a good point with about options premiums preponderate etf is moving around not only the implied volatility of options are expensive but relatively fair how much it's moving you may say i'm ricking one to make 2.2 if all things go the way i like but it's a two-week trade. i like the risk reward given the movement we have seen. options prices look fair to me. >> for everything "options action" check out the website. while there sign up for the news letter it's like you died and went to options heaven need i say more? here is what's coming up next. >> hey, kitty kitty. >> caterpillar just had the best week in two years. but mining khouw and carter worth say watch out. the industrial giant is about to scratch investors. plus, calling all "options action"s fans. reach into your pocket, grab
your phone and tweet us your question at "options action. if it's nice, we'll answer it on 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
this is staying connected with xfinity to make moving... simple. easy. awesome. stay connected while you move with the best wifi experience and two-hour appointment windows. click, call or visit a store today. (indistthat was awful.tering) why are you so good at this? had a coach in high school. really helped me up my game. i had a coach. math. ooh. so, why don't traders have coaches? who says they don't? coach mcadoo! you know, at td ameritrade, we offer free access to coaches and a full education curriculum- just to help you improve your skills. boom! mad skills. education to take your trading to the next level. only with td ameritrade. welcome back to "options action." it was a big week for material and industrial stocks. both outperforming the broader markets. dom chu is back in the newsroom to break down the moves.
come to. >> well, melissa, after th market tries to find some footing after a dismal month of october perhaps it's not a surprise that the bigger rebounds after the recent selloff have been the hardest hit sectors over the course of the past month the industrials and materials sectors have been underperforming the market but in this past week's trading they've been relative outperformers. materials is postsing a nice boundback among notable gainer you have chemical producer dao dupont up 11%. then the industrial side one traders have been watching on being on the front lines coming to stock market reaction to the china trade developments and tariffs and whatnot. after taking a hit in october it's bouncing back as well a bounce back for united rentals up 15% this week, construction equipment giant cat perfect pillar with business in china up 10%.
they are bouncing that's a step in the right direction can the bounces last is the question back to you. >> thanks, dom >> despite the rally carter says one of the names could be nothing more than a dead cat bounce back at the plaza to break it all down >> right we are looking at caterpillar. what we know is that the stock market was able to rally this week because of heretofore very beaten down stocks from housing to materials to industrials. all of which ricochetted 10, 15% in some instances. those are not positive moves those are dead cat bounces stocks 10, 20% moving up 12 doesn't change a thing let's look at the materials sector what we have of course is the circumstance yes, you have this sort of big ricochet but it doesn't change the chance that this is an asset that peaked in january and never made the new high with the market
now the issue is having pounce withed yo bounced you're getting back at some point to where the bounce runs out of steam. could it go more sure but the real risk is after the dead cat bounce, the dat o cat which is dead falls back down to the concrete let's go on to the next one. here is the xli. it's the same circumstance, right. you could draw the line so many ways was it a double top? of course it was is it a plunge it's a big one but is the ricochet basically getting to where the overhead supply, meaning all of this represents people who purchased the stock whose cost basis is higher once it was sitting down here and once you ricochet back a lot of the people become interested sellers. they want their money become having lost it and then in principle the cat can fall back and lie dead on the ground speaking of cats here is a cat and we have a big ricochet
the hit 112 low and almost hit 130 and interestingly filled the little gap left behind on the plunge this is also basically the same principle. this is where a lot of supply is my hunch here is after this ricochet cat fails could they bounce another day or two? sure but this is the point i take the money and run. >> mike, what's the trade? >> yes, i think we are looking at selling a call spread here. and the reason that we are looking at doing this number one for what carter was outlining there that we run into resistance here. options are quite expensive despite the fact that one of the catalysts that usually 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 are short options bus basically if the stock does nothing or moves in our favor direction we collect the premium. but the downside is selling options in you take on risk. by using the spread we can limit
the amount of risk we are taking 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 $$1.65 approximately one third of the distance between the strikes and the idea here is that it holds below 130 by at least the amount of premium we collect. that gives us about 5% cushion to the upside. if we look at the probabilities that i was talking about earlier, there is about a 36% chance that caterpillar could be above that 130 strikes on expiration at about a 25% chance that it gets up to the $135 call that we boy to protect the upside. let's think about that odds for a second basically what's going on here is if there is a 36% chance that it gets to $130. that means a 64% chance that it do doesn't get there that's basically the probability
that we could collect all of the premium we get on this trade by expiration if we hold it that long of course we can see since there is only one in four chance that it gets up to the $135 level that's not important except we see the stock was in fact sharply higher than it is right now earlier this year. if we got something that would propel fxi or cat higher, we cap the amount of risk. >> dan. >> what i like about the trade you lean on the levels that carter identified. the breakdownen level at $1,309 should be interesting resistance if the stock gets above it briefly there is no reason to panic because you are short the call spread. it's not like you are just short a call here. and mike's probabilities make a lot of sense it wouldn't take much for that stock to come back in, back below the 130 level and you'll have a profit in the trade i like the trade idea. that being said, if it can't get above 130 and the market climate remains kind of volatile this thing is going back and test that 112 over the next couple weeks.
>> ultimately that's the hope, right this is a dead cat bounce, a ricochet in something beaten up and that it's back to a level where two things happen. those who are trapped above having seen some of the money return antique it and then two those who bought three four days ago brilliant willy or dumb electric they have big gains selling into the bounce. supply is here. >> mike, last word. >> yeah, you know, one quick point i would say is that if for example this thing manages to hold up the values isn't overly expensive and that could create some level of support at slightly lower levels. to me this is more of a resistance story than a bottom falls out story which is the reason why i'm looking at selling a call spread rather than going pout and buying some very expensive puts right now. >> all right still ahead, mcdonald's one of the boast performing dow stocks in the last month and the charts point to more gains. we explain plus a question for one of the traders of course you do accepted us a tweet to at
"options action. if it's nice we may read it later. much more "options action" right 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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last month carter and mike said mcdonald's shares were about to heat up. >> since 2011 mcdonald's is up 60%. the market up about 120. half the performance but that's the opportunity mcdonald's having underperformed is looking as though it's catching up and comes to life. >> what i was looking at is the december 165 puts. looking at these earlier you could he will them for $4.25. >> well they were right shares of the fast food giant up since the time of the trade. mike what do you do mcdonald's now. >> you know, a question probably a lot of people have is when you sell an option like this and basically the stocks gone in your direction and diminished in value significantly it's worth $1.50 now. we collected two third of the total premium you could collect has been collected we could close the trade out. what's the probability though that option is going to expire worthless? right now the options market implies there is less than 20%
chance that mcdonald's falls below that strike. however, because we have taken into most of the money because i feel like the market is wobbly here i'm inclined to take profit and move on. >> carter. >> we were in for a tactical reason that result was achieved the real issue is this independent of this trade does one want to be in mcdonald's versus other areas of market it's a defensive name and acts well up in october. that says it all. >> last month dan said big tech was heading into trouble. >> the qqq could set up as a good hedge if you are wait it out to the end of the year or hold onto names. look out to november expiration. november 173-160 put spread bought for $3. >> well that nasdaq 100 etf down 2% since the time of the trade >> all about maga. they are all going lower. >> that's catching on. >> it is it's sticking with the
trade it's a small winner when it touched 160 at the short strike it's worth more. but this is what you want to have on the next couple weeks. i think we see lower lows in the maga complex. >> ultimately risk in the qs because they are big names that have yet 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. ♪
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." time to take your tweets the first viewer ask is it stupid to buy naked options as a way to play earnings because implied volatility contracts. >> you need to get things right into earnings direction magnitude of the move and time it's hard to make money doing it that way over time. >> final call time mike khouw. >> when stocks hit resistance sell credit spreads. i'm selling call spreads in cat.
>> oracle long side, cat on the short side >> dan nathan. >> i expect the fxi continuing to be volatile november put spreads. >> that does it forus on "options action. back here next friday at 5:30 p.m. eastern don't go anywhere, "mad money" with jim cramer starts right now. the following program is a paid commercial presentation for total gym fitness. [music] everybody work out. feel the energy. build a better body. the best you can be. another body easy as 123. oh. ahh. better body as easy as 123 with total gym. i feel fabulou