tv Options Action CNBC March 30, 2019 6:00am-6:31am EDT
hey there. along with the nasdaq after a very big day for the markets the guys here getting ready behind me while they're doing that here's what's coming up >> stocks just closed out a blowout quarter. but if you missed the rally, kuo and carter have one big name >> plus -- what dan nath sn saying about retail stocks right now. and it could be about to get ugly for the group he'll lay out the trade. and -- >> what's there to eat >> napoleon, make yourself a dang quesadilla.
>> you might want to think twice about that, that pohlian, because mike ko says chipotle shares are too hot to touch. he'll break it down. it's time to risk less and make more the action begins now. >> and let's get straight to it because the s&p 500 just saw its best quarter in a decade, up 13%. the average stock rallying around 15% in that time. but if you missed the rally don't worry because carter has a way to play catch-up he's going to break it all down. >> we have this rec shaye. what was preceding it was the worst quarter since '08. dow up, unchanged over a three-month period effectively, six-month period, and now the issue is could you find a lag sxrd maybe play it for catch-up? here's the xli industrials of course of which 3m is a part versus spy the market and then mmm. this is the opportunity, the lagging, you'll see the pattern next the presumption is that this is a fairly important bottoming out
formation. several ways to draw the lines you can use a moving average typically i like the 150-day but 200 is the same. what you have in many ways is a double bottom of sorts but you also have this well-defined inflection. turns and now turning again. and so the bet is that this is on its way to meaningfully higher prices. another way to draw the lines would be as follows. just a simple break above the down trend so here too the bet is that this big name, lagging name is going to play catch-up with the market and then let's look at a long-term chart. what we know is it's found this line quite precisely and has bounced, has bounced, has bounced, has bounced and ultimately the question is does it go on and make a new high, make a new high, make a new high somewhere close to that let's look at relative performance and this is also key here's the same chart. here is the setup. here's the prospective resolution on the absolute
but what's so important is relative performance of the industrials. basically, mmm has done nothing for a long time. but again, it has found support all of this relative line repeatedly and we are here yet again. and i think this is the setup for playing a big name, a dow name that has lagged >> all right so carter's very casual but he seemed very adamant about this trade, mike. so what is the trade here? >> yeah, so this is an interesting situation because we have a stock that's trading probably at a reasonable valuation on a historical basis. it hasn't seen a whole lot of top line growth. but this used to be a darling for the longest time they have earnings coming up on april 23rd typically it moves about 3%. that's about what the options market is implying but this is a name where when you take a look a little bit further out what we're seeing is that the options are not overwhelmingly expensive so this is a situation where we can be pretty simple with the trade structure we were choosing i was looking at it earlier today. you can buy the june 210 calls
a little over 3% of the current stock price to make a bullish bet that will capture earnings and a decent amount beyond if you wanted to make a bullish bet here an important point is i think this is one of those situations where you wouldn't want to reach out and buy the stock right here i think you'd be committing quite a lot of capital if the market rolls over, has a beta of almost 1.2 it would potentially get hurt. but if earnings provides a positive catalyst, this is a situation where you could look to spread this into a call spread if it declined significantly further, you could even look potentially at selling some puts if you really felt compelled to buy the stock. but i don't feel that way. right now i think options are cheap enough that buying calls is the way to do it. >> i wasn't looking at fundamentals as quarter calls them i was looking at chart. it looks constructive. it looks like it's poised for a breakout and showing some good relative performance right here. except for the fact that 60% of mmm sales come from outside the u.s. did you see what the dollar did this week, guys? a lot of people were saying
that's it, the dollar's done, it's not breaking out. when you think about all these issues with trade in china and the potential for it to be purkd out i say to myself this is a company that is very -- could be adversely affected by any legitimate pushout which is why mike is saying with option prices where they are and the technical setup pretty good, to buy calls at the money makes a whole heck of a lot of sense because if you get all that right this is going to be a big winner this stock was trading at 260 in early 2018 there's a lot of things i like about it i most like the idea of just defining your risk with a trade like, that trying to be constructive >> imagine -- consider how much the market moved this specific quarter. what if we started to see something similar happen here? some of that overhang in mmm didn't present itself. could the stock be 15% higher in 90 days in i think that's entirely real estate tick. but i also think that given those same overhangs it could be 10% lower. and that's why we're risking 3% of the current stock price to
make our bullish bet the hope is if that proves to be correct we're going to see an outsized win and if we prove to be incorrect we're not going to risk that much >> person who wants to be cautious would say listen, it didn't participate with the bounce in industrials and therefore something is hideous and chronic and wrong. my take is otherwise, that it's such a non-participant that that's the opportunity and it is a sort of slower moving kind of safe name, a household name i think those will be beneficial things >> one last thing i would say that could give it a little bit of an extra boost if things sort of turn positive here is that the sentiment amongst the street, amongst analysts really hasn't been very positive in this thing and of course when everybody's looking down that might actually be a time to start looking up. >> let's talk about another group that's been heating up and that's retail. the xrt retail etf having one of its best weeks of the year and best quarters since 2018 but dan here says the chart is about to make a major fashion faux pass what are you looking at, dan >> there's a couple things here. obviously one of the biggest
headwinds to just our economy right now is this trade situation with china and it doesn't seem that there's going to be any resolution anytime soon the other thing i think it's important thoi about, we just heard it with larry kudlow speaking to you earlier today, mel-s that it seems to be the entire world economy is resting on the u.s. consumer's shoulder here and we've seen a lot of volatility in consumer-related data and i'll go back to -- i know the university of michigan consumer confidence is trading at 18-year high. we got that a couple weeks ago but there's an interesting thing when you pull back one layer of the onion here is that long-lasting goods, the indication to buy those is actually at a multiyear low, despite the fact that consumer confidence is at an 18-year high sometimes that could be a precursor to kind of lower-end goods kind of sloughing off a little bit when you think about this, q1 auto sales are supposed to be down 2 1/2% year over year we just got pending home sales this week. they were down 1% year over year that's the 12th decline. the etf that tracks the s&p
retail sector doesn't act so great. we have a chart versus the s&p 500 since the start of 2018. it really has underperformed especially this year you talk about one of the best quarters it's only up 10% versus th s&p's up 13% yet it's still down 15% versus the s&p, only down a little less than 4% from its highs i say to myself there's not going to be a trade deal probably until june or so. and i think once we get into may and we start getting retail earnings and we start getting less clarity from companies i think that the xrt turns down i have a one-year chart real quickly. i see resistance at 46 i see some support at 44 i see an air pocket down to 38 that was a december low. look at this five-year chart i'll let carter speak to it. i'm not a trained technician but i see that series of higher highs, the lower lows. it breaks that nasty you break that support to 44 there's an air pocket to prior lows to me i look at expiration where the xrt was trading 45, you can buy 459-40 put spread paying a
dollar for that. one of the may 45 puts for $1.15. selling one of the 40 puts at 15 cents. it breaks even at 44 you can make up to four bucks between 44 and 40 between now and the expiration and your max risk is one dollar that's a little less than 3% of the stock price. i like the risk-reward here. >> you know, it's interesting given the potential headwinds you have here and the fact that this as a group really has been in no man's land for a couple of years. what's interesting to me is how cheap the options are. they're actually trading right now the trade he's looking at, those are priced at two-year lows which i think is pretty xoerd. and if you're wondering why it's extraordinary look at names like restoration hardware look what happened to that stock today. them beds basically any of the secular headwinds you can think about in the economy this has a whole basket of those stocks if you think that you're going to see some pressure, the fact that options are cheap i think really sets up pretty well right here >> the truth is it has underperformed four of the past
five years its relative performance peaked five years ago we know it's a broad swath it's 95 stocks it's $1.9 trillion and by virtue of being equal weight it gives you a very good tell and there's something wrong. that's it. and i think it's a good short. the levels are right >> let me pension one other chart which you might agree and it's maybe going up for some of the wrong reasons but have you seen the oil chart it closed above 60 today for the first time since november. that's obviously another headwind so it kind of feels like that underperformance is really kind of telling us something's out there and it seems like given how cheap option prices are this is a good way to be contrarian right here >> no question if you look at the consumer discretionary sector itself, it was so influenced by amazon when it was in there, home depot, mcdonald's the underlying story is a very negative one for most of these consumer names, whether it's autos, whether it's individual stores not good >> yeah. that's the other thing there's obviously a lot of stocks that are in this
particular sector. but a lot of those, the headwinds we've talked about for all of this time the whole sector essentially has gone nowhere, those head winds have not been removed and there are some others in there where you're going to see the -- where you have a decent amount of leverage and not a favorable earnings picture you take a bunch of those things and put them together it's not a great -- >> one last point, len nar, home builder, did you see that thing it was trading 53 bucks after that supposedly better than expected earnings two days ago you know where the stock closed today? $49. reversed the entire move i just kind of feel when you're getting good news and the stocks are not reacting on consumer-related stuff i think we'll see more of that in the next month and a half. >> everything "options action" check out our website. it's the hot new jam apparently so don't miss out. here's what's coming next. >> avocado >> chipotle shares are on fire this year. but mike kuo's saying avocadno to the fast casual trade
he'll tell you how to play it. plus, calling all options action fans reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air. when "options action" returns. , 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. ♪
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." chipotle shares have been sizzling this year check it out
the stock is up 65% in 2018 making it the company's best quarter on record since its 2006 ipo. its second best performing stock in the s&p 500 not only this year it has doubled in just the past 12 months. but mike khouw says it might be getting a little too hot to handle he's over at the plaza to show you in a call to action. >> we're going to take a look at a put calendar this is a stock i've been skeptical about before and of course it's had a phenomenal quarter you mentioned it's up 65%. it's up nearly 85% since the december lows. but it is an exceptionally expensive stock. so are the option ppz how expensive? i was taking a look at this thing earlier today. let's assume for the sake of argument that the growth targets on the top line hold true. and that somehow they managed to expand their net income margins basically to the widest they've been since the company went public that would be about 11%. this company is trading in that instance at about 28 times 2021
earnings i think that's pretty ambitious. so we're going to be having earnings coming up in the third, fourth week of april usually in the month going into earnings the stock moves about 5% in that month preceding earnings we're going to have slightly less than that, actually, when we go into the market on monday on april 1st afterwards we usually see moves of about 10% so the idea here is with an expensive stock wanting to be bearish on the stock but also recognizing that until they announce earnings we might see some muted moves, we can take a look now at the kind of stock price that we've seen. you can see this thing has essentially gone straight up so the idea here is that we want to make a bearish bet, we recognize it could go a little bit higher, i'm not going to be inclined to short this kind of a chart, i can tell you that for sure but i do want to make a bearish bet. how do we do it? the trade i was looking at was buying the june 700 puts expensive. $43.70 to reduce the cost of that
trade. i wanted to sell the april 15 40 puts i mentioned they're going to be reporting earnings in april. but that actually is going to be after those first options expire so we're anticipating relatively modest moves going into earnings relatively big moves coming out of them. so that's the whole idea here. net net i'm going to be spending about $28.30 if you got this at the prices you're seeing here today. another quick point. as we look at this chart if the stock somehow just basically went sideways going into earnings, looks like we're going to be losing money in here we're not. why not? because this thing is just going to be decaying away. but this put over here that basically gives you the opportunity to short the stock after earnings is going to maintain a good deal of its value. this is the one that's really going to decay away here this is a trade that i think for now going into earnings is actually a good setup so that you can own a way to take a bearish bet if the bottom falls out of it. we do have a huge concentrated holder in bill ackman, pershing
square owns one of the largest shareholders it's been a big source of his winnings this quarter. it would be unlikely he would have sold any shares going into the end of the quarter but might want to take some profits coming out of it i don't know i might be inclined to >> dowhat do we think of mike's sflad or do we say avocad-no >> it's the parabolic nature of that one p it's not likely to give up a good bit of that until we have some sort of catalyst. the fact mike is targeting that april 24th earnings date makes a lost sense by selling that shorter dated april put it doesn't catch earnings and he's setting up to own that may put that would catch earnings i really like this trade idea because i think the likelihood of any stock-specific news coming out before earns is probably not great and his trade structure has given him some room to the down side, a little room to the up side and it's fine if it goes up too >> it's actually the june put we're looking at you're going to have a lot more
time essentially coming out of that you're going to get almost two months coming out of earnings which they're going to be reporting on the 23rd or 24th. the week after that april put rolls off. >> the incredible thing is it's return to the scene of the crime. here's a stock that was 50 bucks in '09 at the plunge low basically gets to 750, 760 in august of 2016 and people start getting sick they get their problems stock is wiped out, gose to 2.50 we are literally back to the level where all the problems start ppd that is the definition of returning to a difficult level where there's overhead supply in principle before you could ever exceed a high you typically contend with it. contending is backing and filling or actually backing away i'd rather sell my stock or put an options trade that reflects that view and make the bet that there's a lot more to go >> i was speaking to karen actually before we came on the air about this because i was just talking about how much optimism seems to be built in at the valuations we're currently seeing her point, it's a good swurngs if they are seeing peak
revenues, if they are seeing peak margins, those things may well indeed coincide but the problem is it's basically priced right there right now. so how much more up side could it potentially have unless there's some sort of a squeeze going on in here >> shares frr lululemon reaching for the sky. that's great news for one of our traders. we'll tell you why plus have a question about trading options or maybe you just want to know how dan keeps his hair so sleek? you are in luck because we're you are in luck because we're taking questionsy are you so go? had a coach in high school. in the show. we're live from the nasdaq in times square much more o.a. still ahead 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.
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 back at some of our open trades just last week mike khouw partnered up with guy adami on a bullish lulu bet >> solid chinese sales what does that mean? up 41% in china. an economy that's slowing down apparently they're still buying their lululemon because those sales were crazy and the last operating margins despite all the things they've done, operating margins have actually improved. >> i'm looking out to april. i wanted to tell the 135 puts for $4.30. buy the 145 calls for $9.45.
and then sell the 155 calls. why isn't that drawing for $4.95. >> they were right the retailer falling today still up more than 14% since the time of the trade. mike, what do you do now >> so if you follow us on twitter, and you should, then you would know we recommended earlier this week you take the profits and run. we spent 20 cents to put the structure on when i was looking at it earlier this week you could have taken it off for $9.15. the most it could be worth actually is $10. so really most of the money that you could make actually was made the options market was implying a pretty good move but not as big as the one we saw. i would make one other quick point. if you had just bought the calls it would obviously be a big win. but actually it still turned out to be a very good win because when you take a look at how much it actually geared it worked out about the same this trade worked out. >> the word sublime comes to mind how good also it stopped right at the former high, stopped right at the october high
perfect trade in and out what more could you get? >> earlier this month dan said chipmaker western digital was heading for a rebound. >> it bottomed out on christmas. it broke out above that down trend line here's the really important part it was able to actually get back above 50 today and that was the breakdown level from the fall. that's a really interesting setup. you look out to may expiration where the stock was trading at 51.50 today. you can buy the may 50-55 call spread paying $4 for that. >> still down nearly 7% since the time of the trade. what do you do with western digital? >> this one was in the money at the time we chose the 50-55 spread. it closed today at 48 bucks. what you really need to do here is you're targeting a $54 break even the spread is worth about $2.50. this is one where i really think you have to keep a close eye on and you want to keep a premium stop and i usually like to use a 50%
premium stop sow don't want to see this thing go below $2 because the probability of it being worth much less on the expiration probably increases >> pattern's intact. the bearish to bull versus bottoming out nothing's changed. i think you just stay. >> 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 (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...
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. ♪ ♪ baby love ♪ my baby love ♪ i need you ♪ oh how i need you the "options action" family is growing take a look at baby cortland the newest edition to the wharf family congratulations to carter, his wife jill, big sisters aulden and alice. big brother brewster congratulations. >> thank you very much >> adorable. very adorable. time for the final call. carter braxton worth >> mmm >> i think you want to use calls for that and if you're long chipotle i would think about taking some profits or look at
the puts calendar i recommended. >> dan nathan. >> i think there'sing in brewing in consumer land i know you guys think i always hate the retail stocks >> everything really >> i really hate them now. srt put spread >> see you back here next friday at 5:30 eastern time don't go anywhere. "mad money" with jim cramer starts right now - [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