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tv   Options Action  CNBC  June 19, 2021 6:00am-6:30am EDT

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uted, and you will go to jail. we will keep coming because the e rule of law requires that. we have to hold pepeople accountable. -- captionsns by vit -- ♪ it is friday, you know what time it is, time for "options action", i'm melissa lee live from the nasdaq market site in new york city's times square here's what's coming up -- >> announcer: xlf'd, carter worth shows why it could only get worse for the financials as peak everything peaks. then, just do it or maybe don't do it tony saying swoosh is in to help you play through nike earnings plus, mike khouw takes his broken wing and learns to fly again, to ride amazon higher
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it's time to risk less and make more "options action" starts right now. >> well, as much as a sellof as we've had it's likely still all down from here think we're talking the overall market well, we're actually referring to the xlf specifically at this point it's almost all one in the same the chartmaster carter worth explains everything. carter, take it away. >> everything, that's quite grand but let's try. so what we know is of course financials third-best performer over the past 12 months. we also know 11.5% is an important sector in the s&p. we also know the big banks are the transmission mechanism for the economy. and they're suffering. let's look at the xlf, the spiders for the sector, and try to divide the way forward. the first chart simply looks at the breaking trend taking place. a very clear trend line since the october low.
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we have a clear breaking trend and the second chart, this is the same chart but now on a two-yeesh year basis, it's highlighting the key level, which is the level from which the pandemic took place and you can see the recovery, we have gotten way above that level. so now if you put the first chart and second chart together and the third chart this then calls into question, could we possibly go back to the level from which we broke out, back to the pre-pandemic highs before the plunge and i think that's actually what's coming. next chart, were we to go down, we're down 9% so far, simply to the december/january highs before the covid plunge we'd be talking about a 18% decline. and that's very, sort of reasonable, if you will, given the fact that many banks are already down 12 and 15, regionals and so forth
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so the next chart, this in many ways is the most important what you have is this on the top, same chart we were just looking at, right, the two-year chart of the xlf, you can see the level highlighted, the level of january/february before we plunge on the bottom is the relative performance to the s&p 500 there's the rub. the financials have never even recovered on a relative basis despite all of the gains in small banks and big banks and insurers, they've never recovered on a relative basis to pre-pandemic level and now we're flirting with breaking the minor up trend that's been in effect since december they've only delivered effectively for five or six months and even that is now in question xlf, 66 stocks in total, top 5 almost 40% weight, sell it berkshire leading the way. >> wow mike, what is the trade here for the financials
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>> yeah, so, berkshire is the largest constituent at 1.4 book is not overwhelmingly expensive. and one could argue we have seen the money center banks making up jpmorgan, wells, citi and bank of america but right now the entire city is trading 1.7 times book this is pretty much the highest levels in ten years. valuation is only part of the story. what i'm actually thinking about was fourth quarter 2018. for anybody would doesn't remember how that turned out, xlf dropped peak to trough on the taper tantrum by 23%, drop from xlf from $38.50 high we recently saw would get us to $29.50 so playing on the charts that carter is talking about and also the fact that we have some precedent given what is causing this weakness, i
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think we can look to september put on a put spread. i was looking at september 35 put spread about $1.37 earlier today. 31s were about 37 cent net/net i'm spending $1 for that $4 put spread to give a 3 to 1 pay off. we saw weakness in the market broadly but the financials were one of the areas that we did see considerable weakness, last time we had a taper tantrum, not saying we're going to get it again, but this does have some similar vibes to it, if you ask me, and this is a way to play to hedge your portfolio if you have a lot of exposure to financials or to make a bearish bet with a limited amount of risk >> tony, what do you make of this trade >> i find it quite difficult sometimes to push brand new shorts when an index like this is down 9% in just two days. but as carter showed you the index is up 65% since the election and has gone uncorrected. i think especially with the flat j of the rate curve and starting
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to see trading revenues decline, there is a thesis for this break in trend, as carter puts it. the question is just how far for me when i look at charts i see temporary support around $33 level, that would be my primary targets to the downside. mike's going further out to september. i do like the risk/reward ratio on this put spread looking for potential down side move of 3 to 1. he is only risking about 3% of the underlying etf's value to put on this bearish bet. i do think this is a smart way to play for potentially a sizable correction in financials >> carter, the xlf is a very broad sort of etf. you mentioned berkshire hathaway the biggest weight on their insurance company which sub sector looks the weakest in your view >> within financials it's regional racks meaning the circumstances james discusses which is how much excess return
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they deliver and now the fact peaked on march 18th, think about that, the market's gone a lot higher since then, regiona banks have exhibited poor strength for weeks and weeks, there's a lot of beta there. interestingly tony's level 33 exactly where the 150 day moving average comes into play. let's move on to nike now. the company is gearing up for results next week. tony, what's the set up here >> nike had a great year last year but has really underwhelmed for 2021 i expect a little bit more of that to come on earnings next week when we look at the chart itself, the stock is largely trading sideways for the left 8 to 9 months and breaking intermediate support levels of $130 more importantly relative to you its sector, the consumer discretionary sector, nike is
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breaking below strength levels it doesn't bode well going into earnings next week looking at the business itself, the multiple expansion we've seen nike exhibit in the past year has largely been from growth in the chinese market, there's a lot of risk there, especially in the current political climate, potential boycotts and trades at a rich multiple despite weak sales data i think this is a risk going into earnings. when we look at the earnings report itself the stock is implying about a 5% move here while historically the last eight quarters it's moved about 5% so the market is implying what we have seen from history here but i want to take advantage of the skew that we currently see here in the term structure by trading a diagonal spread. going out to the june 25th weekly 123. august 130 put diagonal. spending $6.25 for the august 130 puts and selling the june 25 weekly options, 123 puts against
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that for $1.24 net net here i'm paying $5 for this $7-wide diagonal spread, risking a little under 4% of the stock's value to place this bearish bet going into earnings next week. >> mike, what do you think of nike what do you make of this trade >> so, you know, it's interesting of course because just from an operating business standpoint nike has been knocking it out of the park. a lot of the plans they made obviously in the online space, in terms of innovation, they've accelerated those plans. to tony's point at 33 times earnings give or take is not exceptionally cheap. i expect if we see a market pull back maybe this is another name that would be hit by that. of course really take a look at the trade. because this isn't a stock i would be inclined to short going
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into earnings based on how well they manage a business, but risking 4% of the stock price, owning the longer-dated option, you're getting downside protection on whether or not it's earnings and potentially anything else that could be causing pressure on the market, and we are seeing that so i like the trade structure in particular as a way to make the bearish bi bet i do think the valuation is rich but maybe deservedly so. >> carter, what do you see in the nike chart >> sure, couple things, one, we know this stock has not participated all year, has been good for equities until the last week or two. nike peaked december 11-12 relative strength is important and it's important to the market and it's important to the sector but here is the real problem, puma is making new highs, so has adidas crocs with a new 52-week high this week. nike hasn't made a high since september. relative strength is poor. >> this is a nike specific problem.
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tony, did you think it was nike-specific problem when you looked at the charts >> we're seeing some of the weakness in china not just with nike but also adidas as carter showed you there's a clear distinction between those two brands but seeing weakness across china not just in nike. >> don't forget to check out our website and sign up for our newsletter here's what's coming up next. coming up, if you played along last week, carter charted a winner in adobe. now he and mike are back with a second similar setup and other, illiterations plus, calling all "options action" fans reach in your pocket, grab your phone and tweet us a "options action", if it's nice we'll answer it on air when "options action" returns
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♪ ♪ ♪ ♪ welcome back to "options action." last week carter and mike constructed a winner around adobe. >> essentially a key moment at a key former high, now make your bets, we think it will break out and exceed the former high. >> one way to make a bullish bet is to buy a longer dated september 540 call trading for a little over $28 when looking at that earlier today, and look to sell some of that elevated
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short-dated premium. i was looking at the june 555 calls. those were just under $5 net/net you would lay out $23.75 per share, that's about or just under 4.5% of the current stock price. >> since then it broke to a new level. in case you missed it, carter spotted a new name with a similar setup. carter >> well, that's what's fun let me just say this, a lot of clients, a lot of colleagues they do both funny miracles and try to marry the two. my world is one thing and i want to keep it that way. what you will see now is the exact same drawings we saw for adobe but they're a different company, it's amazon take a look. do the set ups have to work? of course not. but we make our bets accordingly. what do we have? amazon, strong, uncorrected move, then ten months resting,
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consolidating, resting for breakout next chart, another way to draw the lines, exact same chart, just different annotations, call it ascending triangle, doesn't matter there's tension here and tension standoff our resolve next chart same time frame. just drawing the lines a different way. next chart drawing them yet a different way. all of these drawings are same as adobe does it have to break out? of course not. are there inflection points in the market, yes. this is one of them. now take a look at the final chart. this is a two-panel. again, just like adobe, on the top is the stock, in this case amazon not adobe on the bottom is relative performance to the s&p. so you're going sideways for ten months and the market is ascending the relative strength line is going down but now we see the course is starting to move above the down trend line on the bottom panel
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good setup absolute. interesting developmental action relative make your bets ours is long >> okay. similar set up mick, so a similar trade for amazon, what do you think? >> yeah, we can't do quite the exact same trade for amazon. one of the issues we have, firstly, i would just talk about the stock in general this has been range bound for a time and this stock has been growing into wha historic ally people thought was a high valuation, if you maintain that growth it isn't really you will remember for a long time people used to price amazon on price to ebitda basis and the reason was, rather than looking at net income because the company was reinvesting so much into their business and into their own growth, you can see if you take a look at a long-term chart of its price ebitda that it is at a historical low. actually the company is trading 36 times year 2022 earnings with better than 40% revenue growth in last 12 months we'll see
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something like full year eps growth just under 70% or so. this is obviously a company that has indeed grown well into its valuation. but the problem with using a trade like we did in adobe, the share price is just unde $3500 where it closed today so will the options be expensive. so we're trying to identify a trade structure to make a bullish bet without an enormous outlay of premium. of course it it won't be cheap, because it's not a cheap stock, but maybe we can make it cheaper. i'm looking at august 3650, 3850, 3950 broken wing call butterfly. buy the 3650 calls selling two of the 3850s and buying one of the 1950s. and selling one of the 3850s when i look at it the total outlay of premium would be $31.40 a share $3,140 to put the whole trade on to get exposure to 100 shares worth.
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that's less than a single share of amazon stock. that doesn't mean necessarily that the risk is comparable to owning a single share of stock but is a way to reduce options to reduce the outlay to make a bullish bet. peak profits would be achieved if you hit $38.50 short strike the reason you use a broken wing call butterfly instead of a symmetrical one, if the stock does in fact go beyond that short strike, you will see profits at any level beyond that not as much as you would get at the 3850 level but you will see profits, unlike just using a straight symmetrical call fly, where you're trying to thread the needle and find that short strike this gives us a less expensive way to make a bullish bet, take advantage of the options premiums elevated that's one of the reasons we're selling two of those 3850s >> so a broken wing call butterfly is definitely a trade we don't talk about often. tony, what do you make of this >> yeah, so this is a very, very
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creative way to reduce the cost of this particular trade for those not quite familiar with broken wing butterfly or call butterfly for that matter, a better way to think of it is, think of it as two vertical spreads. what mike is effect live doing buying 3650, 3850 call debit spread and selling 3850, 3950 call credit spread and collecting 13 to $14 on that call credit spread to the upside and use that premium to offset the cost of the call debit spread here's reducing the risk of his trade by 30% than buying the outright debit spread, very, very creative to reduce premium. as far as amazon goes, this is a company that shows absolutely no signs of slowing down. they're building out another 40% of fulfillments space in the next couple years and delivering two thirds of their own packages as opposed to relying on fedex and ups and making the content
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play through acquisitions of mgm and aws is not slowing down any time soon. especially carter's charts here, you see this massive continuation pattern forming for the last nine or ten months. it's about to breakout to the sup side i like this trade but i think mike has taken a smart way to reduce the premium on this options trade. coming up, time to answer your questions we're taking your tweets next. stay with us it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. oh yeah, we gotta take off. you downloaded the td ameritrade mobile app so you can quickly check the markets? yeah, actually i'm taking one last look at my dashboard before we board. excellent. and you have thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪♪ we're carvana, the company
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so we gave 'em thinkorswim web. because platforms this innovative, aren't just made for traders—they're made by them. thinkorswim trading. from td ameritrade. ♪ welcome back to "options action", time to take some of your tweets, first viewer asks would it be possible to get update on slv trade. the price broke to the downside so far in situations like this, do you give the trade more time or do you cut it and move on carter, why don't you take this one. >> sure. we had a lot of back and forth with clients and others on slv talk about going the wrong way the idea was this was poised to move higher and indeed it was poised to drop the question is what to do with
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something that's not working i give you what i've done. i added to my position now, that's probably not what you want to hear risk manager would say take measures, do something often i've said on this program my hunch, what i've done myself, is to stay >> next viewer asked see anything on fdx worth watching. >> we did see quite a lot. people probably realize and be reporting on the 24th, we saw about two times the average daily put volume today it's implying about the average move of a little under 5%. but it was next week's expiration, 280 puts that were the most active options today. and the stock hasn't performed particularly well over the last couple of weeks. so, if those two things are any indication it would seem at least by today's blows that people are taking measures and making bets that next week's
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earnings are not going to be that great >> what's your guess, carter, according to the charts? >> transports in general peak before s&p and my thinking is fedex will move lower. >> okay. next viewer asking if ge announcing 8-1 reverse stock put on july 30th, what happens to my four january 22 calls l i automatically be closed out. tony, why don't you take this one. >> so your calls not be closed out. occ will adjust these options and you'll have the adjusted options in your portfolio, as far as what the adjustment will be on this specific option, i do not know, but you can find out on the occ website >> good tips there up in ex, we've got the final call >> "options action" is sponsored by -- that's why td ameritrade designed a first-of-its-kind, personalized education center. oh. their award-winning content is tailored to fit your investing goals and interests.
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♪♪ visit tdameritrade.com/learn ♪♪ ♪♪ final call time, carter? >> amazon, i like it long. financials, i like them short.
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>> tony? >> nike put diagonals. >> mike? >> amazon. >> all right, that does it for us "mad money" with jim cramer starts right now - [narrator] the following program is a paid advertisement for nuwave oxypure smart air purifier, sponsored by nuwave llc. featuring deborah norville. an award winning journalist and new york times best-selling author. deborah is here today to share her passion for the nuwave oxypure. - we've been living through strange and unsettling times. never in history has everyone on the planet been confronted by the same thing. and we're still trying to get back to a sense of normalcy. we've discovered how devastating a virus can be and the importance of proper cleaning.

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