Transcripts For CNBC Options Action 20151219

Paid to buy shares of twitter for just 18. The action starts right now. Lets get right to it. Where should you put your money. And how could you protect your portfolio. And lets get right to it. Dan. There was open the s p 500 index as far as options are concerned. That expired on the opening and spy options expiring on the close. So a lot of the volatility had to do with the deferential. People use futures to hedge on both sides of that. That helps to exacerbate that. But the rally on wednesday felt like that is what you are supposed to do when you are given what you expect from a fed. And we closed on the highs that day on thursday and friday. And then it was lights out. The realization that fed was pushed into they had to do, to delivery for credibilitys sake. And the Global Economy that they were worried about in september that caused them not to raise, is still bad. And the data is bad. It is a poor entrance into 2016. With the options expiration exacerbated the selloff we saw today, should we not be as concerned about it because options played suppose a huge role in this . No. I think were transferring our concern. We had a reason why the market was under pressure when we broke through 2025 today because that created a wave of selling by people short that strike. But what we have now, of course, is the same thing flattening the yield curve. We have the fed taking away the punch bowl at the near end but the long end of the yield curve is telling you that the economy is not so great. And i think that is where were finding our pressure right now. If we dont have as much liquidity, we should expect greater volatility. As bad as the selloff has been, we are flat on the week, carter. The key takeaway is nothing happened. There is nothing new here. The health has been in question. When you have question, you dont see it, you when you have high cholesterol, you might not see it, but it is hurting the body. And were having a heart attack and that is what is happening now. We have industrials, high Blood Pressure and gout and diabetes. Did you see my doctor . But the point is people looking at the s p 500 and saying it is looking fine, it is deteriorating for 18 months. 45 of the stocks in the index now are down more than 20 . The russell 2,000, unchanged for two years. We have not been in a bull market for a long time. Is this new . No. If you are a doctor, you say that guy is sick even though he doesnt look like it. The market is sick. Lets take this metaphor. Mike kuo, what is your prognosis . One of the things about the illnesses that the carter described, they could be the ticking time bomb and takes a while for it to play out. If you look over the next 60 or 90 days what we might expect, on average going back to 1960 weve had pullbacks taking place over that period of time. And a lot of times they are not that severe. We did have a severe one in august. But it wouldnt surprise me if we test the 10 bear market as we look out 60 days from where we are right now. And so thanks, mike, for the setup there. Im looking at that in the s. P. Y. We have a twoyear chart. Want to pull it up. When i priced it up it was at 201. 50. And when you go back and look at the chart, 180. 1800 in the s p 500, we stopped at in october of 2014 and the crisis level in august. And if you are think being protecting your portfolio and you have large cap u. S. Stocks here, the spy is a good way to do it and that range is one to identify. And want to give yourself a couple of months. Mark was talking about earlyyear selloffs. From january to february weve had two selloffs of 5 and they have come from fears of global growth. Right now we had poor data and stuff around the globe isnt fantastic. If we close down so. Hold on. I have to get this in. All right. This is the second down year in the s p 500 since 2002. So i think you could look to be tactical. If we get a bounce early next week on light volume, you put a trade like this on. The spy was 201. 50 and i priced it up in february. You could buy the 200, 180 put spread for 4. You could sell one of the february 180 puts at 1. 50 and that is your max risk there and that is why 2 of the s p and you have protection down to 180 and that is the level i think we see some sort of spike. So, again, this is a protection trade for your portfolio. Mike, what do you make of this trade . I think this trade is exactly the one you want to be doing here if you are looking to hedge your portfolio for a couple of reasons. First of all, the payoff on this hedge is good considering volatility is slightly elevated here. Paying four to one. And the levels dan is looking at it precisely the ones historically you would look to if you think you are in a pullback here. Lets bear in mind, a lot of the stocks are trading at fairly rich valuations and this is happening at a time when we might be seeing other assets yielding better. That would make them a better alternative to equities and this is a affective way to hedge your exposure. I want to know what carter thinks of dans levels. Good levels. Youre targeting the prior low. And there is every possibility we go through that and many indices are below their lows. But god bless. Put it on and make some money. Mcdonalds sitting at alltime highs. And dom chu is at headquarters with this story. Dom . It is interesting. Because ever since mcdonalds put out the concept of allDay Breakfast, well peg it to the Early September mark, mcdonald stock is on a tear. One of the best performers in the dow. And if you look over all at the performance of it versus its peers that operate in the breakfast space here. Dunkin brands, down 15 during that same time frame that mcdonalds has gained 23. Dennys, cracker barrel, bob evans stores, have been negative since mcdonalds came out with it. It is not to say that all Day Breakfast is driving every bit of the divergence but mcdonalds has seen a spark or a catalyst since the allDay Breakfast concept. The right hand third of your screen is when the divergence between when the s p 500 and mcdonald took shape and started to perform. And lets talk about mcdonalds. Because from a dividend perspective it is a good play. It has a 3 dividend yield with the 20plus percent run it had. So when it comes to all Day Breakfast it could eat the competition lunch. And katie little has that story, that full one online, melissa. Guys at cnbc. Com. You should check it out. For investors, the chart looked good. But the chart master is seeing unhealthy patterns. It could be too much of a good thing. Well see if we could figure it out. A breakout, number two performing dow stock of the 30. And it is all about the performance, of course the golden arches versus anything you want. This is all bad and well, here it is. The numbers speak for themselves. You dont need me to circle them. It is what it is. So the question is can mcdonalds keep that going. By my work, i would say it is overdone. Here is more. Look at this. Okay. On to the charts. Now, and this is the issue. As a dow stock, the performance relative to the bench in which it is a major contributor is a bit of an issue. So longterm. Now, this is nothing short of a blowout. Here is our breakout from the range. It was stuck for four years and well look at that when we tighten up on the chart. The yeartodate performance is incredible. And so this is the october quarter where the stock had a good result. And broke out of a range. On or performing the market. 11, 12, 13, 14 and just now breaking out. And i want to zero in on this period right here. We are right on the trend line. So the breakout has come and gone. And now the question is, is that likely to continue or likely to fill in this gap . Again, i think youre going to break this trend and ultimately get back into the lows and or even fill the gap. Too much of a good thing. Take profits. If you own it, it is a good thing. Try it short, too much. So mike kuo, you have a trade on this. I would sell the february 120, 125 call spread. Collect about 1. 50. It is trading at 15year highs in terms of the valuation and in the 90th percent ill with regard to options. This is a way to collect premium without making the bearish bet. Even if it rallies, you still collect it. And that 120 strike is above the 118 level which is the analyst target price on the street right now for mcdonalds. Does the selloff in the last few days change your view . The stock acts well. In the midst of this. And this went from a situation, the chart that carter was showing, sentiment was poor. People thought they were doing bad things. Sales are expected to be down 15 from the peak from 28 billion a few years ago to next year. And mike said it is trading at a 15year high. They are in the midst of a 20 billion share buyback. And sales might be down. At 22 times expected earnings declining, no mass. And i think mike is being generous with a call spread sale. I might think of long premium to target 105 in the down side. That is very reasonable. And indeed, and if the general selling gets worse, everyone gets clipped and mcdonalds is not likely to resist it. And if you have a question out there, send us a tweet. At options action, cnbc. Videos throughout the week and exclusive trades. You could also sign up for the newsletter. So check it out. In the mean time, here is what else is coming up. Pretty much sums up twitter shares. But what if you could get paid to buy shares of the micro blogger. It is a miracle. It is the miracle of options and well show you how. Plus there is one Stock Holding up well in a tough tape and here is a hint heres johnny. Well tell you why some traders are betting on one of the oldest stocks in the dow when options action returns. Im here at the Td Ameritrade trader offices. Ahh. Steve, other than making me move stuff, what are you working on . Let me show you. Okay. Our thinkorswim Trading Platform aggregates all the options data you need in one place that lets you visualize that information for any options series. Okay, cool. Hang on a second. You can even see the anticipated range of a stock expecting earnings. Impressive. Whats up, tim . For all the confidence you need. Td ameritrade. You got this. Here at Td Ameritrade, they work wow, that was random. Random . No its all about understanding patterns like the mail guy at 3 12 every day or jerry, getting dumped every third tuesday. This happens every third tuesday. We have Pattern Recognition Technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. Theres no way to predict that. For all the confidence you need. Td ameritrade. You got this. Welcome back to options action. Among the selling this week, the Utilities Sector emerged as a bright spot in the market. And that is great news for dan. Take a listen. When the etf was trading at 4180 and buy the february call for 41 and your profits above 43. The stock was at 46 just a couple of months ago. I think you will want to be defensive and be u. S. Domestic and you want yield and investors will come back to the Utilities Sector over the next few months. Well utilities were up 3 this week. So dan, do you stick with the trade, is this where you should go and hide . I think you do. And the important point is the 10 year treasury yield is three basis points above from where we started the year and with the rate increase. And they will continue to look for the yield and u. S. Domestic offensive. And this traded as high as 4380 and long the 42 call and sold the february 45 call against it. I reduced my premium. And now i have a call spread and less at risk. That is how you have to trade these options. Well, dan wasnt the only one seeking safety. Two weeks ago kuo and carter made a bullish call on johnson johnson. Take a listen. Ill play for a move here that taking us back to the alltime high of about a year ago at 8 at j and j. The 105 calls will cost 1. 75 so risking well less than 2 of the stock price to make a bullish bet. Well, the stock is flat. So do you still like this. We are back to where we started which means stick with what you got. Stick with it. Mike, you do the same . I would do the same. We are looking for low beta plays, inexpensive options. We should stay with this bet 105 call. It hasnt changed very much. If the stock falls further you will lose less than the stock price does and if we do get a pop you might have the opportunity to leg into a vertical call spread the way dan was recommending on the xlu. Coming up, twitter shares hitting an all time closing low but mike has a way to buy shares in a generous strategy and hell explain it right after the break. Im here at the Td Ameritrade trader offices. Ahh. Steve, other than making me move stuff, what are you working on . Let me show you. Okay. Our thinkorswim Trading Platform aggregates all the options data you need in one place that lets you visualize that information for any options series. Okay, cool. Hang on a second. You can even see the anticipated range of a stock expecting earnings. Impressive. Whats up, tim . For all the confidence you need. Td ameritrade. You got this. Here at Td Ameritrade, they work wow, that was random. Random . No its all about understanding patterns like the mail guy at 3 12 every day or jerry, getting dumped every third tuesday. This happens every third tuesday. We have Pattern Recognition Technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. Theres no way to predict that. For all the confidence you need. Td ameritrade. You got this. This is our last options action show of 2015. And in honor of the Christmas Spirit we put together kuos classic strategies. A merry Kuo Christmas and strategies with a twist. Yes, theyre all here. Such yuletide favorites as the put spread. Im looking out to march, from the rate news to the holiday sales. The call calendar. I just dont see a whole lot going on right now throughout the month of july. Number one, because of the holiday. Number two, because people are waiting on earnings. Yes, once mike presents a strategy it is eternally his. Youll see losses if the stock goes down a lot further. But bear in mind that would happen any way because you already own the stock. But wait, theres more. Order now and well give you a special holiday version of mike kuos biggest hits. Charts that make no sense at all. This is a chart going back to the 60s. Well see big declines are relatively rare. So risk less and make more this holiday season. Pick up the phone and order now. Special delivery charges may apply. How much is it . That is what i want to know. The price is right. You get this information for free. Just by watching options action. Exactly. Just pay for shipping and handling. All joking aside. There is a classic options trade called a Christmas Tree. So mike, explain that to us. It seems like the right time to bring up the Christmas Tree trade. You want to do it when volatility is relatively high like it is today. And this is a trade you would employ if you dont have conviction on the direction of the stock and also a trade you might do if you would be willing to either buy the stock at a lower level or potentially sell it at a much higher one. And the stock im looking at was one that hit alltime lows today which was twitter. Volatility is exceptionally high and it is probably hard to catch the falling knife if you are thinking about getting long. You might even be thinking about pressing a short. But we might be willing to buy the stock at substantially lower levels. So the trade i was looking at was the march 22, 2018 Christmas Trees. So this is like a ratio spread. What were doing is were going to buy one of the march 22 puts costing about 2. 25 when i was looking at this earlier today. We then sell one of the march 20 puts and collect about 1. 40 for those and sell one of the march 18 puts for 80 cents. The whole trade cost you absolutely nothing. If the stock continues lower and through 22, you could make up to 2. Basically the value of that put spread that you are long. Now if it continues lower, you could potentially be compelled to buy the stock at 18. But of course, because we already made 2 on the first put spread, our effective Purchase Price would be closer to 16 which represents a 30 discount to the current stock price. One thing i would quickly point out that would work out to a value of 9 billion, excluding what they have in cash. I would think twitter starts looking attractive. Maybe to a buyer or an activist, im not sure. But this is a unique social media property. At that valuation it looked like a threelegged unicorn. Without a horn. This strategy makes sense. You are buying yourself a reasonable room of profitability on the first put spread and then to the down side. This is a stock that was tough for me. I had my best trade from 35 to 50 and the worst from the low 40s to the mid20s in the second half of the year. Sentiment is atrocious here. And in a stock like this in a market we could be going into it, it could overshoot on the down side and that is where he will go next. I dont think so. If someone asked how are you doing . Down and to the right. Everything is going down to the right. Two years ago it was 74 and now here it is 22 it could go to 8 or 16. So buying a stock is something in a downtrend and saying today is the day. Other key levels . No. What makes a level is where a stock has traded before. If you never owned it before, you are into the ether. And why would you say 16 as attractive to some buyers out there. Isnt there the fear it would hit that level and it is a broken stock nobody wants it. And that is why we call it catching the falling knife. We dont have a specific line in the sand to draw. But we could look at is there a level at which companies could be interested in acquiring it or active hedge funds would say this is a company that doesnt cost a lot. And you look at fundamental levels. And 9 million for the enterprise, it is not expensive. The president ial election year, sentiment is bad. At some point it will shift and ill be back in there in a big way because it is a unique social property. Coming up next, your tweets and the final call from the options pits. Im here at the Td Ameritrade trader offices. Ahh. Steve, other than making me move stuff, what are you working on . Let me show you. Okay. Our thinkorswim Trading Platform aggregates all the options data you need in one place that lets you visualize that information for any options series. Okay, cool. Hang on a second. You can even see the anticipated range of a stock expecting earnings. Impressive. Whats up, tim . For all the confidence you need. Td ameritrade. You got this. Lets get to the final tweets for 2015. Why is the dress code for options action jackets required . Dan nathan . This is a good question. And it is dressing down it is in fast money, i dress down to my competition. I have guy adami sitting next to me and all of the smart guys here and i dress up for it. You know what i mean. Were the fancier show. Next tweet. What are your thoughts on gdx into the First Quarter of 2016. Carter . If you are picking out of bad choices, this is the least bad of thing. You want to do Something Like the xlu or the j j, it held up well relative to other things. Time for the final call from the options pits. Mike kuo. Premiums are elevated, look to sell call spreads. Im looking at mcdonalds. 120, 125 call spreads, sell that. If you have mcdonalds, take some profits or try it short. Dan . Twitter sentiment is bad and facebook is good. I think at some point in early 2016, it is long twitter and facebook trade would be good. Our time has expired this year. Check out options action at cnbc. Well see you back on options action in 2016. Announcer the following is a paid presentation for cize, brought to you by beachbody. Get ready to cize it up. [ beat drops ] [ people cheering ] are you ready to dance . 5, 6, 7, 8 on my way in ima take it walk straight ima put it on a playlist my name is shaun t. Welcome to cize, the program thats gonna teach you how to dance. Girl, jump with the rhythm in 30 days, im going from a nondancer to being able to do six routines. And i would say im a dancer now. I was not a dancer when i