Transcripts For CNBC Options Action 20170430

How to protect yourself. The action begins right now. Lets get to it. The nasdaq 100 posted its longest monthly winning streak since 2009. And the index hit high after high this week thanks in part to blowout earn gs from amazon and alphabet soaring to record highs. It aint over yet, next week the big kahunas, apple and facebook, facebook hitting an alltime high today, both stocks implying big moves with potential to spark a more than 40 billion shift in market cap next week. Should you continue to bet on big tech, and which is a better buy right now, apple or facebook . Lets get in the money. I think earnings we saw last night from amazon, from google, from microsoft, really shouldnt lead you to believe were going to have any massive surprises next week. The Way Investors are positioned, we knower that overweighting these things, theyre massive gamers, driving that massive outperformance in the nasdaq, the nasdaq is up 12. 5 versus the s p. I hate to be so because say about it. But i think apple, the implied movement is 3. 5 , average 5 the last four quarters. Id be shocked to see it move outside that range. First of all, why would people at this stage be looking to offload their winners . It doesnt make a whole lot of sense. In apples case, its not ludicrously expensive based on its trailing earnings. Facebook is growth story. If anything is poised to move facebook is it, they have a lot to live up to. The expectations are for a 45 increase in revenues year on year, 120 increase in net income year on year for the quarter. Obviously thats high hurdle to get over for anybody. What its going to end up being, we know, is this momentum peak for these very crowded, successful names, or are they going to continue to lead . Put the current price income perspective. Analyzing a rate of 36 . Just to put that in context, thats the biggest annual rate of return except for coming off the 09 low, up 60. Then 98, 99, about 75 each year. So the question is how much more can we do . Obviously thats what were going to try to discuss. Ive got some charts. Were going to first do a round of would you rather . If you had to put mork money to work right now. Both at alltime highs hide go with apple. I think there are catalysts that are identifiable out a year. As far as facebook we dont know. Youve got to give them all the credit in the world, they make acquisitions, use their currency, use their cash, and they work out or they have so far. To me theyre the ones that have more surprise. Apples going to be more you can look down the road and see whats coming. Straight equity i also would be with you just because i think we are obviously at these very heady levels at this point. I think apple presents significantly lower Downside Potential risk. However that said, given the momentum that facebook has had, given the fact that thats really the bigger grower out of these two, if theres a way to play it with options, then i might lean that direction. I wonder what kind of trade youre going to have. Carter . So im going to go with facebook, which means its two to one. Lets go look. I want to start with the whole well do apple and facebook first. First the bigger situation is this maybe how it all ends . Apple, what . Well i think you could draw the lines like that. Something of a head and shoulders bottom. The question is has the head and shoulders bottom played out . Whats the price objective . Typically its to the high, maybe through the high a little bit. And what youve got here is the breakout. So what im thinking at this point is apple has some checkback risk which is often what we see after a stock moves to an alltime high and back through, often youll revisit. My thinking here day to day, apple has some Downside Risk going into its number. Contra distinction, look at facebook. This is of course the picture of what an uptrend is. In fact if you put lines on it, it has lived within this quite precise channel. So the question i guess is this. Meaning weve been at this low, at this low, at this high, are we getting close . I think weve got a little bit more to go. Were going to stick with the bullish bet on facebook that mike and i are working on a month or two ago. Lets pull it back from these two and try to put this in perspective. Okay, these are the top big stock in the s p. Theyre valued about 2. 8 trillion. In fact, its the same exact value as the bottom 250. Top five, bottom 250, worth the same. That is actually not that rare a circumstance. It happens 19 of the time. 1990 to present. So take a look. At these numbers. Market cap. Top five, bottom 250. Cash flow. Its identical. And theyre trading at the same valuation. The fundamental guy would say the top five are growing faster, a better bet. Forget about that, look at this chart. This is a chart of those top five stocks, 2. 8 trillion, plotted equal, bounced off this lines perfectly, i think its a little steep and that you have the risk youre going to come down like this. So this is whats happened Going Forward when the top five equals the bottom two. The top five underperform. Back to the chart. I bet you this is ultimately whats going to happen. Weve had the earnings from all of them. If i had to pick apple versus facebook, im going with apple. Mike, you picked facebook with an options trade. Yeah, the idea here is obviously we have earnings coming up, we wanted to mitigate the expensive buying options into that. I was looking at the mayseptember 155 call spread. The Options Markets implying a 4 move. This is a bet that its going to make that 4 before move to the upside. The premium for that near dated option is going to decay much more rapidly than the longer dated one. Essentially were going to try to use this catalyst to take advantage of that effect. Then your long net longer dated call, sell more calls against the two after may expiration if you chose. This is a trade structure we havent talked in a while, it makes perfect sense, especially for a stock that literally has gone on this leg higher here. Listen, this stock going to go up 10 . Very unlikely at this point. The idea of selling near dated premium to help finance longer dated premium, let the things consolidate a little bit. That chart of the five stocks, when you look at the move, its really scary. You know, when you think about it what are you doing when youre dying an index . The collective earnings and the growth and all that sort of stuff, it makes me nervous. Ive been saying this a year. Ive never seen anything like it. Youve seen it late 90s but that didnt independent so well. Its happened 19 of the time, in effect, the top five stocks equaled the bottom 250. Markets are always biased to a few successful stocks. But this one in particular, just because of the basically stellar rate of its growth, is reason why its the reason its been doing this well. Theyre all the same type of thing. Jim cramer makes this the point all time. Then pick the stocks. Because if you had owned those stocks versus the s p over the period rather than the etf, youd have massive, massive alpha generators. Another stock on the hot streak, tesla, shares hitting a fresh new high, ceo elon musk revealed a glimpse of what the upcoming electric semi truck will look like. He also suggested that the company will likely add four new giga factories later this year, musk telling the audience the semi truck can be driven around like a sports car. This comes as tells la gets ready to report earnings next week. How should you play it . Heres the thing, the stock is up 45 on the year, up actually 70 from lows in december. I think there was a lot of trepidation among investors that into the election, a lot of the rhetoric of the candidate was not going to be particularly favorable to green stories. Hes done a good job cozying up to them. Now the stock has had that massive leg higher. I think theres risk near term back toward that 280 level. I think if youre a holder of this stock you should consider near dated some protection. So today when the stock closed at about 314 you could buy the may 310, 280 put spread, paying 8 for that, buying one of the may 310 puts for 10 bucks, selling one of the may 280 puts at 2. That is your massive risk. You make up to 22 between 302 and 280. Think of that as protection. Breakeven protection to 10 , 11 . If you were looking to make a bearish bet this trade makes some sense. If you thought the stock would sell up, q1 deliveries, shorts have gotten queetsed, maybe add a little bit of a checkback. You cant short a stock like this where the Short Interest as high as it is. Its not trading basically on any kind of trailing fundamentals. And the future is pretty murky with respect to the valuations. The energy side, its the size of a duke energy. The car size, the size of general motors. It doesnt make any money. Which do you think is more vulnerable to the downside . Would you say facebook or tesla . If theres trouble . Facebook. Both. Sorry. Thats good, what do you think . Its a good one. I think facebook because its a 430 billion stock. I think people are going to be left scratching their head. You love the chart on tesla not long ago, loved it. Its worked. And its worked. What now . I think stick with it. Stick with it, ha ha. What do you like better, tesla or facebook . You gave us the question, i give the question to you. Thats fair. I think ill go with tesla. Interesting. Facebook for me. Got a question, send also tweet optionsaction. Check out our website optionsaction. Cnbc. Com. Our newsletter. Heres whats coming up next. Go with the perfect storm. Lets not get carried away. Future if you are worried about may, well teach you how to protect your portfolio for less than two bucks. Let me get a burger with a slice of cheese but no onions hold that please m m and oreos i want everything on the dollar menu thats impressive but not as impressive as mikes options trade which doubled his money in one week. He has a way to make even more cash when options action returns. Get tomorrows news today with the futures now newslett newsletter. Realtime trades and a sneak peek at interviews. Stay ahead of the headlines and make todays events tomorrows profits. Cnbc. Com futuresnow email. Hey gary, what are you doing . Oh hey john, im connecting our brains so we can share our amazing trading knowledge. Thats a great idea, but why dont you just go to thinkorswims chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders . I know. Your brain told my brain before you told my face. Mmm, blueberry . Tap into the knowledge of other traders on thinkorswim. Only at Td Ameritrade. What if we could bring you by having better values . At blue apron, we work directly with more than a hundred family farms. So instead of spending on costly middlemen and supermarkets, we can invest in the things that matter most making farmland healthier. Cutting down on food waste. And bringing you higher quality, fresher ingredients for less than you pay at the store. Because food is better when you start from scratch. Get 30 off at blueapron. Com cook but weve got the get tdigital tools to help. Now with xfinitys my account, you can figure things out easily, so you wont even have to call us. Change your wifi password to something you can actually remember, instantly. Add that premium channel, and watch the show everyones talking about, tonight. And the bill you need to pay . Do it in seconds. Because we should fit into your life, not the other way around. Go to xfinity. Com myaccount what . Pony neighing] hey gary. Oh. Whats with the dogsized horse . Im crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. Isnt that right warren . Well, you could get support from thinkorswims inapp chat. It lets you chat and share your screen directly with a live person right from the app, so you dont need a comfort pony. Oh, so what about my motivational meerkat . Inapp chat on thinkorswim. Only at Td Ameritrade. The s p 500 just posted its fifth positive month in the last six. As april comes to a close the stocks set near record highs. Should investors adhere to the adage, sell in may and go away . Bob pasan at the New York Stock Exchange with more. This is one of the most famous adages. You can argue about why it works but theres something to it. Sense since 1950 the s p 500 has been up. 4 may to october, compared to a gain of 7 november to april. This is according to gale and jeff hirsch in 1986. Sounds good but in the past 10 years, theyve refined this by layering in two additional factors. A technical signal and a signal based on president ial cycles. The technical signals will get you in earlier than november 1 and keep you in longer than may 1 if the market is trending up. The opposite if the market is trending down. The other signal involves the president ial cycle. Dont sell in may in the third and fourth year of the president ial election cycle which markets tend to outperform. The hirschs claim this means you can make four trades every talk years. Combining these two signals, the hirschs claim, produces surturbo charged results. An average return of a loss of 0. 8 per year for the s p 500 may to october october, compared to 10 november to april. Translating this to money, a 10,000 investment made in 1949 from simply the may to october period would now have 4,500. Thats a loss of 5,400. The same 10,000 invested in november to april would produce a gain of 2 million plus. So you can see why this hoary saw has so much staying power on wall street. So if you are worried about losses in may, how can you protect yourself . Lets get to the call to action. Mike, what are you looking at . Talking about insuring your portfolio, one of the things to Pay Attention to is timing of your hedges. Rope is because hedging a port tote i dont comes at a cost, like buying insurance on your car. If you do it all the time its going to create a drag on your returns. The magnitude that youre trying to hedge, are you concerned about a big decline . Or just looking at a potentially modest decline . Finally one of the things you want to take a look at is volatility. That means both the volatility of the broad market and also the cost of options. If we take a look here at the s p, you can see what i was talking about before. Right now you would have made money if you hedged there, maybe here, here, here, and here. Thats five times. The rest of the time you would have just been spending some money. That also emphasizes how important it is to focus on that timing. Now were going to take a look at how the market has done so far. Just basically over the course of the last year or so. If you can imagine that youre looking for approximately 1 returns per month, then over the course of the next three, maybe youre hoping for 3 to the upside. So what we can do is say, all right, i want to have this much upside. But i want to have protection down there. You can do that with something called a collar. Specifically the trade were looking at here is selling the july 245 call, collect 1. 35 for that. Then using those proceeds to help finance the purchase of the 230 strike put. Important point, looking at spy, they are paying a dividend of about 1. 18 estimated in june. Net out that dividend, this is going to cost you nothing essentially to insure your portfolio. 3 to the upside, anything worse than 3 to the downside we got you covered. A free hundred, doesnt sound too bad. It doesnt. Back in the day, long short equity traders at hedge funds used to slap on a bunch of spy shorts, spy, etf. I prefer the idea of selling an out of the money call which is what mike is doing and using the proceeds to buy a put. That is the collar. Rather than just selling spy at the money. Youre giving that portfolio stocks or the spy some room to the upside to appreciate if the market does go higher. You also have that disaster protection below and didnt pay a lot for it. Rather than neutralizing potential games versus your spy shorts. So i love the idea of a collar. I like it more so on a single stock. But i get why youre doing this. Insurance is always thats something. One wants to go with what bob was talking about, seasonality, theres another reason. Also Market Construction argues for it in the sense there are fewer and fewer Stocks Holding things up as Energy Continues to fall, industrials to the consumer, this crowding into very successful but perhaps overdone growth things. Market structure seasonality, its a good time to insure. If the market takes the stairs up and the elevator down, collars let you participate in that mild upside but protect you against the catastrophic crash. So thats essentially what were looking for here. Still ahead, mike bringing home the big macs from his bullish trade on mcdonalds, doubling his money in a week, now a way to make even more cash. Taking your tweets later in the show, dig deep, pull out those phones, think nice thoughts, send them to us with questions. Much more options action right after this. Hey gary, whatd you got here . This bad boy is a mobile trading desk so that i can take my Trading Platform wherever i go. You know that thinkorswim seamlessly syncs across all your devices, right . Oh, so my custom studies will go with me . Anywhere you want to go the markets hot sync your platform on any device with thinkorswim. Only at Td Ameritrade we rbut we are not victims. Ack. We are survivors. We are survivors. We are survivors. And now we take brilinta. For people whove been hospitalized for a heart attack. We take brilinta with a baby aspirin. No more than one hundred milligrams. As it affects how well brilinta works. Brilinta helps keep platelets from sticking together and forming a clot. In a Clinical Study brilinta worked better than plavix®. Brilinta reduced the chance of another heart attack. Or dying from one. Dont stop taking brilinta without talking to your doctor,. Since stopping it too soon increases your risk of clots in your stent,. Heart attack, stroke, and even death. Brilinta may cause bruising or bleeding more easily,. Or serious, sometimes fatal bleeding. Dont take brilinta if you have bleeding, like stomach ulcers,. A history of bleeding in the brain, or severe liver problems. Slow heart rhythm has been reported. Tell your doctor about bleeding,. New or unexpected shortness of breath, any planned surgery, and all medicines you take. If you recently had a heart attack, ask your doctor about brilinta. My heart is worth brilinta. If you cant afford your medication, astrazeneca. May be able to help. Whoa,i just had to push one button to join. Its like im in the office with you, even though im here. Its almost like the Virtual Reality of business communications. No, its reality. Intuitive one touch Video Conferencing is a reality. And now its included at no additional cost with vonage business. See why 3,000 companies a month are switching to vonage. Business grade. People friendly. Oh hey john, im connecting our brains so we can share our amazing trading knowledge. Thats a great idea, but why dont you just go to thinkorswims chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders . I know. Your brain told my brain before you told my face. Mmm, blueberry . Tap into the knowledge of other traders on thinkorswim. Only at Td Ameritrade. Time for the look back at winning trades. Mike got hungry for mcdonalds and made a killing. Heres how. Its how we headache famake fas. Risk less to make more. Mike thought shares of mcdonalds were going higher. But just buying the stock, 100 shares would cost more than 13,000. So instead mike turned to the Options Market where he could buy shares of mcdonalds for less than the cost of a big mac. How do you do it . Whats your secret . Its simple, mr. President , heres how. To make a bullish bet, mike bought the september 135 call for 3. 40. That 3. 40 is the most he could lose on the trade. But to make money, mike needs max donalds shares to rise above the strike of that call by more than the cost of the trade, or in this case above 138. 40 by september expiration. It gets even better. If shares rise that call will increase in value faster than the price of mcdonalds stock. Meaning more money in mikes pocket. Since the time of the trade mcdonalds shares are up 6 . Meaning mikes trade is right in the sweet spot. Theres still plenty of time the clock. There is, m. J. But options action fans all over the world want to know what will mike do now . You might be asking if mike thought mcdonalds was so great, why didnt he buy the stock . Stock versus options. Had you bought shares of mcdonalds last week youd be up around 6 , thats not bad. The 135 strike call for 340 is worth 740. That is a return of nearly 120 in just one week. So mike, to you keep this trade on . Its interesting. The day this news came out we sent a tweet about it. The stock trading 141 at the time. What i suggested was taking the money. The advantage of options is the fact that youre risking very little and you have that upside. In this case, now that option is worth about 800 bucks at the time. I said you could take a poring the profits and roll out and up to another one if you wanted to basically continue to make a pullish bet on mcdonalds. I think weve basically gotten the move here. Big breakout, news related, take your money and run. We cant all be winners. Thats the case with dans bearish bet on tech. I want to look out to july. You could put a pretty wide put spread on today. Etf trading 132 half, buy the july 132, 120 put spread, pay 2. 50 for that. We were talking about this earlier. Apple and facebook report next week. How are you managing this trade . This is one that id like on an outright basis. Think were going to get a pullback at some point. The concentration in five stocks make up 40 of the qqq. To me at some point they cant keep growing like this or this much higher. To me the trade was put for 250, broke even at 129. 50, the stock at 136, worth 140 right now. Makes sense to use a 50 premium stop on long premium directional trades. We have catalysts that could get the market rocked. Were looking at this as insurance also, thats the way to think of it. Up next your tweets and the final call from the options pit. [pony neighing] what . Hey gary. Oh. Whats with the dogsized horse . Im crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. Isnt that right warren . Well, you could get support from thinkorswims inapp chat. It lets you chat and share your screen directly with a live person right from the app, so you dont need a comfort pony. Oh, so what about my motivational meerkat . Inapp chat on thinkorswim. Only at Td Ameritrade. Hthis bad boy is a mobile trading desk so that i can take my Trading Platform wherever i go. You know that thinkorswim seamlessly syncs across all your devices, right . Oh, so my custom studies will go with me . Anywhere you want to go the markets hot sync your platform on any device with thinkorswim. Only at Td Ameritrade time for tweets. Vance asks, what are your thoughts on using out of the money put ratio spreads out of the money ratio put spreads to minimize or eliminate the cost of protection . You know in a situation like this i think its a pretty risky proposition, actually. Normally i love this strategy but the problem is, selling more puts than youre long means youre essentially short puts. Do you want to sell puts in this market or own them . Or turn it into a butterfly, a put butterfly. That would be a better way. Selling to the guts and buying one on the down end, that takes care of the margin implications too. Time for the final call. Next week i would use calendar spreads on facebook for a modest upside bet. We talk about directional put strategies. To me the tesla is great protection for a long holder to enjoy big gains. Our time has expired. Im melissa lee. Check out optionaction. Cnbc. Com. Its the ultimate game at white heart lane. Over 3,000 tom enham g