tv Options Action CNBC December 28, 2019 6:00am-6:31am EST
>> the small caps have been sitting out the record run but one trader says a big breakout is coming he gives us the trade. and later, netflix takes the crown. the stock surging more than 4,000% over the past decade. but if you think stranger things are afoot we'll lay out a way to play it. time to risk less and make more, "options action" starts right now. yes, it does and welcome, everybody thank you for joining us eye i'm brian sullivan in for mels melissa again your traders tonight are mr. scott nations. nation shared shares christian from hertz founder of trade group and tony zhang, cnbc contribute are. lets get to it another record day for wall street no big moves in the market but on a are record high every nudge up is a new record the dow and s&p 500 closing at all-time highs but if you are worried about things getting frothy at the top or made a lot of money and want to protect yourself a bit, have no fear, because scott has a way to cover yourself heading into the new year lets get in the money with the protection play for 2020. >> i mean, sully what is not to love only the fourth time in the last 30 years the s&p is up 30%
for the year it's great but easy to get down on what's driving the broad market 80% are earnings, so so, and interest rates incredibly low. right now the 10-year low is 86 basis points where it was a year ago. if you are not paying attention, then you might be bearish. but if you pay attention then you are likely to be bullish that doesn't mean there aren't reasons tor worried. there are plenty of reasons to be worried we talk about interest rates, actually up 40 basis points since the middle of the summer that's one reason. in all of those times we have seen the s&p up 30% we have seen profit taking in q1 of the next year. that's entirely possible people put off selling until they don't have to pay taxes for the year
that's the potential and there is always the tune for something else from the president. while i am bullish we don't want to be idiots and not take advantage of the opportunity to hedge ourselves. now we could do this one of three ways we could buy a put we could buy a put on the s&p. say spy pach. the problem with that is while
we could do this trade for a total of $2.90 what are we coulding we're actually buying the february 320 strike put in spy and paying $4.35 we reduce the cost of the entire trade by a third by turning it into a spread and selling -- selling that 300 strike put at $1.45. we reduced the cost by a third how does it work out that means the max profit is going to be $17.10 our break even occurs at 317.10. we get a lot of protection for not much money opinion sully you know we measure the efficacy of put spreads by comparing how much we pay vertsz the total payoff or how much we pay versus the width of the spread. we are paying 15% of the width of the spread. this is a great way to generate protection. >> a little rally regulates clothes. christian, tony be thoughts. >> i was lacking at spx earlier today. trading 8% above the 200 day
moving average which is extremist and i think you get a pull back like you expect in january. i like this put spread normally i would buy a put but the fact you can collect $119.45 on the $00 put makes sense because of how much premium you bring in. >> i mean, i think with trading there is always a lot of uncertainties out there, right we'll always have this thp i pauwels balance fall back to what we know the right now the vicks is a 13. protection right now, puts are really cheap i think it makes sense i think it's a great way for you to kind of stay in the market. as welling a even with the
market coming a bit off the highs today we saw that s&p is still overbought according to rsi. >> taking advantage of the low vol discount thanks for that. lets move to a group not caught up to the market's record run. it's not bad but in this market, check out the iwm, one of the bigger small cap etfs. up 24% this year but underperforming the broader markets. but if you bet on the small cap surge in the new year tony has a way to play that, tony. >> i like small caps here because it's underperforming throughout the entire year but recently in november it started to break out above the 160 resistance level we have gotten a breakout on an absolute basis but also started to get a breakout on relative basis. looking at a clarity of the iwm against broader market it's underperformed the last the two years and bottomed the last few months we've had a lower continuation of higher lows the last few months and this is support of small caps going lower in 020. coupled with a strong economy and accommodative fed, these are reasons why i want to be long small caps i don't particularly like going long this particular stock at the current price. i prefer selling puts here this is a strategy ulgts underutilize by investors of selling puts to acquire the stock it at the lower price. collecting about $1.32 this allows me to purchase iwm
stock if it's below the 164 by the january expiration my net cost basis would be 162.68 which is the level iwm was at when it broke out above that 160 resistance level that's where i'd like to be long the stock. >> so, i mean, small caps will be an interesting tell for 2020. right we have a nice ray rally on our hands the small caps just started to outperform a bit the last couple months if you look at the trend line between spy and iwm right now it's kind of stalled out the last couple days a couple of days isn't a trend but definitely something to watch for 2020 we want to see the small caps outperform. and i think financials which are a big chunk of it will have to outperform. >> i love the fact you said you don't want to just run out and buy the stock. >> buying the stock underperforming is like going to supermarket and getting in the longest line thinking it's speeding up. but this great strategy. overtime options cost more than they're worth. take advantage of that
you're not drying to dodge a bullet if it comes back and buy it at a discount you got to be ready to do that have the money segregated. you got to be happy to buy it at a discount if you get the chance. >> short puts is only a strategy if you want to purchase the stock. in this particular case i like it. >> you got to like it or undervalue etf or equity works the same for both. you could do the strategy right. we have done macro we have done a sector. lets dry drill down ton a specific stock opportunity for the money. the payment pace monster global payments visa master card leading the way. master card outperformed apple the last decade. but if you missed your chance to cash innen oh the cash handlers this year, this next trade is for you. christian, what name are you looking at >> so i'm looking at paypal. a name in the payment space, also a way to play consumer skrergs discretionary we talked about in the last segment what i like with paypal is what we have going ob in the technicals and also what we see in the option activity. if you look at the technicals there is a couple of things i like here. number one, the price just got over the 00-day moving average and we see a little bit of consolidates here. it held up fine in a weak tape
and then also on the weekly chart as well we have a new macd crossover which is telling me that this is looking like it can push to back to new highs. and then just also what i like to see for confirmation is when we see a lot of call activity in there. and right now if you look at the -- just going out to january and the at the money strike, the 110 calls be, i see over 20,000 of open interest and interesting too here is what they've been doing is they haven't been going after that just in one particular trade but they continue to add to the position and we also see some positioning a little bit further out. i lake this name i like just going out in the short term rykering about 2% of the capital and lacking for paypal to push back to 119, 120. >> i love the stock from a he can itle perspective -- you mentioned it broke above the 200-day moving average i see the inverted head and shoulders if it gets the 112 level. if you get above that you have a nice run to 120. but also the fundamentals, the fact you play both consumer discretionary and the payment space which i both love. >> the interesting thing is he is just buying a call. a name like spy or imt wm, those options are liquid you don't have to worry about the execution. in the name like paypal, the options are not that liquid you have to pay attention to execution. this is where it's really difficult to to a big spread or
combination trade. and this is one of the situations where an outright option makes sense. >> how important is options liquidity. >> well to a guy like me, i mean, i. >> to our viewers. >> may want to to start doing the strategies you guys talked about, may not think about things because all equities are liquid they may not realize the options are simply not that wick i had and could get trapped. >> you don't have toware about that in iwm or spy it's almost a
>> how important is options liquidity. >> well to a guy like me, i mean, i. >> to our viewers. >> may want to to start doing the strategies you guys talked about, may not think about things because all equities are liquid they may not realize the options are simply not that wick i had and could get trapped. >> you don't have toware about that in iwm or spy it's almost a non-poorkt factor but in a paypal you can put in a reasonable limit order to buy the call and likely to get filled >> all right guys a good discussion a couple of strategies, a sector, a macroand stock specific one for ops everything "options action" you can check out the website "options action".cnbc.com
while you are here, here is what's coming up next. look up in the sky it's a bird. >> it's a plane. >> nope, it's the netflix. streaming higher as the the decades best performing stock. if you bet investors keep tuning into the name in 20 we have a way to play it for less. plus calling all "options action" fans, reach into your pocket, grab your phone, and tweet us your question at "options action. if it's nice, we'll answer it on air when "options action" returns. ♪ >> announcer: "options action" is sponsored by think or swim by td ameritrade. ♪ ♪
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♪ >> announcer: year end records for tech giants and the markets in sight is there room to run the outlook for investors. if you are home for the holidays you're probably doing a lot of streaming. in fact it's statistically probably that someone in your family has a netflix account based on numbers here is another stat netflix is the best performing s&p 500 stock of the decade. the original streaming giant up more than 4,000% since 2010. and while the streaming space looks different than it did 0 years ago it can be big gains for the stock in 2020 and scott is here with a way to play it. scott. >> well, sully, it's fun to talk about the the monster stocks but lets focus on a way to make money now. and we're talking about executing a call calendar spread in netflix, and why is that? well as you would expect with any stock that rallied 4,000% it's pricey. so netflix is pricey
the pe right now for this is in triple digits. 105. so we can't just run out and buy the stock even though we love the company. it's a great company if you you remember the little red envelopes you realize that they have built an industry. but the stock is priced so we can't just run out and buy it. you also had to define risk in a name like this as you would expect it can obviously rip your face off. so not only is it up a bunch, and would be really expensive if we were buying it and see it collapse, there are some shorter term problems with the stock i love the stock we want to buy it. but we're talking about some of those in a little bit. but with a name that's been up 4,000 peppers in the last ten years we want unlimited profit potential. we don't want to be trading for small -- we don't want to trade this name for a small profit
given that we have seen what it's capable of. we want unlimited profit potential from a name like netflix. so lets look at this chart the one-year chart i talked about some things that you might worry about. one is you can see the high from may. and we are not there yet we're not become that. even though the broad market is making all-time highs. netflix is not participating recently also, right here, there is actually a gap there is an earnings gap and the bottom of that is about 340. and we have not gotten back into that i'm a little worried until we get back into the gap. and finally this morning netflix actually spent much of the day, morning anyway, as the worst performer in the s&p didn't end up the day there but lets look, the best performer for the decade, in morning the worst performer in the s&p that's another reason we want to worry. that said, we want to have
upside potential so buying again a call calendar. lets brake it down earlier today you could buy the february/march 350 strike call calendar what are with we doing there we're buying the march 350 strike call, paying $13.50 and to reduce the risk and reduce the cost we're going to sell that same option, that is the 350 strike call. but in the february expiration and we could sell that for $10.80 the whole thing cost $2.70 as with any calendar spread we by that's the max risk the $2.70. lets break it down what do we want to have happen what do we want netflix to do? this works best when that february option expires
worthless. and that's really what we're shooting for we want netflix to be below 350 at that february expiration. that call will then expire worthless. that leaves us just net long this march 350 call. we're long that call outright. we're long it at a net cost of $2.70. so what wed paid for the spread. and we have absolute upside potential. unadulterated upside potential because now after the february expiration we are just long the call long at $2.70. so that's our cost that's our max risk. >> all right good stuff, scott nations. tony, a comment, thoughting with criticism. >> agree, disagree. >> i agree with this trade very much netflix just got above the 200 day moving average this week i think it's supportive of the stock moving higher. however i think the fact -- the trade is very smart because it risks less than 1% of the underlying stock price to effectively bet the stock moves higher after earnings in late january into february up to 350 level. i'm bullish on the stock but
don't think the stock is running to 360, 370. having the 350 cap is smart risks less than 1% great trade. >> good trade. i guess that's the buy if we were doing the other game up next it's been difficult times for boeing and it's investors we break down how one trader navigates through all of this noise for the company. plus, you got an options question you are dying to ask? tweet our handle at "options action" and you just might get our answer on the air. as always, live at the nasdaq market site in times square, don't go anywhere, we're back after this >> announcer: "options action" is sponsored by think or swim by td ameritrade. ♪ ♪ ♪ ♪ dealing with our finances really haunted me.ttle cranky.
♪ again welcome back to "options action. it's time to look back at open trades last week mike khouw laid out a way to protect yourself from news out of boeing. >> it isn't as if the only problem they have is the 737 max. we have structural problems with the ng things like that. valuation on the company is not that cheap all things considered implied volatility the price of options is a bit higher. we've been talking about the options getting to the upper level, sell calls against it i was talking to an institutional client short the 350s in march. you could go nearer dated i was looking at 345s in fed. >> since then there is major news out of boeing the company firing the ceo monday the stock higher from a week ago.
mike obviously is not with us today. but he did generously send us a post card from california. quote, i'm cruising the slopes of squaw valley. but the boeing position isn't going downhill despite the departure of the ceo headwinds persist so i'm happy to continue staying put and collecting proposal yum for now. -- premium for now happy new year so christian what do you think of the trade as he skis in thoe. -- skis in tahoe >> sounds like great snow out there which is nice i like the trade. i think boeing will be in the headlines for awhile i think any time you see a little bit much bounce i think it's great to kind of re-establish that trade. i just think that they're taking a lot of time to work the situation out. and if you're long the stock already it's a great way to capture some income on the trade. >> headwinds and turbulence is what you see with bogey. -- boeing. selling cover calls makes sense. there is a line in the send, 320 the range it holds for some time if it gets below 320, i would
roll to a make 320, 325 strikes and take the premium and buy puts >> given everything that's going on, the options are expensive. mike was a little unfortunate not as the ceo but he was unfortunate the ceo got fired. perversely that often gives a pop to stock and that's part what have we saw. >> mike khouw, if you are watching for some reason what time is it 2:30 he should be on the slopes but if you are already off skiing hi up next, your tweets and the final call >> announcer: "options action," sponsored by think or swim by td ameritrade see? i see an unbelievable opportunity. i see best-in-class platforms and education. i see award-winning service, and a trade desk full of experts, available to answer your toughest questions. and i see it with zero commissions on online trades. i like what you're seeing.
i'm not really a, i thought wall street guy.ns. what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade when i say there is a lot of people in times square, look at that there is a lot of people in times square there is people, guys in missouris. 42 batman. >> elmo. >> a lot of elmo. >> batmen.
>> is it bats man or batsmen. >> i'm asking. >> you time to take your tweet this tweet from ed for tony. he says do you stay long february starbucks calls, tony. >> so this was a roll i suggested off of dan's profits on the january starbucks trade if you roll this into the february 91 calls that i had suggested and you were able to do that for even moneys in a great way to play earnings into february you're able to risk less than 2% of the underlying stock price to take a bullish bet on starbucks. normally costing dunlap that -- double that stay in this trade. >> good stuff time for the final calls, scott, why don't you kick it off >> i love netflix a great business but not trying to pick a top. if you want to be long you have to use a structure like a long call calendar. >> okay. christian. >> paypal, long the january 110 calls. paypal is going higher. >> that was your call on "fast
money" too double paypaling >> tony zhang. >> small caps. i like it on the breakout. sell puts to own it. >> like it on the breakout and sell puts. interesting show and strategy of names. a great year i'm off until 2020 tony i'll do it after the show because i can't reach you. thanks for watching. "mad money" is next. - [announcer] the following program is a paid advertisement for the nuwave brio digital air fryer, sponsored by nuwave. live well for less. we all love fried foods, but yuck that means scoops of grease, blobs of butter, or gallons of oil just to fry. this adds up to a lot of unhealthy fat in your diet year after year. stop! now you can cut out all the added fat, and still keep all the flavor with the new brio digital air fryer by nuwave, the world's first digital air fryer with flavor infusion technology. coming up next, you'll see how brio's compact design makes mountains of crispy wings
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