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tv   Options Action  CNBC  July 4, 2021 6:00am-6:31am EDT

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i feel so limited here on earth. i feel like we should be in space. you can go off the beaten path too, just long as you remember... the true enthusiast will always beat out the poser. have a little fun now and then. . it is friday before the fourth of july and "options action" starts right now here's what's coming up. >> with the bigs, the new loss and nasdaq 100 approaching a rarely seen inflexion point we guide you through a potential window of opportunity. then, from windows to floors tony zhang is looking to play an tonight in a name we don't cover very often in a very specific
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subsector of housing. >> finally, we know you'll probably be on vacation next week, so our professor is getting you set right now to you weeks ahead of the barrage because the early bird gets the income "options action" starts right now. >> let's get right to it the vix just hit new lows and the nasdaq is behaving in a way that happened a handful of times in history carter explains why that is important right now. carter >> you bet unusual circumstances which is to say you can grow up two weeks in a row or three but now we have a circumstance where the qqq and the nasdaq 100 index, the index on which qqq derives is up seven weeks in a row when you look at what happens thereafter and that is not just statistics but data mining the facts are the facts and we'll look at them together. the nasdaq 100, this is weekly
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bars and what we have now is an ascent of seven consecutive weeks. if you look at the next slide or table, you'll see just what exactly this is in the context of history so this has happened 17 other times. this is the 18th instance or circumstance where you have seven consecutive weekly advances this goes back to february of 1958 so if you take all rolling seven-week periods you've got 1,849 of them. this has then happened in 17, divide that, of course, an interest rate of less than 1%. the real question is what has happened thereafter? interestingly the market is up, albeit sort of in a slight way take a look at the next table. so what we have here is looking out to week eight, next week it will matter. week nine and week ten the median and mean gain you can see in the table there, while not all that robust, it's up, and the odds of being up are
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substantially, well, above average next week and then it becomes 50/50 thereafter so the issue here is is it right to maybe trim a little bit or sell some premium or take some measures or stay for a little bit more all of that is fair. final chart. here is the nasdaq 100 with its 100-day moving average notice it's bounced to the penny twice in the past six months, and we now have slightly made new highs and as the mid-cap and russell have not. >> thank you for that, carter. >> mike, what do you do here >> yeah, so as carter pointed out in as you just mentioned the vix has now hit a post-pandemic low. so we traded around 14.5 in the vix today. to put things in perspective, the 150-day moving average for the vix at the end of 2019 was over 15, right, so that should just give up some context that we are now entering a level of market complacency, at least as
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it's implied by options premiums looking out 30 days on the s&p 500 that we haven't seen since well before the pandemic, and what's interesting to remember when you have a circumstance like this is that, of course, there is information contained in that. right now, basically those markets are telling you which eve been that a low volatility market and we should expect one, at least for the near term, so how do we deal with this if you have a market that you feel is beginning to get extended, if you are identifying the fact that options premium have declined, there are ways you can try to take advantage of that, and i think one of those ways, if you're involved, is to say maybe this is tactically a decent time to contemplate putting on a hedge, and the hedge that i was looking at specifically referencing the nasdaq 100 and the qqqs that carter was just talking about was the 25-wide put spread, the
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355s were 10.849 and the 350s, 4.60, loubd it up calling it 5.80 for simplicity. a level over 1.6% of the current level of the qqqs and you can use that were you hold qqqs or hold some of the key constituents of the qs which will be the biggest and most common names that we think of and essentially you'll be spending over 1.6% to get protection down nearly 8% or so, and i think that's one of the things that you can do look, hedging all the time section pensive. if you had to pay 1.6% of your portfolio value every throw months that would drag on your returns very heavily, but if you're doing it after you've already seen all-time highs and a two mount stretch of gains, maybe that's a better time to take a look at it. >> tony, what do you think >> yeah. so the trades with these types of hedges, the trickiest thing is always the timing aspect of it, and mike last week spoke about the skew index, talking
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about the skew that we're currently seeing from options prices that's certainly very elevated, historical record highs that we've seen, and that shows us that while the potential pullbacks here are relatively elevated, it doesn't necessarily mean that they are probable, and if you look at the vick, and the vol q, the nasdaq 100 volatility index, both made a new low, 52-woke low today and if you look at the three-month vix versus the front month vix the three-month vix is elevated and that ratio of over 1.3% shows that the markets are further complacent so you have a lot of evidence that there's a lot of complacency and this, again, talks to the fact that there's a more elevated probability of a pullback but not necessarily a probable one, and that's what makes a put spread like this the right strayed to make to potentially hedge, because as mike said he's only risking 1.6% of the etf value to put on this hedge what that means is between now
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and september if the markets continue to rise another 5%, 10%, you're only taking out about 1.6% out of that gain, so you're not giving up upside next change for this downside protection, so i think it's a great way to protect the portfolio against some short-term volatility that could materialize over the next couple of months. >> yeah. two quick things i would add to that he was you can it aing about the term structure and the fact that the september options are elevated relative to the near term that actually is a fairly common thing that we see. generally speaking we'll find that the premium for option beyond labor day are going to be higher than those that run through the end of the summer. september, a lot of people think of october as being a highly volatile month historically september is as well and, you know, oftentimes is it because people are coming back from the beach. i don't know what the reason, is but seasonably we do tend to see more volatility in the september time frame than you do in july and august so that's one of the reasons for that that i think it's justifiable this also, of course, gives us
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some time on our hedge in the event that we continue to see the meltup that we've been seeing. >> tony is also seeing a rare opportunity in a name we rarely talk about and it's in plain sight right under your nose or maybe your feet. tony, what is it >> yeah. so the stocks that i want to take a look at is mohawk, a stock that we usually don't think of very much within the home builder index they are one of the largest makers of carpet and flooring, an essential piece of home-building, so if we look at the chart here for hoe hawk, a long-term chart here, this is a six-year chart, you see that $175 represents a fairly significant support level that broke below that in about 2018, and we finally got back above it here in march an after breaking above it we've come back to retest the level of support and bounce higher so this is the opportunity that i see for substantially further upside, especially if you look at the long-term charts, and if you zoom into the short-term charts here, recently we've seen about a 25% pullback in the past two
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months, and recently we just broke out above that bearish trend line so i do think that on the short-term charts you have the timing for further upside here, and then when you look at the business itself. this is where i really think it's quite interesting you know, you have a company that's growing revenues about 15% this year and it still trades at about 15 times earnings which i think is relatively inexpensive considering the business generates about 30% gross margins and about $1.3 billion in free cash flow last year, so this is a business that i think should be trading closer to 17 to 18 times earning, somewhere around the $230 mark so the trade structure that i'm using here reflects what i believe is a stock that's oversold but still fundamentally sound and relatively inexpensive, is to go out to august and i'm buying 1995 2.20 depp yibt spread, paying $11.20 for the august 195 call option and collecting it.80 for the august 2020 paying
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net-net here 8.25 which is 4% of the underlying stock price betting that this will go back up to the recent hires around 230 or so. >> carter, what do you make of the charts do you see that rally coming >> all right what's so interesting is where the stocks stopped and pivoted just recently is right over the 150-day moving average that's an important circumstance which is to say if it has a serb look, a stock ascending since the market low and has had a pretty moan selloff. the peak-to-trough decline of 20% is almost double the selloff of the move in home builders so that's the opportunity, a stock that really slowed off more than its peers, if you will, and now has bounced where it needed to in the 150-day moving average and has a lot of cyclicality as a business, this stock earned
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850 in 2004 and 2020, a lot of years with not a lot of earnings growth but the cyclicality means you can have a lot if things continue to progress. >> yeah, i mean, i think one of the important things to take a look at here, is you know, we're sort of at a crucial point right now. are we in a market that is extended and is going to reverse, or are we just going to continue to so what we have? this is a stock that had a recent setback, so if you are thinking i want to press a bullish bet and do so in a way that limits my risk, that's when you would say, okay, maybe i'm going to purchase some call options but the important thing here is that call options by themselves trading at 40% in applied volatility for a three-month call option is a little pricey. considering if the vix is 15, this is the equivalent of 40 is considerably more expense ips which is the reason why tony is looking at a call spread so in terms of the trade structure and why you would be uses options and a simply going out and purchasing the stock or call outright makes a lot of sense to me. >> don't forget we have a website, optionactions.cnbc.com
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and here's a newsletter. check it tout. >> coming up, professor prepares you for the next learning session with the special covered call to action. plus, calling all "options action" fans, reach into your pocket, grab your phone and tweet us your questions @optionactions and if it's nice we'll answer your question on air when "options action" returns.
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welcome back to "options action." we know you're probably not doing a ton of trading this holiday week but two weeks from today is very important and the best time to prepare is now. professor khouw's play on the special call to action make, take it away. >> we don't talk about it often but it's one of the most common option investment strategy this is an investment strategy rather than trading strategy, because what our going to be doing is selling calls against stocks that you already own. why do people do this? it's essentially to give themselves an additional source of yield, and that, of course, can certainly help as bond investors know your investment performance over the long term and can help nuke the viflt your investment performance, so this is a trade that you typically will do though on stocks that you don't think that a massive amount of upsit.
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why is that because, of course, by selling the call you're going to be foregoing some of that upside now the two-week event that we're talking about, of course, are a slew of earnings from all every big financials, goldman, citi, bank, jpmorgan, all of these companies are going to begin reporting in a couple of weeks, and this does two things, but one of the more important ones is that it does tend to elevate options premiums in the near term, so i was taking a look at citi bank and taking a look specifically at the august 6th 75 strike call it was trading at 1% of the current some price those options expire 35 days from today, again, collecting 1% maybe that doesn't sound so great but if you're collecting 1% every 35 days, that actually creates a material amount of yeeshlgsd and you want to try to take advantage of situations where you have stocks that have
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had good buns where you think the stock side is limited and you've had options premiums and, again, this is an investment strategy do this again and again and sometimes it might go through that short strike and sometimes it may not but you can sort using the volatility on some of the stocks that you own. >> carter, you view financials much the same way as you do energy from last week's show. >> that's right. financials, it's a question of are you getting paid for the risk, beta adjusted and risk adjusted to not keep up with the market it's a problem let's take a look at a few charts to put that in context. the first is we know xlf, the sector etf, and obviously you can see there we've broken trend, albeit slightly real, the bigger issue is this look at the next chart this is the exact same to imframe, yes, and it's basically taking the xlf just before the pandemic hit, and so we have a sector that has not recovered on a relative basis to where it was. the bottom panel's relative
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performance to the s&p even as it's made new absolute highs, and then look at city, the next chart. i mean, this is sort of really kind of tragic i mean, now you've got a two-panel but it's sitting on the top. citi's relative perform to xlf on the bottom and the final chart, this is three comparative lines. this tells the whole story citi bank is below where it was before the pandemic. financials is a sector are up 20%. the market is up 40%, most big banks like jpmorgan and the bkx and vre are all above where they were what's wrong with citi something must be. >> calling citi tragic, tony, caught my attention, that's for sure what do you make of mike's take on financials and the strategy >> yeah. so this is one that i'm somewhat conflicted on because when you look at the business itself, citigroup is one that i actually like you know, we're expecting 11% eps growth this year after what has opinion a flat year last
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year it trades at a fairly deep discount to its peers, but technicals, as carter showed you, they are very poor. there's no other way to put it you have that failed triple top at $80 that's concerning to me and the fact that it broke below the 100-day moving average is continuing and that it will continue down to the 150-day moving average but most importantly is the relative chart to the financial sector, the underperformance other for this is the reason why i do think mike's strategy of selling a cover call here is the right strategy i think citigroup should be trading back to 75, 80 but the strike price that mike chose is the right strike price a 22 delta usually when we sell cover calls, i like to go a little further, a little lower in terms of deltas because i tend to prioritize capital appreciation of the underlying stock over income, but in this particular case i do think because of the poor technicals it makes sense to be a little bit more tactical, choose a higher delta. it's going to collect a little
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bit more income in this particular case like you said. 1% of the stock's value in about 30 days or so. that's going to help offset some of that volatility and it will provide a little bit of downside protection going into earnings. >> make, last week. >> you still have 8% upsit in the stock if you do this tim addressed the important point, if you take a look at the ten, you like to see a steep yield curve that's a tail wind for financials we don't see it yet. >> up next lost in the amazon don't worry. your guys are still here with you. we'll explain right after this 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.
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welcome back to "options action." this weekend jeff bezos leaves his post at amazon but two weeks ago mike and carter went on to a track into the name. >> now we so, of course, that it's starting to move above the downtrend loin in the bottom panel. good set up absolute and interesting developmental action relative make your bets. ours is long. >> i was looking at the august 3635, 3850,3950 broken wing call butterfly this isn't a trade we talked a
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lot about. you'll be buying the 3650 calls, selling two of the 3850s and then buying one of the 3950s >> since then, mike, the stock is almost flat maybe a little higher. so what do you do? >> the stock obviously didn't break out at that moment at long last, but this continues to be a name that i like we have still a bit of time to go to expiration we are short options around the ones that we own, and that's one of the reasons that you want to have a spread like that, you get a decay offseat and i'm going to stick with it. >> let's take some tweets here our first asked i own uup january 25 call and was looking to sell the july 2327 next week is this short dated. tony, your thought >> july 23rd is three weeks out, not next week so i don't necessarily think that's too short but generally speaking i like to go 30, 45 days out shorter options you'll have to
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manage them more frequently than the longer dated actions >> mike, your two sends. >> a little calendar school education there. yeah, i think that's right shelling shorter-dated options against ones you own is one i do like and i think we did a bullish trade. >> las vegas or diss in the secretary half of 2021 carter, how do you charts look >> disney is what i call a of pair of 2s, stock going nowhere, tying up capital and mine share and lvs would be the favorite of those two but sees year's even better i don't know if that was a choice there but we'll allow it. mike khouw, your thoughts. >> yeah, one thing i will say is i think -- we don't know what's shaking out with delta variants and stuff like that but i do like disney and disney plus and like their diversification of businesses but it is true that las vegas sands are a long period of weakness and that may be an opportunity.
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>> this is an interesting one. this is how do you play the recovery, tony so what would you say? >> i certainly think that you have a little bit more leverage from las vegas sands than you have from online betting thrown in there so i think that that has in my opinion a little more upside than disney. >> mike, just going back to you in terms of how you might structure a trade here what would you do seeing that volatility is so low and, you know, these are definitely reopening plays? >> no, they certainly are, although i will point out that a name like las vegas sands isn't going to enjoy the kind of low options. >> that's true. >> that we see in spy options in q options and things like that so the trade that tony was talking about earlier in mohawk is the kind of trade that i would use if i was talking a look at las vegas sands, a way to offset to apply volatility in that name is a way to apply the upside. >> time for last call. last word from the options pit carter worth, what do you say?
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>> qs expect more on the upside but time to hedge. >> tony? >> carpets and flooring with mohawk i'm buying a call debit spread to play for upside. >> mike khouw. >> hedge when you can and not when you have to and i like q put spreads and cover the options you have in stocks. options you have in stocks. >> that's it for thid to fit "options action. weekend edition is up next and it learns with you, so as you become smarter, so do its recommendations. so it's like my streaming service. well except now you're binge learning. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn ♪
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>> that's it for this edition of "options action.
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