tv Options Action CNBC March 17, 2019 6:00am-6:30am EDT
hey there, live at the nasdaq marketplace in times square the guys getting ready for a big show here's what's coming up. > delivery >> fed ex is on deck for earnings next week dan 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 -- ♪ freak out >> biotech stocks going wild
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 surge this year, the nasdaq the best performing of the major indices, up nearly 16% in 2019. behind that move biotech, the xbi etf up 27% so far this year on track for its best quarter ever and this could be just the beginning of a bigger breakout according to the chart master. let's get straight to carter. >> in many ways it's momentum or beta trade i want to look at that in the context of other aggregates. but ibd versus xbi versus health care versus the market the trade here is just play xbi for follow-through peak to trough declines. we know we had a q4 wipeout. and if you were to look at the order, a descending order, xbi
down the most which is dominated by small cap, equal weight now down a lot but less, ibb, dominated by the larger cap. down a lot, of course, the market, lower beta still, spy. and health care which has very defensive characteristics, merck, lily, managed care stocks on the way down in line with the respective beta and risk of the four etfs. now look at the reciprocals. if we move to the ricochet, it's exactly the opposite so xbi up 27% year to date biotech up 18% the market and then of course health care, which again, slower, is calmer 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 a thing that has had the most plunge and most balance. and that's what the xbi trade is
all about. let's look at a few charts first a comparative chart. it's the same thing as the tabular form on the last screen in chart form. and what we know, of course, is that the more aggressive the xbi, the more the bounce, and that here is that this is a place that's going to deliver a performance. now look at the last five years. so here too, talk about beta the small cap way down and then way back up. the "v." it's about risk, it's about reward let's look at the chart of the xbi itself so many ways to draw the lines what we know is two ways 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 is just a classic head and shoulders bottom either way, to my eye, we've got more follow-through and xbi is the trade. >> okay. well mike is out in san francisco today. what's the trade, mike >> yeah, so xbi is an interesting one when we take a look at biotech. we talk about it a lot when we do, we usually talk about the largest biotech name, names like gilead, biogen, things like that those tend to be the low multiple names and they tend not to be that volatile when you look at biotech etfs, we usually talk about ibb which also is not as volatile. xbi is significantly more volatile the reason is it's an equal weighted index it comprises almost 120 biotech stocks so those big names that don't move a lot are offset by a lot of the smaller ones that really do how much do they move? on average the 30-day volatility of these things is 65.
so if you think about the price of options, compare that to something like that the vix, under 13 today these are stocks that can really move around. going out and buying calls and xbi is going to cost you more. look at a calendar call spread we'll choose one that's out of the money. essentially what we're hoping here is the stock is going to 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 spend 1.05 for that. if we're looking for, if it rallies up to that strike, that first option could expire worthless, collect that decay. that longer data june option we're going to own is still going to have some value and may even have gone up in value the trade here is really targeting an upside move from here up about 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
you know, options are a good way to play this because a lot of these stocks have no earnings at all. really what you're looking for -- all these things are essentially call options in and of themselves on the biotechnologies they're working on. >> dan >> it's interesting. i agree with carter seeing technically and the way mike is playing this through may and june, playing for a move back up prior to where the stock would be or the etf would be breaking out. so mike's call calendar is doing something where he's giving himself some time to move up three, four, 5% or so. then he has the optionality of playing for a breakout later on into the early summer. i like the trade i think regular viewers of this show will know we often do calendars, we often get the technicals right, get the catalyst right, and sometime we get the trade wrong. i think mooib is giving himself enough room with the calendar with the 97 strike to the upside. >> it's all about picking the right time frame and mike has
done that. trying to find a vehicle, i think we've done that. and with a breakout here, you should get some pretty good ratings. as good a bet as there is. >> mike, last word in terms of fundamentals, it does seem like xbi in particular, biotech in general, are a little bit more insulated from maybe the political headwinds of drug pricing, for instance, the need to do acquisitions to bolster a pipeline >> that's 100% true. because other than the bigger names like biogens, gileads, things like that, most of these other names are completely id idiosyncratic stories. one of the reasons they don't have any earnings. a lot of relatively small companies that are call options on pioneering technologies they're trying to work out, and buying any one of those is a risky exercise because obviously you have a lot of panel dates and approvals and things that you have to work -- are these technologies going to pan out? when you buy a basket of them you're betting on biotechnology in general and i think that's a
smart thing to do. i think the way carter has laid it out, now is a good time to do it. >> a number of big names including mike criterion, tiffany reporting earnings next week and the options market is implying big moves on the results. shares of fed ex in a bear market down more than 35% from its highs. dan is betting that the stock's going to fail to deliver on the results. >> yeah, i think this is a really important one of all those names reporting next week, it's going to give us a sense of where this global economy right now. this is a company when they reported their fiscal q2 on december 18th 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 throes -- this stock was in the throes of that sell-off that we had. greatly accelerated because of their fundamental news we hadn't had the government shutdown yet we know the overhang with brexit, disruption with trade in china because of this trade war. and none of those 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. when i think about the quarter that just ended i say to myself, they're going to have the same uncertainty, they're going to have the same headwinds of last quarter, visibility is going to be really poor so i think about this. 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 about 5%, 5.5% or so i look at this thing, a one-year chart, see where it failed it failed last month right at that gap level from december there's the chart. if you look at the five-year chart, that 185 level is actually a pretty massive level. i'll let carter speak to that how that looks relative to the transports when they report next would be, i think it's really important to understand that last month they announced they lost their president and c.o.o., 42-year veteran of this company, thought to be the heir apparent of the ceo. all those other macro headwinds.
i say, i'm not sure they're going to be able to beat and guide up if they guide down one more time, this stock's going to go test those lows from late december i think that's just a trade. that's what you want to do that's what you want to set up for. if we get back to those lows, i think this is a really cheap stock, a really well-managed company, and i think it's kind of priced for a better 2019 after that here's the trade i'm looking to april expiration where the stock is 178.5 you could buy the april 175, 155 put spread, pay $4, buy one of the april 175 puts for $5.15, selling one of the april 155 puts at $1.15. that cost you $4, breaks even at 171. you can make up the $16 between 171 and 155. obviously your risk is $4 between 171 and 175. above that you lose the full $4. i think 2.5% of the stock price, you have the potential to maybe make up to four times your money if they do miss and guide down,
you have a month to play out. >> mike? >> i think it's really interesting how cheap this put spread is going into earnings, given how sharply the company has moved after they reported relatively recently. less than 3% of the current stock price is really 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 about 10 times forward earnings this is a company that hasn't seen an eps decline, a 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 to see further weakness in the stock. if you're inclined to press a bearish bet after the declines you've had, a put spread is absolutely the way to do it. right now i'm actually surprised that you can put this trade on for the price that dan's identified >> so just look at the chart that dan started with. what we know is the stock peaked before the stock market. it peaked in june, around 270. and 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. now it's bounced quite a bit back to the level from which it gapped down, a news-related gap. 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. >> yeah, i would just say mike made a good point. i wouldn't press this short. this stock is down, cheap, well-managed company dealing with a 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 fed ex here. but i'm just playing for one more miss and guide-down next week and i'd be out of this and a lot of people would be kicking the tires of this thing at 160 with estimates much lowered for the balance of the year. still 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. check out our super-cool newsletter too what are you waiting for we've got much more show right after this i don't know what's . 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. ♪ ♪ ♪ our new, hot, fresh breakfast will get you the readiest. (buzzer sound) holiday inn express. be the readiest. need a change of scenery?
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it's a now there's one store that connects your life like never before store. the xfinity store is here. and it's simple, easy, awesome. 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 over a software upgrade to its max but having the worst week in years as the company continues to deal
with the aftermath of last weekend's deadly crash as uncertainty surrounds the company and the cook mike khouw's got a way to trade it for next to action first 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 that there is some potential town side here. 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 had these two crashes very close together, virtually brand-new aircraft and of course 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 this software, as you pointed out, that could point to potentially some increased liability, and further downside for the stock the second thing is that it is still sharply higher than where it was in december i think that level that we saw
in december might actually represent a potential area of some support for it. and finally, because it is so news driven at this point, we've seen options implied volatilities rise pretty significantly. so the trade, i think we ought to take a look here at a three-month chart. go back to that december level that i was referencing it traded to 294 at the 378 close that we saw here today we're talking about an increase of over 20% from just those lows so even net of the 10% decline that we saw this week and the declines we saw in the week prior, it's still substantially higher the stock's not overwhelmingly cheap, 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, about the same as airbus 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 that we get further news
and i was looking out to may at the 340, 315, one by two put spread looking at this today, spend $6.50 for the 340 puts then sell the lower strike 315 puts for 325 net-net you're not laying out any premium. if the stock does trade below 340 from 340 down to 315, you're going to see profits because you own that 340 put below 315 you're going to have the stock put to you at explanation. 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. and at that point, actually, it is going to be trading at a relatively attractive valuation. that represents a pretty significant decline from where it is right now and would represent a big discount to where it has been trading over the course of the last couple of the years. i'll about carter what he thinks of that support level and whether that would represent
from a technical point of view a good entry point fundamentally it seems attractive it seems we're going to get more news and additional downside risk is possible here. >> so in terms of support, there is a considerable amount of support at the level from which the stock gapped up on january 30 we've retraced that exactly. if you believe in gap-filling theory, not all gaps are filled, a lot are, the stock gapped up on earnings beat and is now down peak to trough 18% which for now we have price discovery. it has discounted the fact that it's not just two random accidents, they are related and there's a problem with the aircraft from here to go lower you have to start getting into lawsuits and capability and secret memos and that kind of stuff basically other than that, i think you're at support. and my hunch is there's not a lot of downside. >> dan >> what i think is important about this trade, mike was talking about the scenario in which you are put the stock and effectively long it. there's a whole scenario between
290 and 340 where you actually have a lot of -- a big range of profitability because that's what you're really playing for the ideal scenario on may expiration would be that this stock is 315 and the put spread that you own is worth $25 and you paid nothing for it. that's the best-case scenario. i think there's a wide range of options with this trade. if you were prepared, worst-case scenario, to be 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 most -- highest probability scenario that is the stock is about 315 on may expiration. >> mike, last word >> if the stock trades about where it is right now or even comes a little bit but doesn't get down to the 340 strike you own, there is possibility implied vol bit, the price of options comes in a bit if it does 315 puts are going to decay probably more rapidly than 340s you may have opportunity to take this off at a profit even if it doesn't get down to those
levels. coming up, good news for one of our traders got a burning question congrats because we are taking your tweets later on in the show we're live from the nasdaq market site 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.
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. ♪ time to take a look at open trades in february dan said nike could wind up in trade war turmoil. >> i think nike has the potential to be rejected here in the mid 80s and maybe move back toward 85 usingerings as that catalyst in march. we have no idea what the outcome is going to be of this trade situation. i don't think we're going to have a clean deal any time soon. i want to look to april expiration when nike was trading at 85.25 you could buy the april 85.75 put spread, paying $2.50 for that, buying one of the april 85 put forth $3.10, selling one of the april 75 puts at 60 cents. again, it costs $2.50, break-even 82.5. >> nike is still moving higher heading into next week's earnings report. how do you play this one now >> it's interesting. the stock's up 2%.
the stock was 85.25, closed 86.80. it's trading near those highs. am i nervous into earnings not really i just don't think they're going to have any gusto that's going to get this thing breaking out in a meaningful way. the put spread that cost $2.50 is 175, stick this out a bit. >> i think you've got this dead to rights. think about the month over month performance, basically gone nowhere versus the stock market, and large cap, which has gone much higher. fallow asset. >> 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 131 bucks. 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. selling the 130 put to 385, buying the 160 call for 6.70,
selling the 165 calls against it net-net you're spending 55 cents to put this structure on. >> all right, looks like mike was spot-on with this one, what do you do next >> yeah, 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 $1,500 it expired today so if you have this trade on in your account, you've just got the money. i think we should ask carter whether they thinks nvidia has further upside. >> i do. >> you do? all right. bullish. well, we'll see if mike will do a trade next week. coming up next, your tweets and "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.
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," mike >> yeah, the made 340/315, nothing in boeing. >> carter? >> spiders biotech spi long. >> dan >> fed ex, i would not short it
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