tv Options Action CNBC October 11, 2013 5:30pm-6:01pm EDT
♪ this is options action. tonight -- well, you might be the only one, that's because investors dumped gold at a furious pace. and according to traders, it's about to get worse. we'll tell you why. plus, which one of these three companies is about to release an earnings bombshell? >> i could tell you, then i have to kill you. >> no worries, maverick, we got the answers. and is netflix about to become a nightmare? >> you won't believe the dream i just had. >> the stocks had its worst week
in months. but is the pain about to get worse? the action starts right now. ♪ >> live from nasdaq markets in new york city's times square. these are the traders at the desk. playing russian roulette with american credit. the consumer that options action is watching tonight. because despite the rally in retail stocks, troubling signs emerging from very large retail names. is d.c. dysfunction pinching americans' pocket books? let's get in the money and find out. dan, i know you are worried about retailers for some time. now we have data from the gap, which really makes the picture worse. >> yeah. just this week, it's been going on a couple months. one of the things interesting to me. it's all -- all areas of retail, it's low end to the high end. back in august, we had disappointments from macy's and nordstrom, then on low end had target and walmart disappointing. then in between, panera, we had restaurants. so it's continued into this week. we saw himitted, gap, and cosco
miss comps. to me, it shows there's a strained consumer out there, regardless whether the s & p is 1.5% back to its all time highs. it will make an all time high in the next couple weeks with f we have a resolution, underlying the consumer in the states seemed tapped. >> we saw this the last time we had this debt ceiling issue. >> well, so we have all of the headline news things, that's not going to improve. one of the other things that could improve sentiment, one of them $8 be falling unemployment, rising participation, other signs of real economic strength. so consumers really need to see that. they need to see incomes rising, make sure the government is working. they don't have either. i don't see any reason why people should expect consumers to be out there spending like crazy. the only thing they are spending on, are those things where they think they are taking advantage of a discount they are getting right now. low interest rates, i run out and buy a car, things like section 179 deductions, these are the reasons people are
consuming. >> section 179 deductions. >> that's right. the only thing doing well is nike. everything else, whether it's nordstrom, which has been wallowing sideways all year or abercrombie & fitch which has been horrible. nike is the only name that is doing well, and they are doing it, because people are buying more expensive shoes. melissa, the question was, terrified of the shutdown? no. shutdown, we're doing okay. what you should be terrified of is debt ceiling. if we breach that, everything will be killed. retailers, utilities, materials names, financials, everything. >> scott, don't think for a second, the longer the shutdown, the more strapped there is a whole slice of the consumer in the states. to me, i think there's a tremendous potential for disruption on the consumer front in the next few weeks we are getting reports in the next week, we just got some this week that are backward looking. that's in the tank. that's okay. but going forward, what are stocks going to trade-off, future earnings prospects.
if q-4 is murky, i'm nervous about these stocks. >> the earnings prospect thing, we haven't talked about margins, that's what cosco did talk about. we have seen earnings growth from a lot of companies, function of financial engineering and buy backs and basically epic margin growth. we aren't going to see that. so what can propel stocks higher would be rising multiples, you won't get rising margins. >> dan, you're taking a look at home depot at the cross section of the housing trade and retail. >> home depot is interesting, the thing has been monster up 23% on the year. and it's obviously been a massive beneficiary of this housing trade. but to me, we had rates hit 3%, the ten year last month. and you know, this thing stalled out t. did not make a new high with the s & p. the technicals actually look strained. momentum is kind of deteriorateding in this one. so you know, this is not exactly -- if you look at the chart, it's forming a triangle. i actually don't think you should short the stock. one of the beauties of this show, we can actually get into
bearish shorts. i want to lay out a trade that gets me long puts. but i can finance it in the meantime. i want to be there for the earnings event that comes in december expiration. >> dan is clearly bearish. he has a bearish on home depot and using a put calendar. we have done calendars before, it's good to crack open the playbook. in this strategy, you will sell a near dated put and use that money to buy a longer dated put of the same strike. it's a bearish strategy, requires timing here, you want the stock to be above the strike that put you short by the first expiration, but below the strike of the longer dated put you were long by the second expiration. so dan, walk us through the trade. >> i think the stock will trade somewhere in mid70s next couple months. there will be catalysts. i want to set up to own the puts in december. so today, when the stock was 76.54, i bought the november, december, 75 put calendar. i sold one of the november 75 puts at 1.10. i bought the december 75 puts for 2.30. i paid 1.20 for that. what i would like to happen on november expiration is the stock
to be at or a little above $75. then i own those december puts for cheaper. then i have options there. i can basically spread it. turn it into a calendar again. what i'm trying to do is help finance owning puts for an event. you know, i do have to thread the needle a bit. but i'm not risking this whole 1.20 unless the stock blows out to the upside. >> i have a question. talking about the consumer being strapped, the consumer feeling not so optimistic because of what's going on in washington f. there's a resolution and this goes away, even if it's temporary, and it's for the next whatever, three months, six weeks, whatever it is, doesn't the bearish case go away? even if it's just for this time period in which this calendar -- >> for the short period, you could. but that helps favor calendar trades such as this. one of the reasons is that decay in that nearer dated option is going to accelerate even more than you would normally expect. essential each that put will go to zero. so you still have to get to own longer dated protection and take advantage of that dynamic. >> that's the thing. shorter dated put will go to
zero overnight. about two puts trade for every call in home depot today. the five biggest trades, five biggest option trades in home depot, all puts. >> wow. for the latest news out of d.c. check our special report tonight called the debt threat right after options action tonight, 6:00 p.m. eastern time. move on to the big story of the day, the terrible plight of gold for more let's go to dominic back at headquarters. >> hi, melissa. gold prices took a hit in today's trade. it continues its longer term down trend. gold futures finished down today. we'll call it 1270 in terms of gold futures. prices were hovering around $1800. now, the gold chart looks rather interesting. some technicians or analysts that look for trading patterns in these charts are seeing more down side to come. the price broken below a key level and something called a head and shoulders pattern. it's a sell signal for gold. of course, earlier this week goldman sachs head of commodities research said that
when the budget and debt issues in washington get resolved, gold will be a quote, and i quote, slam dunks sell, remember goldman has a price target, melissa of 1050 in terms of that price. >> thanks very much, dominic. that's 1050 for next year, we should note. so mike, what's your trade here? >> i would just say quickly, i have never been a gold bug. part of that, history may not repeat exactly. but it tends to rhyme. if you go further back on the charts, back to the last gold bubble we had from 76 to 1980, it was up 600%, a rise similar to the one we actually experienced up to the highs in 2011. it then fell back about 34% or so, had a little bounce. and then just went straight down. it ended up falling about 70%. if you think it's fallen a lot, and that's a buying opportunity, you better prepare yourself for what can happen when a commodity turns against you. this thing was supposed to be a safety trade. everybody had an excuse to buy it. those excuses are breaking down one by one. when the debt crisis essentially
is eviscerated and tapering comes into place and interest rates rise, dollar will strengthen, you'll see the final wash out in this. that's what i believe. i'm also inclined to make a bearish bept. i'm inclined to take advantage of the volatility we are seeing now in the metal, today's behavior is a big part of it. i'll just try to put on a calendar put spread much like dan in home depot. i'm looking specifically at the november march 120 put spread. by those puts for 6 bucks and then near data ones against it for 2.60 a net debit of 3.40. the term structure, the near data options are highly priced in gld because of what we've been seeing. >> scott. >> gld, gold in general got ahead of itself more than anything else, because of qe. this week, somebody asked how to be bullish in gold. i don't like that, because for all the reasons mike lays out also because it's showing lower highs and lower lows, if you want to be bullish, this week's web extra is how to do it. >> putting out a trade but don't endorse it. >> i say that the first part of
the web extra -- >> there are times people want to do things and you can't talk them out of it. what you have to do, if you're going to do it, at least do it safely. put on a helmet before you jump off a cliff. >> identify risks. >> i actually shorted it yesterday. to me if this thing in washington gets cleared up, we go back to this complacent market environment we've been in most of the year, gold gets crushed. when it broke 1300 back in june it went to 1200, i think we probably will see that off this technical pattern that just broke the neckline at 1300, the head and shoulders. >> little stocks versus options, short gold, the equivalent of waging nuclear war against your portfolio. big leverage to the down side. got a question out there? send us a tweet at cnbc options, we'll answer it in our web extra. tonight scott as he mentioned has an alternative trade on gld which he doesn't endorse. but he'll lay that out for you. check it out. in addition to scott find great trader blogs and educational material. you want to take a look. here's what is coming up.
>> so we didn't net profits, last month a bearish bet on netflix, the stock has stayed flat. why is he doubling down on his bearish bet? plus, it's king kong versus godzilla. that's because it's d.c. dysfunction. >> this isn't some damn game. >> this ain't no game, flash. >> versus the biggest week for corporate earnings. so who will win? we'll explain when we come right back. ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪
[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. welcome back to options action, close to 70 companies in the s & p 500 are going to report earnings next week, so we're getting into the heart of
earnings season, now, there are a couple big names on tap. talking big bank earnings season rolling on, citigroup posting results on tuesday before the open. b of a does it on wednesday before the open. then goldman sachs, they report on thursday. before the open. you also have big tech names on tap. intel, ibm, google, all of these guys are reporting. now, according to s & p capital iqs senior index analyst, third quarter earnings per share expected to post another record, but and this is a big but, sales growth may not be as robust, and that's the reason there is still cause for concern, melissa back to you. >> thank you, dominic. despite the upbeat estimates one name that one of our traders feels could post sickly earnings, trying his hand, dan, you are taking a look at johnson and johnson. >> without carter this plasma would get lonely. sickly earnings may be pushing it. johnson and johnson has been a massive performer, up 27% on the
year. it was a massive beneficiary earlier in the year, when rates were low. and investors were looking for high yielding stocks. right now it has a 3% dividend yield xpekted to grow, probably high single digits, it's trading at an expensive multiple. my issue here with johnson and johnson, we look at q-3 earnings next week. it isn't that they will miss so dramatically. it more has to do with the fact that expectations are high. the stock acted well. i think the technicals actually set up really weaken this. so the implied move in the options market for the earnings is 1.5%. the thing only moves 1.25%. i'll take advantage of the elevated implied volatility for the earnings week in october in my trade. but first i want to look at the chart. i will tell you what i'm looking at. on september 20th here, i bought some october puts. and i was looking at this exactly this. this is the chart on september 20th. this is a head and shoulders formation, the neckline right here. that's the left shoulder, that's the head. that was the right shoulder. okay. i bought the october 90 puts.
you know what the stock did? if i go like this, here's the chart today. here's the same pattern right here. there is that shoulder. there was that head. here is that other shoulder. it went right down to the neckline almost at 85 bucks. that was really interesting to me. so what happened in the last couple days, with washington issues kind of abating a bit. the stock rallied 4% in a straight line. so what i want to do right now here, i want to take advantage of this trend line. the stock is continually since making all time highs, it made lower highs here. i think we have an opportunity actually to get this thing back to the $85 neckline. i don't want to go out and buy out right puts. the market could have a run to the upside if we get things really cooling down next week in washington. but i want to set up for a bearish trade. i want to use high implied volatility in the earnings, expiration next week to do it. >> all right. so dan, walk us through the trade at this point. >> so here is the -- just do this. a calendar here, people. we've been talking about them
all show. what this will do, when the stock today was about 87 -- no xcues me, 89.25, i bought the october, november 87.5 put calendar. i sold one of the october 87.5 puts at 40 cents. i bought one of the novembers for 87.5 puts for 1.10. what i want to do get by the earnings week, and then i think the stock has the opportunity to go back to the $85 level that it almost got to in the last couple weeks. >> mike, you follow johnson and johnson. what about the fundamental side of the story? >> fundamentally johnsen and johns sn tried and true bond proxy. this is a stock that doesn't have substantial top line growth. it trades actually at a premium to the market. it's two or three turns richer than s & p here. and like a lot of stocks that have basically substituted as an income source for people that can't get anything in the fixed income markets. this is one of the ones that will become vulnerable to rising
rates. so this is a kind of stock i would not be interested in owning here. you can see that it actually has had quite a rally. it came off somewhat. it's still elevated. i'm not real interested in owning it. >> scott? >> i think this is interesting, because johnson and johnson really low implied volatility. you don't want to clown around and sell out right options, so dan is getting the math working. doesn't work out quite as well and really low implied volatility names. but it's working like it does on all calendars. and he's not selling out right options in a cheap option name. >> dan, carter would be proud of you. you did a fine job with the smart board. nice drawing. coming up next, could netflix become a nightmare? the stock took a tumble this week, we'll reveal why the pain could get worse. back after this. [ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪
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action time for total recall, we invoke the name of a classic action film to review a complicated derivatives trade that has not worked out. a couple weeks back dan made a bearish bet on netflix, the trade has not quite worked. but here's why dan hasn't lost that much money. >> on options action it's how we make money like movie stars. risk less so we make more. that's just what dan tried to do with his bearish bet on netflix. dan thought netflix shares were going south. >> the stock is going to pull back 10 to 15, 20% in the next month or so. >> just shorting this momentum stuff -- you get the picture. so to make a bearish bet dan bought the october 2.80 strike put for 6.85. to make money he needs netflix to fall below 2.80 by more than the 6.85 he spent or below 273.15 by october expiration. but shelling out 6.85 to bet
against netflix, does that come with a bucket of popcorn? dan, let's do this for less. >> i sold two of the october 255 puts. >> now we're talking. so to cut his cost dan sold not one but two of the october 255 strike puts for a total of $4.60. makes it easier to make money and here's how. between the 6.85 he spent on one put and the 4.60 he collected selling the other lower strike puts dan cut the cost of his trade to $2.25. and now instead of meeting netflix to fall below $273.15 to make money dan sees profits if netflix shares fall below the price of the put he bought by more than $2.25. or below 277.75 by expiration. >> this is it. >> not quite. because there is a tradeoff, and by selling more puts than he bought, dan could be forced to buy netflix at that low put strike price, in this case for
255 even if it falls below the level. >> they ruined it. >> to protect himself against that nightmare scenario, dan then bought the october 230 strike put for $.75 and completed his put fly for a total cost of $3. now dan's protected below the 255 level. but because he spent more, he'll need netflix to fall more to make money. specifically dan needs netflix shares to fall below the 280 strike put by more than the $3 he spent on the trade or below 277 by october expiration. since the time of the trade, netflix has dropped 5%, not quite enough to make this trade a winner. and now movie lovers across america -- >> quit telling your stupid story about the stupid desert and just die already. die! >> one more thing, what will dan do now?
>> all right. take a look at this. the timing is pretty interesting. the trade was sort of working. but then the stock rallied. expiration is next week. so dan, what are you planning on doing? >> on wednesday when the stock was at 270, this was a decent winner. i made a decision to stick with it. at that point i had 7.5 trading days left. the stock was acting so weak it came down so hard so fast, so i'm still inclined to stick with it here. this was a set it and forget it trade. the stock closed poorly today on a day the market closed very well. the momentum might have been broken. so i'll stick with this. >> now, you i think said you thought if there's a debt ceiling sort of agreement over the weekend, then it would be a sell the news event. you are setting up nicely. >> i think so. i think that the markets are positioned for that. if we open up and then sell the news they will come back at these stocks they started coming at earlier in the week. >> well, i think everybody knows i'm not a big fan of netflix here. i probably am more inclined to go longer data on trades, the vol is so high, options so
expensive you need to sell things against it. that's why you do a butterfly or calendar put spread or even -- a lot of things can you do i like bearish bets. >> you don't want to just buy options, 287 is a moving average. that's the important level. >> quick note here for the latest news out of washington d.c. catch nbc special report, the debt threat that starts after options action at 6:00 p.m. eastern time. coming up next final call from options pits. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪
[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. time now for the final call, the last word from the options pit. >> next week a chance to be greedy with executions. >> i'm not going to be greedy, i want to leg in to these bearish trades in home depot and johnson and johnson. >> weren't you wearing a tie earlier, i like calendar put spreads in gld. >> you always notice the wardrobe. so astute. looks like our time expired.
i'm melissa lee for more action checks out our web site. we'll see you next friday. meantime, don't go anywhere, special coverage of the shutdown called the debt threat, starts right now. 5 days until america runs out of money, and still, no deal, the debt threat continues. the dow closed up today 111 points. hello and welcome to cnbc's special report. >> hello, everybody, "mad money" will be on tonight at 11:00 p.m. eastern. but for now, we have an all star of experts that will help you navigate the market. what you need to know before we go into this important weekend. >> and let us begin in washington, where lawmakers are still trying to hammer out a deal.