tv Options Action CNBC August 22, 2015 6:00am-6:31am EDT
cnbc's breaking coverage of the sell-off continues. if you're just tuning in here is what happened. the dow losing 530 points, worst week in four years and officially in correction territory. the s&p 500 losing 3%. it is now down 1% over the past 52 weeks. the vix jumping 34%. -- 44%. in the month of august the volatility index has more than doubled. and that would be a record. that has never happened before. and apple is now officially in a bear market. it is now negative on the year. how much worse is this going to get and what do you do with your money? i'm going to start with the technician because here's an interesting stat. the dow not only lost 2% two consecutive sessions but it also closed at the dead lows both
days and that is the first time that, carter has happened on record. >> records are meant to be broken. but i guess the issue is this. there's weakness to take advantage of in life and there's weakness to stay away from. that's the big debate. do you step into this weakness and say this is an opportunity or is it something to actually be careful about? i'm in the latter camp in the sense that while one could say short-term and we could talk about vix and things overdone, but it's really not about that. it's about the damage that's been sustained and what it does to sentiment and psyche and what it does to many individual charts and to the market. we think in principle this is something to be very careful of and to avoid. >> investors overall have been conditioned to believe that every single dip has been a buying opportunity. in fact, we've seen that play out in 2015. the worst five-point drops have been followed by average one month return of 2.33% according to s&p. that's pretty damn good. is it going to happen again? >> for the broad market i don't think so. here's something i would point out. the s&p was trading almost 19
times next month estimated earnings before we got into the rout we just seen. we're trading at 17.5 times which is still above the long-term average multiple. if you're trying to use dips as a buying opportunity the way you should do that is when stocks are cheap, and the s&p by and large is not cheap at this point. but i want to make one quick point here. i haven't added to my net long positions since august 2014. and i did actually today. we're going to get to what name i put it into. but a couple stocks i think are getting a little washed out and those are the places you're going to want to take advantage. >> that's interesting. >> how about you? >> short term i did do some buying today and short-term i think we could see a bounce. we'll talk about the vix and maybe why that's signaling it later on. but you saw some panic today. at an expiration day. it's a day that a lot of people as i mentioned before are going on vacation next week, they just want to get out. there was a bit of a panic in the market today. in the short term i'm playing for a bounce. in the longer run we'll have to see how this washes out. carter talks about sentiment. if you got creamed this month you're going to be real reticent to get back in big positions.
>> once you draw down like this you trap a lot of people above. so you have people who bought in the last three, four, five months. but i went back and looked at all instances since 1927 when the s&p has had a five pe-cent -- 5% plus correction. you go down two or three it's noise. even four. but five it kicks in and accelerates. there have been 212 times when the s&p has gone down 5% or more. if and you were to look at the median or average draw down, the median is about 8.25 and the average is 12.5. we're only down 7.6. so we haven't hit the median at 8.25. and if we're going to be average we have another 4% or 5% to go. meaning damage -- problems occur -- other problems. we know there's margin calls. derisking. that's the problem here. >> margin calls are one point. the other thing is if you're looking for somebody to come and support the market we need to have a lot of deployable cash and we know self-directed investor cash balances were down.
it's kind of hard to figure out where the incremental buyer would come in and say i want to take real advantage of this right here. >> let's talk about the vix because that surge above 27 today that was the first since october. brian sutland is one of the biggest vix brokers at the cboe. when we get vix surges like this how do stocks usually respond? >> well, it's going to get volatile, melissa. stocks are probably -- they need a lifeline right now. when you look at vix surges, i mean, take a look at iwm or some of the other indexes, the nyse composite, they're basically unchanged for 20 months. that's dead money, melissa. why does that happen? you see the volatility surge we saw. we haven't seen surges like this in one-month time frames since august 1990, you're talk about august 1998 and september 2008. these were huge surges, nearly 100% in those cases and saw gigantic moves in the market after that. a year out when you look at these moves august 1990 the market up 22%. august 1998.
but the september one we didn't see the markets move. they dropped 9% over the next year. you're going to see some major moves in the market. the market really needs a lifeline. when you get these moves, melissa, basically the federal reserve is going to have to change their policy. that's what happened in the past. all three of those instances major shifts in federal reserve policy following these huge surges. >> all right. thanks so much, brian stutland. carter is taking a look at the sector that could have the most downside ahead, carter. what would that be? >> financials being the second biggest in terms of market cap but arguably the most important. let's look at the chart and try to figure this out. i want to start with a chart of asset managers because in many ways these stocks sniff out corrections early. i'm not going to draw on the next few for a second. this is t.rowe and ben franklin. and blackrock, janice, allowance bernstein, legg mason. they're down from their peak and they peaked five months ago. by contra distinction banks are still at or near highs. the xlf is at or near highs.
we think this is a harbinger of things to come the way these have been traded. let's look at the xlf itself and try to see where we might be going. here's a chart and i started this specifically from the absolute bottom, the nader of the financial crisis, not the '09 crisis but when we got the debt downgrade and we dropped 20% on the s&p. you can draw your lines and we are literally on the line. the problem here is -- and today we broke. we broke for the first time in basically five years. so the next reference point is a longer-term line. this is picking up of course the '09 low and it's picking up this 2011 low. so here's our 2011 low when we had a 20% line. if we were to go back to this trend line, this implies another 12 to 15%. and financials have a lot of beta to them and they've held up fairly well as we've seen from the big banks. if they go the way of the asset
managers, this is not a good place to be. >> wow. you know what's interesting here is that we are all under the impression that yield curve would, in fact, steepen. that was a big part of the xlf trade. >> not all of us. >> yes. and that's why i turn to you. it doesn't seem like it's going to happen. >> i think it's going into vert. and that would signal we have a recession coming at some point in time. what you're talking about is the spread between the two-year yield and the ten-year yield and banks make a lot of money when that's real wide. if that starts to flatten out these banks aren't going to make money. that was what was behind this whole xlf trade. as the economy improved, banks are going to be able to lend at higher prices. in my opinion as the global economy slows down that's going to flatten out and banks are going to be very challenged. i'm with carter. you stay away from these financials. >> we saw some pretty steep declines. when you look at the individual. bank of america and morgan stanley were down each about 10% this week alone. >> so yeah, they were down. if you take a look at the xlf or the financials more broadly it's kind of interesting that they haven't been hurt more badly. and i think one of the reasons that's interesting to me is
there's two really crowded institutional trades. airlines is one and financials is the other. this is a problem. when you have a crowded trade and people start heading for the exits there is nobody there to pick up the pieces as these things decline. it is not just simply an issue of the fundamentals. it is also an issue of where capitals are going to flow. and i don't see how you're going to see money flow into the crowded trades. if anything it's going to flow out of them. >> what's your trade? >> very simply i think you look to the november 24, 2 2 put spread in the xlf. 90 cents for the 22. sell the 22s against it. it's a little more than 25% of the distance between those strikes. this is one of those situations where the bump in volatility that we saw today helps justify doing the spreads. because options have become more expensive. >> yeah. i mean that's a great way. we talked about the vix and how it's exploded today. that's going to make this trade a lot better when you can put that spread on. in terms of the xlf i agree with mike. i still think they're very challenged here. it was a crowded trade.
and you still have a lot more room on the downside. >> reits have helped the sector hold up. they're a big part of the financials. those have also had big moves as the rates have come back down. if those start to falter that will even add more to this. there's limited upside and unknown and plenty of downside. >> just one more point. let's not forget their exposure to the energy sector. a lot of these banks have loans to the energy sector they've tried to offload and they haven't been able to do that. >> cnbc's coverage of the breaking news sell-off continues after this break. you're watching cnbc. first in business worldwide. >> apple's doing something it hasn't since 2012 and it could signal your opportunity to buy. ♪ hallelujah >> we'll tell you what it is that has traders so excited when "options action" returns. ♪ turn your love around here at td ameritrade, they work hard. wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or
jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this.
our thinkorswim trading platform aggregates all the options data you need in one place that 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... what's up, tim? for all the confidence you need. td ameritrade. you got this. welcome back to "options welcome back to "options action." let's take a look at what's happening with the technology sector because it is important. it's the single biggest one in the s&p 500. and as of right now today's close, 40% of the s&p 500 technology index is in bear market territory, down stocks at least 20% from their recent 52-week highs. you can see today a bad day here, down about 4% from the index overall for the technology sector. if you put it in a broader context you take a look at some of the performance there as well over the past week we're talking about down 7%. and again, it carries a lot of
weight. it's the biggest sector in the s&p. looking broadly again at the technology sector overall, a year-to-date basis it's down 5%. one of the biggest decliners so far in the s&p 500 overall. and you take a look at one of the etfs that tracks this particular index, the xlk, the select sector spdr. the ticker there that tracks this index also down 7% as well. among some of the individual names to the downside just over the course of this past week, intuit shires 15% to the downside and then a couple flash memory/semiconductor names. sandisk, micron, both down 15. 14% as well. so again, technology a big focus for a lot of traders out there. melissa. back over to you guys. >> thank you so much. speaking of tech losers, apple is down almost 9% on the week and is officially in a bear market off 20% from its recent highs. the last time that it happened appeared to be a great opportunity. in fact, in the words of carl icahn it turned out to be a, quote, no-brainer.
so will it again? mike kuo's at the smartboard with a clever way to get long. mike. >> you might think that selling puts is probably the craziest thing you could do after the market has seen the kind of volatility and rout we've just seen. 40 million options trading today and probably a lot of those people were buying puts. but we're going to examine today how you might want to sell one. why? because stocks are down and options premiums are up. one of the things you want to do obviously identify a stock that you want to own and the level you want to own it. the next thing is you're going to look because you're selling options. you want these things to decay relatively quickly. choose an expiration of maybe one to three months. and finally, you want to get a yield of at least 1% per month or about 12% annualized, which is commensurate with the kind of returns that you would expect if you're going to be long equities. and i'm looking at apple because today i was able to sell the november 92 put for a little over three bucks. and in fact some of you who are watching have a better opportunity because these things closed closer to $4. this is a situation where i'm going to get long the stock at 95 bucks but of course because
of the premium collected to get my net purchase price going to be about 92, down 10% from the current price. here are some things to think about. at that level apple's going to be trading less than 5.4 times free cash flow. enterprise value going to be around $375 billion. levels we haven't seen since early 2014. this is a situation we're trying to take advantage of elevated premiums and declines in stock prices. this stock has $26 a share in cash. if you own it around 90 bucks that's about 30% of the share price. >> carter, what do you make of the chart? has the technical damage been done also to apple? >> it's pretty bad. you know, for what it's worth we were playing this on the long side for a breakout. it reported its earnings at the high. gaps down. if something goes wrong something wrong with that but you've got to take some measures. here we are down 21%. the only reference point there is here at this point and there is an important one, if you look back to its former high in september of 2012, we're almost there. so you have a prior peak at 100.
and it is down as you point out over 20%. at this point if one were to bet on s&p versus apple, apple's probably your better bet. s&p has more downside risk and apple having had a lot of that risk removed. >> and of course we're hitting against potential catalysts. september 9th a new phone could be out. some details on apple tv could be out. >> right. and it's really important that we're coming up on those cat lists in the sentiment in the stock. the sentiment's awful. i like mike's trade, being able to buy it at 92 bucks, 95 bucks, wherever he's able to buy it there. it's important that if you're down at these levels i don't think the catalyst coming september 9th is going to be anything that great, right. we have a new phone coming out, it's an upgrade cycle. fine. most people know about that. but now that the stock is down here, this is a great place and a great way to play it going into that. >> right. obviously the strategy can be employed with other tech stocks. would there be other tech stocks that you would consider adding or buying right now effectively? >> yeah. one name i would actually take a look at, it's more of a
social media play believe it or not, and we've even talked about this before, is twitter. >> twitter? >> it's been beaten up sos badly, showed some relative strength today. down around the 13, 14 billion dollar valuation. i find it very hard to imagine somebody not beginning to kick the tires on this. and options premiums are off the charts in names like this. we did something kind of like this with our ratio put spread. we were net short downside puts. but for those of you thinking about essentially putting a limit order out there to get long the stock and get paid in the meantime selling some downside puts can make sense. >> twitter today closed below its ipo price, carter. is that significant to you? >> i don't think so. i think you're in no man's land. buying that i'm all for it but i'm right behind you. you go first. that's not my game. >> but look at the options spreads that you can do to that. i looked at one in twitter today where you could pay 50 cents to make 2.50. the 28-31 call spread. that's what mike's talking about.
that 5 to 1 risk/reward ratio is fantastic. >> in terms of your tech shopping list. >> twitter's one. i am long that call spread. >> mike can go first before you. >> cisco as well. 26 bucks seems to be decent support there. that's another name i'd go for. >> coming up next jim chanos on the halftime report announcing he was short solar city. shares then tunneled. but the ceo lyndon reed has called into our control room and and he's going to respond to chanos's call. reed has called into our control room and and he's going to respond to chanos's call. ireed has called into our control room and and he's going to respond to chanos's call. vreed has called into our control room and and he's going to respond to chanos's call. ereed has called into our control room and and he's going to respond to chanos's call. eed has called into our control room and and he's going to respond to chanos's call. d has called into our control room and and he's going to respond to chanos's call. d has called into our control room and and he's going to respond to chanos's call. has called into our control room and and he's going to respond to chanos's call.
the problem with solarcity relative to some of the plays like sun edison that are industrial and commercial plays is they're a residential model. and the residential model i'd like to point out, solarcity is really a subprime financing company in effect. i mean, you basically lease the panels from solar city. they put them on your house. and they collect the lease payments. so in effect, if you're putting on panels you have a second mortgage on your home. because you hope it's an asset but in many cases it turns into a liability. >> that was noted short seller jim chanos announcing his short on solarcity on the halftime report today. that stock ending lower by more than 11%.
that was, in fact, the biggest decline in 21 months. and the carnage in the solar trade this week was brutal. sun edison down more than 22%. first solar down 10%. sun power down 13%. here to respond is chanos is solar city ceo and co-founder lyndon rive. great to have you on the show. >> thank you for having me. >> you wanted to phone in to us that the comments that chanos made outraged you essentially. in addition to what he said that we highlighted there, i have the slides from his presentation. he also says solarcity is really a financing scheme. what do you have to say to chanos? >> yeah. i just think he needs to have his facts straight. let's just correct a few things. subprime market is customers whose fico scores are 640 and below. our average customer fico score is 750. so it's really good customers. the flaw, the lowest customer that we'll accept is a fico score of 650.
but this aside, the value that we bring to customers is savings. so when we go to a customer, we sell them energy at a lower rate than they can buy from the utility today. the likelihood they're going to default on us is extremely low. then they have to pay the utility more. given the choice of paying us less or paying the utility more when you're in financial distress, the customer would rather pay us as we offer the same product at a lower price. >> part of the argument chanos was making is also that the leases will become a liability essentially because the panel costs are dropping day by day. does that play a role here or is it just the savings that the consumer gets from electricity that really justifies the cost of the panel even if the cost of the panel on an ongoing basis are declining? >> yeah, customers that go today see savings early. we've been doing this now for nine years. the costs have declined -- solar technology costs have declined
over the nine-year period. but our default -- there are essentially no defaults. our default rate is around half a percent. accumulated over the last eight years or so. so extremely, extremely low default rates. people save money. and they know when they join that when they go solar it's the only energy source that can lock in the energy rate for the next 20 years. no utility will offer you that proposition. no utility will guarantee and tell you what price of energy you're going to pay for the next 20 years. solar is unique. we give customers that choice. they know now they can maintain control over their energy cost. and they make that decision. >> lyndon, i want to switch gears slightly. the sector has been under duress as is the entire stock market here. do you see consolidation happening in your space? do you see perhaps rolling up other residential solar companies? let's just say for instance one
became available, one of the largest residential solar companies with approximately $1.4 billion market cap that starts with a v. would you be interested? >> no. so -- we would be interested in buying more companies. we just bought a company now in mexico. but probably very low interest in buying companies in the u.s. itself. we have a very big footprint in the u.s. we're doing great. so the fact that the stock is taking a beating has nothing to do with the fundamentals of the business. we had record bookings in q2, record installations. improved profits. everything about the business is doing better than it's ever done before. so the reflection of the stock has nothing to do with the fundamentals of the business. but in terms of consolidations for us specifically, i don't see that happening in the u.s. i do see consolidation happening for the industry itself. absolutely. >> okay. lyndon, we've got to go. thanks so much for phoning in.
we appreciate your comments. lyndon rive, the co-founder and ceo of solar city. i ask that specifically meaning vivant in case sunedison had to walk away from that deal for whatever reason. >> right. it sounds like that's probably not in the cards. sounds like he wants to do more for roll-up and get growth somewhere outside. chanos's point on this is it's like the old telecom companies. >> got the final call from the options pits. stay tuned. here at td ameritrade, they work hard. wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade.
ahh... steve, other than making me move stuff, ces. what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that 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... what's up, tim? for all the confidence you need. td ameritrade. you got this. tune in sunday cnbc will be live with a special report report "markets in turmoil" to get you ready for what could be another volatile day on wall street on monday. time now for the final call. carter. >> reducing your exposure to financials if you're a trader, go short. greedy when others are fearful. i sold puts in apple today. >> b.k. >> take a look at twitter on monday morning. i think the risk/reward in these trades, particularly call spreads-r fantastic at this point in time.
5 to 1 risk/reward. b.k. likes that all the time. >> our time has expired. thanks so much for watching. i'm melissa lee. for more "options action" check out the website optionsaction.cnbc.com. meantime, again, sunday night 7:00 p.m. eastern time, "markets in turmoil." to get you ready for what could be another roller coaster week on wall street. have a great weekend. >> announcer: the following is a paid presentation for the nutribullet rx, nature's prescription nutrition extractor, brought to you by nutribullet llc. >> my stomach issues literally went away. >> my acne has cleared up. >> my hot flashes have subsided. >> i'm saying goodbye to diabetes. >> my shoulder pain has gone. >> i was able to sleep better at night. >> i've lost 100 pounds. >> announcer: over the last two years, all across the country, an astonishing 10 million people, at a rate of 15,000 a day, have joined the nutribullet healing revolution, using the power of nutrition to completely tror