tv Options Action CNBC March 16, 2019 6:00am-6:31am EDT
hey there, we're live at the nasdaq market site at times square the guys are getting ready for a big show behind me here's what's coming up. >> special delivery. >> fedex is on deck for earnings next week, and dan nathan says investors should return this stock. he'll tell you how he's trading a failed delivery. plus, it's been a rough week for boeing the stock is down 10% this week, and if you think there's more pain ahead, mike khouw has a way to profit for almost nothing at all. and, biotech stocks are
going wild and the chart master says there's something in the charts pointing to even more gains ahead. it's time to risk less and make more the action starts now. we start right there as stocks surged this year. the nasdaq is the best performing of the major indices, up nearly 16% in 2019. behind that move, biotech up 27% so far on track for its best quarter ever this could be the beginning of a bigger breakout according to the chart master let's get straight to carter worth over at the plasma. >> in many ways it's just a momentum or beta trade and i want to look at that in the context of other aggregates. the trade here is play xpi for follow low through
peak-to-trough declines. we know we had a q4 wipeout. if you look at the order, xpi down the most, which is dominated by small cap because it's equal weight. down a lot but less ibb, dominated by the larger cap. down the market, spy and health care, merck, lilly, managed care stocks on the way down very much in line with the respective beta and risk of the four etfs. now look at the reciprocal if we move to the ricochet, it's exactly the opposite xpi up 20% biotech up 18, the market and then of course health care which, again, slower, calmer and so the situation here is that if you are talking about the general plunge and the general ricochet in equities and one is a believer that the ricochet continues, you want to in principle go with the thing that's had the most plunge and
most bounce and that's what the xpi trade is all about let's look at a few charts first a comparative chart. it's the same as the tabular form on the last screen in chart form what we know of course is that the more aggressive the xbi, the more the bounce. the bet here is that this is still a place that's going to deliver a performance. now, look at the last five years. so here to talk about beta, the small cap way down and way back up, the v. and so it's about risk, but it's about reward now let's look at the chart of the xbi itself so many ways to draw the lines what we do know is two ways would be as follows. the well-defined tops from which it broke out, checked back, and
then pivoted and went again. that is a nice setup the other way to draw the lines, of course, is just a classic head-and-shoulders bottom. to my eye we've got more follow-through and xbi is the trade. >> okay. well, mike is out in san francisco today. so what's the trade, mike? >> xbi is an interesting one when we look at biotech. we talk about it a lot when we do, we usually talk about the largest names, like gilead, biogen, things like that they tend to be low multiple names and not as volatile. when you look at biotech, we usually talk about ibb, which is not as volatile. xbi as carter was pointing out is significantly more volatile the reason is it's an equal weighted index and comprises almost 120 biotech stocks. so those big names that don't move a lot are offset by a lot of smaller ones that really do how much do they move? on average, the 30-day
volatility of these things is 65 if you think about the price of options, compare that to something like the vix which was under 13 today so these are stocks that can really move around going out and buying calls in xbi will cost you more than it would in the big stocks or ibb i think the way to play this is look at a calendar call spread we'll choose one that's out of the money. we're hoping that the stock will run to the strikes that we select by the time the first option expires i was looking specifically at the may 97, june 97 call spread. you can spend $1.05 for that call spread. if it rallies up to that strike, that first option could expire worthless. but that longer dated june option we're going to own is still going to have some value and may have gone up in value, so the trade is targeting an upside move of 60 days, 7% to the upside carter can speak to whether or not that's the kind of numbers he's looking for but this is a situation, we
don't talk about xbi that much but options are a good way to play this because a lot of these stocks have no earnings at all what you're looking for -- all of these things are essentially call options in and of themselves call options on the biotechnologies that they're working on >> dan, how do you like the trade? >> it's a really interesting setup because i agree with carter technically and mike is playing for a move back up prior to where the stock would be or the etf would be breaking out. so mike is giving himself to time to move up 3%, 4%, 5% or so and has optionality of playing for a breakout later in the summer i think regular viewers of this show know we often do calendars. sometimes we get the catalyst right and the trade wrong. but i think mike is giving himself enough wrong with this calendar, at least with the 97 strike to the upside. >> it's all about picking the
right time frame mike has done that trying to find a vehicle, i think we've done that. and with a break out here, you should get some pretty good, so it's as good a bet as there is. >> mike, last word to you. in terms of the fundamentals, it does seem like xbi in particular are a little more insulated from maybe the political headwinds are drug pricing, for instance, and the need to do acquisitions to bolster a pipeline. >> that's 100% true. other than the bigger names, like the am gens, biogens and gileads, most of these other names of completely idiosyncratic earnings so essentially you have relatively small companies that are call options on pioneering technologies they're trying to work on. buying any one of those is a pretty risky exercise because
you have are these going to ban out. when you buy a basket of them, you're really betting on biotechnology in general and i think that's a smart thing to do and i think now is a good time to do it. a number of big names, including micron, fedex, nike, tiffany, all reporting earnings next week. the options market is implying pretty big moves on the results. fedex is down 35% from its highs. dan is betting that the stock will fail to deliver on the results. >> yeah. i think this is a really important one. of all those names that are reporting next week, it will give us a sense of where this global economy is right now. when they reported fiscal q2 basically laid an egg and the stock went down 12% the next day. they basically blamed weak global growth. you have to understand here this company was in the -- this stock was in the throes of that selloff we had we hadn't had the government shutdown yet there was some overhang from brexit none of the headwinds that the company really missed on when
they reported in december have actually abated for all intents and purposes other than the government shutdown. so when i think about the quarter that just ended at the end of last month, i say to myself they're going to have the same uncertainty and same headwinds they had last quarter and visibility will be really poor so the implied move in the options market is about 6% between now and next friday. most of that is for the earnings event. on average over the last four quarters the stock has moved 5, 5.5% or so i look and see where it failed it failed last month right at that gap level from december there's the chart right there. if you look at the five-year chart, that 185 level is actually a pretty massive level. i'll let carter speak to that and how that looks relative to the transports when they report next week, i think it's really important to understand that last month they announced they lost their
president and coo, a 42-year veteran of this company, that you say to be the heir apparent of the ceo all of those other macro headwinds, and i say i'm not sure they can beat and guide up. if they guide down one more time, this stock will test the lows from december and then if we get back to those lows, i think this is a really cheap stock, it's a really well managed company and i think it's priced for a better 2019 after that here's the trade i'm looking out to april expiration when the stock was 178.50 you can buy the april 175-155 put spread that costs you $4 and breaks even at $1.71. you can make up to $16 between $171 and 155 your risk is at $4 above that you lose the full $4. i think 2.5% of the stock price, you have the potential to make
up to four times your money if they miss and guide down and you have a month for this to play out. >> mike, what do you think of the trade? >> you know, i think it's really interesting how cheap this put spread is going into earnings given how sharply the company has moved after they've reported relatively recently. less than 3% of the current stock price is dirt cheap to make a bet going into earnings it's a good thing too because the stock is also dirt cheap it's trading 10 times forward earnings this company hasn't seen an eps decline or revenue decline this is one of the cheaper valuations we've seen in this name going back two to five years. you really have to see a lot more bad news i think to see further weakness in the stock. if you're inclined to press a bearish bet after the declines you've already had, a put spread is absolutely the way to do it and right now i'm actually surprised that you can put this trade on for the price that dan has identified >> so just looking at the chart that dan started with, what we know is the stock peaked in june
around 270 its lows with the stock market in december, that's a 44% decline down to 150, twice the rate of the s&p. talk about beta and cyclicality. it's back from the level from which it gapped down a lot of supply comes into play, resistance, whatever you want to call it. the odds are as good as any that it gaps again on an earnings miss. >> i wouldn't press this short this stock is down a lot this is a really well managed company dealing with a whole host of issues that are out of their control. this is a stock that as soon as we have better macro clarity, you're going to want to own fedex here i'm just playing for one more miss and guide down next week and i'd be out of this i think a lot of people would be kicking the tires of this back at 160 with estimates much lowered for the balance of the year. still oo head ahead, the
boeing fallout continues the stock is down nearly 10% this week. if you think there's more pain ahead, we'll tell you how to trade the stock for nothing at all. for everything options action, check out our website. while you're there check out our super cool news letter too much more show right after this. 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. ♪ (client's voice) remember that degree you got in taxation? (danny) of course you don't because you didn't! your job isn't understanding tax code... it's understanding why that... will get him a body like that... move! ...that. your job isn't doing hard work...
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and still save hundreds of dollars. do you guys sell other dogs? now that's simple, easy, awesome. customize each line by paying for data by the gig or get unlimited. and now get $250 back when you buy a new samsung galaxy. click, call, or visit a store today. 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. 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." boeing bouncing back a bit saying it will roll out an upgrade to its 737 max but it's having its worst week in years since it is deal with the
aftermath of the deadly crash. mike khouw has a way to trade it for next to nothing so let's go to mike for his call to action mike. >> yeah. so it's interesting, of course obviously the stock seemed to level off a little bit over the course of the last couple of days but i still think there is some potential downside here. melissa, you were asking an important question earlier this week how the situation that we've seen with boeing here might differ from prior situations and we have that because we have these two crashes, very close together, virtually brand new aircraft the question is was there something that was known in between the first and the second that should have grounded these airplanes a little bit sooner. if something like that comes out and they were working on the software like you just pointed out, that could point to increased liability and further downside for the stock the second thing i would point out, it is still sharply higher than where it was in december. and i think that level that we
saw back in december might actually represent a potential area of support for it finally, because it is so news driven at this point, we've seen options implied volatilities rise pretty significantly. so i think we ought to take a look here first at a three-month chart. we can go back to that december level that i mentioned that december level traded down to 294 at the 378 close we saw today, we're talking about an increase of over 20% from just those lows so even net of the 10% decline we saw this week and the declines in the week prior, it's still substantially higher the stock is trading 18 times forward earnings as it currently stands that's a premium to a lot of other peer groups, especially in the defense industry and about the same as airbus, so it's not like it's a screaming bargain here so with options also not a screaming bargain, being somewhat elevated, i think one could make a modestly bearish bet on it in the event we get further news
i was looking out to may at the 340-315, 1 by 2 put spread you could sell the lower strike puts for $3.25 apiece, selling two of those net-net you're not playing out any premium. here's how this trade is going to go. if the stock does trade below 3.40, from 3.40 down to 3.15 you'll see profits because you own that 3.40 put. below 3.15, effectively you'll own it because you made $25 on the way down, your effective purchase price on those shares is going to end up being 290, which is actually just below those december lows. at that point actually it is going to be trading at a relative low attractive valuation. that represents a pretty significant decline from where it is right now and represent a big discount to where it has been trading the last couple of years. i'll ask carter what he thinks of that support level and whether that represent a good entry point.
from a fundamental view it seems to be reasonably more attractive it does seem that we're going to get more news and more downside risk is possible here. >> in terms of support, there is a considerable amount of support from the level from which the stack gapped up on jan 30. if you believe in the gap fill theory, while not all gaps are filled, a lot are. the stock gapped up on an earnings beat and is now down peak-to-trough 18% for now it is discounted the fact that it's not just two random accidents, they are related and that there's a problem with the aircraft. from here to go lower, you have to start getting into lawsuits and culpability and secret memos and that kind of stuff other than that, i think you're at support and my hunch is there's not a lot of downside. >> mike was talking about you were effectively long it but there's a whole scenario between
290 and 340 where you have a big range of profitability because that's what you're playing for the ideal scenario on may expiration would be that the stock is at 315 and the put spread you paid nothing for it that's the best case scenario. so i think there's a wide range of options with this trade if you were prepared worst case scenario to put the stock, you're playing for an overshoot of mike's strikes. i like the trade structure because you're not laying anything out the highest probability is the stock is above 315 on may expiration. >> mike, last word >> if the stock trades right about where it is right now or comes in a little bit but doesn't get down to that 340 strike you own, there is a possibility that implied volatility, the price of options comes in a bit if it does, the 315 puts will decay more rapidly than the 340s you may have a chance to take this off at a profit even if implied volatility does drop.
chip stocks ripping higher extending their rally. we'll tell you why that's good news for one of our traders. got a burning question we are taking your tweets later on in the show we're live from the nasdaq marketplace in times square. more "options action" right after this (indistinguishable muttering) that was awful. 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.
♪ ♪ our new, hot, fresh breakfast will get you the readiest. (buzzer sound) holiday inn express. be the readiest. what do you look for 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. ♪ welcome back to "options action." time to take a look pack at a couple of trades dan said nike could end up in trade war turmoil. >> i think nike has the potential to be rejected here in the mid-80s and maybe move back towards 85 using earnings as that catalyst in march obviously we have no idea what the outcome will be of this trade situation. i don't think we'll have a clean deal any time soon so i want to look out to april expiration when nike was trading at 85.25 you could buy the april 85-75 put spread paying $2.50. buying one for 60 cents. break even is 82.50. >> nike is still moving higher heading into next week's earnings report. how do you play this one now, dan. >> it's interesting.
the stock is up 2% the stock was 85.25. today it closed 86.80. it's trading near those highs. am i nervous not really i don't think they're going to have any gusto the put spread $10 wide. the cost is about $1.75. i think you stick it out. >> i think you've got this dead to rights. month over month performance has basically gone nowhere and large cap has gone much higher. also in february, mike said nvidia could be ready for a breakout >> this is the level that i'm talking about right down here. basically hit a bottom i think it was about 131 bucks, so that's basically the level we're thinking we want to give ourselves some cushion in the event it goes back to that level. how do we put this trade on? i was looking at the march 130, 150, 165 call risk reversal. we're selling the 130 put for $3.85.
buying the 150 calls for $6.70 and selling the 165 calls against it net-net you're spending 55 cents to put this structure on. >> well, it looks like mike was spot on with this one. mike, what do you do next? >> you don't actually need to do anything except take a bit of a victory lap. we put this trade on for 55 cents. it's worth $1500 it expired today if you have this trade on your account, now you've just got the money. i think we should ask carter whether he thinks nvidia has further upside. >> i do. >> we'll see if mike will do a trade next week. coming up next, your tweets and the final call 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 ♪ ♪ our new, hot, fresh breakfast will get you the readiest. (buzzer sound) holiday inn express. be the readiest.
what do you look for 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. ♪ final call time. mike. >> the may 31 by 2 put spread in boeing. >> carter. >> spider's biotech, long. >> dan. >> fedex i would not short it but i'd look at that put spread in april.
>> that does it for us here on "options action. catch us next friday at 5:30 p.m. eastern time. "mad money" with jim cramer starts right now have a terrific weekend. - [narrator] the following is a paid program for luminess silk, sponsored by luminess air. watch this revolutionary touchless makeup that appears to erase flaws like magic! it'll transform the way you look in minutes. - see this here? gone! - see these blemishes over here? all gone. - you can see all the sun damage that i have in here. you're gonna see it just disappear. you see that? gone. - [narrator] people are leaving ordinary foundation for this miracle breakthrough