Transcripts For CNBC Options Action 20161007

What some traders think starbucks is going to do. Options actionbegins right now. Lets get right to it. Honeywell shares tumbled on guidance today and it was the worst day in five years and that could have big implications. Lets get in the money right now. Mike. You know, obviously, industrials probably with the exception of boeing, did pretty poorly today. I dont know that theres a direct coreration between honeywell and caterpillar in very different businesses. One thing we do know, cap x is down and when its down its going to hurt industrials who depend on that. Thats definitely definitely true for caterpillar and likely to get much weaker. Not a good recipe for caterpillar at this point. Wasnt the only warning. Ppg, as well. So there is some doubt about these sort of cyclical whats interesting, you would think if the fed is ready to lift off and start normalizing rates, or go on a rate increase cycle, cyclical stocks would be ready to take off and leading the way. Because you would have this global reflation trade. And the problem you have with honeywell is to see a gap like that, that tells you people were offsides, look at General Electric. A quarter before. Right. No, this is second announcement. But General Electric 12 . The s p down 1. 5 from its alltime high. So there is something going on here under the hood. Its going to take a little more than reflation. Obviously, if we do start to see a rate increase here that will hurt caterpillar, which only generates 48 of its revenues in the united states. So that also could be a challenge. The only bright spot, i think, is that some Construction Spending seemingly in china has stabilized somewhat for caterpillar. Right. In fact, carter, youre taking a look at caterpillar here . Yeah. Obviously, thats a Big Industrial name. Its tied to things that are sort of global, as we know. And materialsbased, energiesbased. The best performing dow stock in sometimes you can say too much of a good thing. Up 35 total return yeartodate. If you look at the correlation, this stock versus its sector, versus materials in general, resources. But copper in particular. They have a relationship. And the relationship is quite divergent. So two lines, you can see them quite clearly. Cat is here in blue and then weve got copper. Of this is a twoyear chart. Take a look at the same relationship going back three or four years. This is the same problem. At least one could say, maybe its not a problem. It says that cat suggests that copper is bottoming. But thats not what the longterm chart suggests. So here we have now a tenyear chart. And whats so important is this huge ricochet. And if you look at what bk was doing with banks in the u. S. Versus banks globally or financials, youve got this problem. Meaning cat is implying that all is well, and yet one of the major things you can correlate it to is not suggesting that. In fact, take a look at this longterm. So this massive move up, again, 30something . All the while, copper dragging, not coming to life. So no earnings. Same thing, but not looking at cat versus copper. Cat price per share versus its earnings per share. I mean, here we go. Cat is rising, and yet earnings still on a downward trajectory. In fact, lets talk about forward earnings. Thats the past. Now this table is pretty selfexplanatory, right . Youve got columns and youve got rows. Youve got years. Of take a look at the earnings in 12 and declines to 579 and up to 6 and then 4. And this year estimated for 350. Now take a look at the dividend payouts. And then look at what, of course, the ratio is. Meaning they pay out a quarter, a quarter, now 40 , now 60. Now almost 90 . And remember, thats an estimate. Thats already been trending down. Next years estimate is for no growth at all. So as all thats happening, stock rallying, earnings not recovering. I want to just fade this. I want to be short cat. And i think you can make money doing it. One of the important points, i think, about the dividends he was just demonstrating is that cat has limited number of things they can do with their cash flow, right . So they can preserve their arating, they can pay their dividend and they had historically been buying a lot of stock. They bought about 14 of the company back over the course of last three years. Those repurchases, folks, are essentially suspended indefinitely, okay, so there is a lot of challenges. We know that were probably going to be looking at lower revenues and next year, as well. This is one of the situations we can look to sell some premium going into earnings. The december 87. 5, 92. 5 call spread, sell that for about 2. 10 it is. Now if the stock just stays right here, this is a trade thats going to pay you some money. One of the things i would point out, this is a stock also due to go x dividend in early october. So thats actually priced in. If you think about the stock price, net of that dividend, its actually below 88. So this is effectively not the money call spread. This is typically a strategy that pays off nicely. Good probability of profit here. What do you think of the trade . It makes sense when you talk about the buybacks. They were so aggressively accelerated over the last five years. Is if theyre not being that aggressive, the stock is back to where it is actually the mid point of the last five years right now. With less accelerated buybacks, that should not that should be a problem for the stock. Of the only issue ill say, this year theyre supposed to do 3. 50 in earnings. Three years ago, this he did 7. 5, 8. 5. If you ever see an acceleration in earnings growth, the stock trading at 25 times there are very responsible people who have highly, lets say, purposeful background who have cfas, cpas and mbas. You mean not me. Present company excluded. Lets also bear in mind on wall street, there is no growth for the next 24 months. It keeps going up. Reported in august, the stock had a massive move. Going down deer is more domestic, more ag, more for restry. Gist just trying to both animals. In terms of it valuating the actual structure. I think if carter is charting and mikes fundamentals view. The idea of selling high premium near the money, thats probably a high probability trade, okay . But the thing is, youre risking a certain amount, right . To possibly make a lesser amount into an event. Thats my only point about the short call spread. Last quick word. It was a dog on the dow last year. This year the best. So bet on that. I want to bet. Now to the best performing sector this week, the financials. The xlf nearly 2 since monday. This is earnings season officially kicks off next week. Cnbcs dom chu is in the news room with what we can expect. Hey,dom. Melissa, traders getting ready to kick off another earnings season, that time of year again. The early part of the season dominated by the financials. This time around traders arent expecting fireworks. Heres what were talking about. Shares of citigroup as we head toward the earnings. The Options Market currently pricing in an implied move of around 3. 1 . Versus an average oneday stock move for citi around earnings closer to 3. 5 . Jpmorgan chase expected to move by around 2. 4 . The average there post earnings is 2. 7 less volatile there, as well. Embattled lending giant, wells fargo, could move by around 2 or 4 up or down. The average move 3. 5 . And Regional Bank pnc. A 1. 8 move up or down. The average is 2. 9 . There are a number of reasons we could see less volatility. Among them, bank stocks laggards pretty much all year, arent viewed as a compelling story up or down. Also the idea that more clarity on the future direction of Interest Rates will be needed before any kind of big direction until bets based on the banks. So the options will be used for a lot of clues for this earning season. Back to you guys. Thanks, dom. So dan, how are you playing the banks . So heres the deal. On friday morning, youre going to have citibank, jpmorgan, pnc and then wells fargo all report q3 earnings. Thats almost 30 of the xlf, the etf, the banking sector. Just remember, the reits are taking on other than berkshire, a pure play banking etf right now. I think you have a really interesting situation. Dom just mentioned the banks showed some pretty good relative strengthening, but there have been lag guards. The yield in the ten year up 15 bips a massive move. I also have to mention that the likelihood of a rate increase in november dropped to about 17 . Still stayed pretty well bid in december at 65 . Thats pretty likely here. But that might have been just baked in. That might have been the move we saw in yields over the last couple weeks or so. So to me, i dont find the banks particularly interesting. I also thought it was very weird didnt jamie dimon call on your show earlier in the week and stick his neck out for john stumpf at wells fargo . I thought that was really peculiar and he was a good man, bought the stock, genius. Heres the thing, xlf. If i were long the stocks, i know there is a lot of volatility with Deutsche Bank and Interest Rates. I might that i about hedging on a short term basis. My banks stocks i own. Looking out at the xlf, there is the chart. 19 is a very big support level. I dont think its getting through 20 any time soon here. I dont think the results are going to justify that. But if you think it could break down if you think there is worse news in wells fargo or Deutsche Bank or jpmorgan surprises on the down side, looking out at the october 14th next week, 19. 5 strike puts, you could pay 12 cents when this stock was 19. 63 today. Look at the breaks even down at 19. 38, less than 1 of the underlying stock price. I know thats one week. You dont want to analyze that. Im pitching this as a bit of a hedge against some long bank stocks. Two fridays in a row, rumors about Deutsche Bank. This seems like dollar cheap short term protection. Puttings arent the primary driver. The other types of issues. Two affect all stocks. If you dont think youre long financials, you kind of are. Because you are if its a rate bet. And you are if there is some kind of concern over the basically Financial Condition of a major bank like Deutsche Bank. If you own stocks, youre exposed it to it and this is a cheap way to hedge. Regionals act quite well. Dont have the dollar problem and better earnings and theyre not tied to Capital Markets as much. If you look at the overall performance, the kre, quite good. What about if this is stuck going nowhere . Thats what this looks like. Youre 19 level, the 20, just there it sits. It could be a fair money. You know, we dont recommend just put purchases against long stock all of the time. Thats an expensive call for all intents and purposes. The idea of tactically using cheap premiums makes sense. This is the sort of trade that if i was just inclined to see i could actually see for a couple reasons that between now and next week, that the xlf could break 19. This is a cheap way to do it. We did see some institutional bets betting on higher volatility. Uup, basically the dollar etf one of the places we saw a bet like that. Tagging along with big and smart money. Quick question to you. I get a lot of questions on twitter about Deutsche Bank and your call on Deutsche Bank that was going lower. It had a very good week this week, up 4 . Right. The question is, if one is investing in that equity does one think this is weakness to take advantage of . Its cheap . Or are you stepping into a problem. Im in the camp youre stepping into a problem. Can the bank be saved . Sure. The bank will go on forever. Its about the equity. And the ricochet makes it much more vulnerable. So youre saying it goes lower. Right. Send us a tweet for everything options action. Check out our website. While there, check out our super cool newsletter. Its a last thing that dan reads before he goes to bed. So what are you waiting for . Heres whats coming up next. Im going to make him an offer he cant refuse. You got that right. Because with a twitter takeover around the corner, weve got a way to play the merger for free. Thats right. Free. Well explain. Plus, investors are getting burned by shares of starbucks this year. Ah mother of pearl that is hot and the chart looks like its about to get worse. Well tell you how to protect yourself when options actionreturns. Im here at the Td Ameritrade trader offices. 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 and 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. Td ameritrade. 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. Welcome back to options action. A roller coaster ride for twitter this week as rumors swirl about a stakover. Josh lipton is in San Francisco with the latest. Josh. Well, melissa, our own david faber reported this morning that multiple bidders do remain interested in buying twitter, so who are these bidders and why would they want to buy jack dorseys company . Investors certainly are wondering and reacting to all these headlines. It was not a good week for twitter bulls. You saw that stock drop almost 15 . The problem reports that some Big Companies arent actually curious about making a bid. For example, alphabet was widely discussed, given its cash pile, nearly 80 billion. Twitter also would give larry page a real social platform. But mr. Page is not currently interested. Thats according to recode, which also said disney, another reported potential bidder, isnt in the running. So that leaves sales force mark benny off, only saying he looks at a lot of different opportunities. He was equally noncommital with the new york times, saying im not saying im buying it, but im not saying im not buying it. The rationale behind crm buying twitter, perhaps its data could help salesforce customers create targeted marketing campaigns, and some analysts not fans of any such deal, btigs joel fish saying buying a licensing deal for twitters content like googles deal to integrate tweets and search results would be a much smarter use of capital. Josh lipton, thank you. A lot of speculation out there. Whats the best way to play twitter . Dan is at the smart board with our call to action. A lot of things going on right now that actually make trading the options in the name really attractive, rather than buying stock here. If you look at whats going on since david faber broke the story on september 23, are the stock at one point up 35 mercedes. Obviously, josh just said, it was down 20 on ricos reporting that google and other guys were not interested. Heres the thing. Nothing has been confirmed. Its not even being confirmed the company supposedly set a date by the end of the month. October 27th, they want to take all of the final bids. Heres the thing. I wouldnt be rushing in to buy the stock here at 20 if you thought there was a good likelihood between now and the en yearend there may be a deal or even just a bid may keep the stock propped up. I might consider a strategy called a risk reversal, looking to play for a high 20 sort of price here. And i just wanted to kind of go through the playbook here on a risk reversal. Why would i use a risk reversal i would be selling an out of the money put to buy an out of the money call. One of the reasons i want to do that is to take advantage of the differential between the implied volatility of the short put and the long call. The other one is i want to better define my range. I dont really want to trade entry here in 20 with this structure. I can actually define my risk better here. And then the other one is, i want a medium minimum premium outlay here. I dont want to go in and just be long premium thats going to decay. And if nothing happens, i have ab a problem. I wouldnt use that october 27 deadline. I might consider with a stock around 19. 70 or so selling the december 16 put at 65 cents, using the proceed to buy the december 24 call for 65 cents. That trade costs me nothing in premium terms. Mark to market as the stock moves closer to long call strike, ill make money. As it moves closer to the short put strike, ill lose money on expiration. If the stock is between massive range, between 16 and 24, there is no harm, foul, no loss. Look at what im looking at here. The stock stopped out at 25. That was at 2016 high. It has great support between 14 and 15. I would be a buyer of the stock at 16. So the worstcase scenario, no bid. They miss other cue earnings and guide down. The stock probably goes back towards here, 15, 16, bucks. I would be a buyer there. So this trade structure gives me the opportunity to get long down at 16. Down about 21 or so. And get long up at 24. I dont think this board can sell this company for less than that 2013 ipo price. Jame jim cramer saying 29. Probably gets done in the high 20s. What do you make of this trade . One of the things i like about the trade, if it goes to 26 so youre going to make 2 bucks on this thing. To lose 2, it would have to drop to 14. I dont see that happening basically no matter what the news is. One thing i might consider is actually doing a call spread risk reversal so i get slight better participation at lower prices. Like dan, i dont really see the company being willing to sell for less than the ipo price. But i also dont see bidders coming in and being willing to pay substantially more. I think the potential up side here is probably limited. We saw sellers of the november 22. 25 strangle saying they think the stock is somewhere between 19 and call it 28 bucks between now and november expiration. So i think youre if you want to make money to the up side, it has to be in this range. Of. Its 40 to 50 six times up or down in the past yearandahalf. Couple things we know. If youre first day in life is the best day, how bad can it be . Let me tell ow now its tried to bottom, news related. But really, this kind of volatility, youve got to do a strategy like this. Just getting long or short, its just gambling. Go to vegas and get a free drink. Thats an important point about this strategy. I am giving up some nearterm profit participation, anywhere below 24 for all intents and purposes for not really getting slammed if the stock goes back to 17, for instance. Thats where it started in august. Before all this rumor stuff started happening. Thats why i like this trade structure here rather than getting in at the midpoint of the 2016 range. Still ahead, shares of starbucks tumbling to the tune of 11 this year. Our traders think its about to get even worse. Well tell you just how low it could go when options actionreturns. Im here at the Td Ameritrade trader offices. 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 and 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. Td ameritrade. 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. Welcome back to options action. Time for total recall. Last month, coalin carter thought starbucks was about to tank. Longterm chart. Since 2010, six years. Longterm trend line, weve broken the longterm trend line. Want to sell starbucks. Im looking specifically at the november puts. Sell 2. 25 for those. Carter, how does the chart look so far . Of not getting any better. Lower. I mean, something cant be right. If every time you go to the store the line is full and every store gets stuck and not working. Maybe its coffee prices going up. But i think we stay. I also ammin chinaed to stay. We had an opportunity to put the roll in the 50 put spread and playing with house money thats the way i would press this bearish bet out to december. I would say that nike is like its brother from another mother. These two they dont act well and theyre trading near 52week lows. Next, final call. Stay tuned. Im here at the Td Ameritrade trader offices. 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 and 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. Td ameritrade. On a perfect car, then smash it into a tree. Your Insurance Company raises your rates. Maybe you shouldve done more research on them. For drivers with accident forgiveness, Liberty Mutual wont raise your rates due to your first accident. And if you do have an accident, our claims centers are available to assist you 24 7. Call for a free quote today. Liberty stands with you™. Liberty mutual insurance. 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. Verizon rates makes us seem a lot smarter in the world because we make more money. Its 4 billionplus on a core basis a year if rates go up 100 basis points, but were not waiting for that. Were obviously in our quiet period. If you think about last quarter, what you saw is the expenses keep coming down and the revenue stabilize and growing. And were growing in ii margin. Net income by putting more volume through. That was bank of america ceo off jim moynihan with cramer discussing interest trades. Mad money, top of the hour. Final call time. Carter. Sell caterpillar. Mike. Sell call spreads in c caterpill caterpillar. Dan nathan. Looks like our time has expired. Im melissa lee. Check out our website and see you next week. Mad money with crim jim cramer starts right now. My mission is simple, to make you money. Im here to level the Playing Field for all investors. Theres always a bull market somewhere, and i promise to help you find it. Mad money starts now. Hey, im cramer. Welcome to mad money. Welcome to cramerica. Other people want to make friends. Im just trying to make you some money. My job is not just to entertain but to alsoiate and teach you. So call me at 1800743cnbc or tweet me jimcramer. Today is our final show from our invest in america,