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tv   Options Action  CNBC  July 9, 2021 5:30pm-6:00pm EDT

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it is friday and that mean it's is time for "options action." here is what is ahead. >> earnings season begins next week with institutions that could foretell the state of our economy. but they're not the banks you may be thinking of it carter worth explains then, could the summer travel season officially under way, a covid variant gaining steam, we're assessing the best
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of the e-mail industry plus, hold your hedges why you should keep your hedges on and how not to be caught in an over ledge thorn bush options action starts right now. good friday evening or friday afternoon on the west. some expect earnings this quart tore be red hot as well. and while we love to focus on all of the big names here on cnbc, the names you know, carting scarter say there's is one that is as good of a tell as anybody. carter explains. >> a huge name, fastenall. nearly 40 billion in market cap. it had a broad reach
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and it does business to construction and to both retail, automotive, adhesive, it goes on and on and the street hates it. of the 16 analysts only three have it as byes. the 16 analysts that cover it the price target right now is lower, looking out 12 months, to where the stock is trading i think it will do well into earnings let's look at a couple charts. first just to put it in context is fastenall versus microsoft. here we are, the summer of 2021. you can see that this company has kept up with one of the greatest commercial enterprises in the history of the world, microsoft, leg for leg that's the s&p way down there on the bottom here we have going back quite some time to the 1980s, a steady orderly uptrend.
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look at the second chart it's in it's channel it's not that hot, it's not as extended as stocks can get the next chart is a two-panel in is important the top panel is fastenall and the bottom is relative performance to xli the etf that tracks the industrial sector. you see that red line and the green arrows every time the relative strength line has come down it has bounced to the penny the final two charts first is just fastenal last chart, approaching the former high, does it or does it not break out? we think it does fastenal long into earnings. >> a beautiful looking chart
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there. so mike ko how do we trade this and do we trade this >> i think we do when we're using options we have ways to play bullish thesis, bearish, neutral, and there are ways to use options going into earnings carter laid out a good case. i think it is important if we're going to consider fundamentals as he eluded to this is a company with a lot of stores and a lot of products. i think they have over 10,000 skus a lot of things you might find in your garage are purchased there and things that industrial production uses. and what is interesting is that this is a company that also registered decent, about 6% top line revenue growth in the year 2020 despite all of this one of the reasons for that is the diversity of the products
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they sell among the things they sell, about 20% of their revenues last year was safety equipment. so a lot of that saw a uptick. why is this relevant you might think okay, does that potential tail wind in a period of economic weakness potentially turn into a head wind? the answer is no and the reason is because as industrial production picks up there are more conventional products, probably 30% or more, they have a higher margin. let's say assume that is 30% of their business and that is about a 5% better margin that is about 15 cents to 20 cents worth of ets multiply they be their 30 times, 34 times multiple and you see that alone will add $4.5 to $5 going in taking advantage of the fact that as we always point out options tend to be slightly elevated going into a catalyst
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like earnings. we look to sell those options. i was looking at the august 5th calls, the november call was about $3.50. so you're spending $2.50 you'll observe that is the difference between these two strikes. if you're targeting a longer term appreciation in the share price we can sell that call and once that one expires in a little over 40 days we can look to sell another call and also, of ourse, bear in mind that the stock was well over 53 when it happened today some thoofof that is intrinsic e so i think this is a way that you can make a slightly more hedged bet going into earnings and bear in mind that you know, 34 times earnings might seem expensive, but there are a lot
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of companies right now trading these kinds of multiples there is a company seeing good and consistent top line growth good and consistent bottom line growth, and if they see a more favorable product mix that could enhance their margins. >> kind of an under the radar name all kinds of stuff for the office doesn't get a lot of love, but maybe it should. speaking of love, of course the biggest part of the american economy is not janitorial supplies, it is all of you out there. the consumer spending your cash on stuff and food and travel travel is going to be huge this year tony is looking at one related name that rises above the rest >> that's right, brian, i want to look at southwest airlines. ticker luv this is a airline not performs particularly well here in the past couple months and i think that is our opportunity here
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if we first look at the chart of luv relative to the global airlines etf, you see it is under performing since april if we zoom out further we see it is just touching a major bullish trend line here in is the opportunity that i see for a potential bounce on southwest airlines to start outperforming the airline industry back in february it broke out above a $50 level. traded up, and then pulled back now to the $50 level yesterday and this is really where the risk and reward in my opinion favors to the long side at the moment if you look at the business itself it is the only one of the major airlines right now adding capacity in the other half versus the other three that are slashing capacity because of labor constraints in is a stock that i like a lot going into
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earnings so the trade structure that i want to use reflects the fact that because earnings are coming up here in less than two weeks, the implied volatility for these options are a bit on the expensive side so i'm going out to the july 30th weekly options, september, 52.5 56 call diagonal here, and i'm spending about $3 for the september 52.5 calls, and i'm suling the july 30th calls against that so net-net here i'm paying $2.40 for this call diagonal risking about 4.5% placing a longer term bet. they will perform well on earnings and well into the second half of this year >> mic, what do you think you look at the trade there, is this a trade that you advise
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doing on a sector that is already traded out it has been red hot for about nine months. >> first of all in defense of the trade structure, it's not that dissimilar to the one that i'm recordmmending on fastenall. but interestingly, one of the thick things that the other major carriers, they depended very heavily on people in the front of the bus, love is far less dependent on that and i actually witnessed that we're getting considerable rebounds in, you know, regular consumers, travel oriented airline travel. and we're not seeing as much is business travel. and the reason is changes in the way that we do business. there is a reason that southwest would add capacity and others
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would not. there is a reason you might favor them they have the strongest balance sheet in the industry. so when you combine those factors, and they're not all-time highs it is not at all-time highs. taking a look at it, ten times earnings, i like southwest among the other players. >> some of the airlines came off of that peak from a few months ago. carter it is very similar to the fastenal trade >> that's right in terms of the sell off, it is a hard pivot it is a high of 65 double to a 50 that is the day and the high so when you think back to november 9th, the biggest move in many, many years, because vaccine opened up the airlines,
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and it stopped right there i think that is a good bounce here >> all right, a good call there on luv for every day option's actions, take out or blog while your there, if you want, sign up for the newsletter but don't do it right now. wait until the show is over you have 20 minutes left coming up, keeping hedges manicured without getting clipped by over leverages thorns come for a walk to the meditation lab resistant
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♪ ♪ >> all right welcome back to "options action. last week before the big market gyrations we talked about effective hedges methods while we had a big day up today, if the volatility on the downside is not over like some predict, our traders suggest that you still keep on those or similar hedges on. now we have noticed an increase on the use of options for levers atfs there's a reason carter kept it impel and you probably should too.
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let's talk about hedges to scramble your brain at the moment >> yeah, there are good reasons for that to use those things as trading instruments. some people don't use it, but you can sometimes get basically a form of optionalty take a look strex at the volumes an actions on sqqq that is a leverages eff on the qqq. compare that to big options volumes in conventional etfs as well so one of the important things i would point out is that when people start using the leverage etfs, and think they maybe i can add even more by trading options, but the fact is that they are considerably more
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expensive. and in fact there is no free lunch, there is no way essentially to get extra leverage without really paying for it i would encourage people to look, for example, at say the august 9 calls in the sqqq that is a way to make a berish bet. it is an inverse leverage short. and you could buy puts on the qqq that are a comparable amount out of the money so the point that i'm making here is that it often makes sense to try to keep it simple you have direct correlation because you have subsequent st constituent stocks you could always just buy outrights as well.
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i think based on the volatility we saw this week and some of the things last week, it makes sense to be hedged here, the market has had a tremendous run >> your comments on his strategy there, but also your quick comments on things like inversed levered etfs, should they exist in the first place >> wall street is famous for one thing, providing products, right? so if they allowed to exist, until they're not, they do but more importantly it was a poor week until the stick save on friday, right in the end the s&p was up only 40 basis points. that is the point of hedging we were down 2% and protection is important but first let's look at the circumstance that is fairly
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rare sheer a chart of the nasdaq 100. is that a sflord no, but it is exceed gliorare. if you look at the history of the index, going back to 1985, how many rolling eight-week periods are there? they're at 1894. how many times have you gone up eight weeks in a row 13 this is the 14th 14 times, so the question is what happens and actually it's fairly muted runs it is a good time to hedge >> i think you just gave me about 18 rbis. how many 18 week period social security there hope i don't get that question later on tonight i understand that you get ques questions. how do you answer?
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>> that is exactly right we see a lot of this in the leverage and inverse etfs. for a trader looking for intraday moves, leverage, or short exposure, these are great products for that these are not free there is two things that people need to understand they only meant to give you that exposure over a single trading day. if the index is up 1% you will see a return that single trading day. so you're going to start to see a drift over a period of time. if you hold these for a long period of time, don't expect toe to see it the same with the
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under lying index. they traded a smaller amount of volume than the qqq or the spys. which means if you have options on them, the bid or spreads is larger so if you have an equivalent you're likely going to pay a larger transaction cost to get in and out of those trades so for those reasons you're better off trading the actual etfs their themselves. you're going to see lower transaction costs even if they're equal in nature. >> i feel like you should charge for this stuff we're not done yet we're answering some of your sweets after roller coaster week on wall street we'll be back in two minutes after this
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welcome back to options action, everybody. it is time to take some of your sweeting reporting results and a similar looking chart to amazon that just broke out a bullish bet did not work, brutal honesty do we go back to netflix one more time on the long side and if so, carter, what the trade, lase? >> that's exactly right. meaning if you have a certain set up, one can try to say this one will or this one won't work. and then play the set up and we know it will not always break your way apple is about to do it. and so netflix will
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presumptively break out. i would buy those. >> all right, our next viewer question asks this what strategy would you use to protect profits on an apple september 17th $145 call bought for $2.13. >> well one way to do is is to spread you can do out of data calls maybe the 150s or the 155s >> thank you as always for your tweets and your questions. up next, your final call of the week i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center.
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all right, time now for the final call kick it off, carter. >> buy fastenal. >> one word, luv >> put spreads on. >> love it, at wthas fast, guys. thank you. "mad money" starts right now have my mission is simple to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now hey, i'm cramer. welcome to "mad money. i'm just trying to help you make money, call me or tweet me for weeks now, we've been flying

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