tv Options Action CNBC July 26, 2020 6:00am-6:30am EDT
to gw roas a person but to grow as a boss and a manager and grow as a friend. jennifer: yeah! whoo! lemonis: bring it in! bring it in! bring it in! tad: ready? caterers: one, two, three, honest foods! ♪ >> ty friday because it is "options action" time. here is what is coming up on the big show >> as the saying goes, home is where the heart is now carter worth thinks home is where the money is he'll help you refresh your holdings with a coat of paint. then boeing. setbacks at every turn with no clear air to be seen but tony zhang has a way to pilot you through. plus hold the phone. literally. after a huge run apple and other tech giants are on deck to report in the busiest
week of earnings season. afraid computers might crash your i.t. guy mike khouw has some patches for your portfolio. it is time to risk less and make more "options action" starts right now. let's get right to it. despite the weak selloff in the market, one group of stocks managed to lay down some strong foundations for a rally. the itb managed to rally 4% this week carter says there is one name in that that would make for a particularly sturdy trade. what's the name? >> it's sherwin williams it's the right environment it's the one area within consumer discretion that is holding up so well and yet not extended and not overbought. so a lot of characteristics that make this desirable. let's look at a few tables and charts
talking about sherwin williams, this is one of the best performing stocks in the market regardless of its line of business here you're looking at a comparative chart. going back to the beginning of data in 1985, you're talking about a sixfold increase over the general market if i introduce the nasdaq 100, this is apple, microsoft sherwin is even beating the nasdaq 100 by a healthy margin in fact, take a look at the next slide. this is a simple table if one were to have been so lucky as to put $10,000 in sherwin back in 1985, that is now $1.3 million or thereabouts versus 850 for the nasdaq and you'd be as a paltry 168,000 in the s&p. in any event, home builders act well and sherwin is the best performer long-term. it's not a home builder, but
that's the key it doesn't have the cyclicality. the fourth chart is itb year to date versus the market home builders as a group were up 10%. it's like home depot in a way. it's tied to home builders, but it's better than home builders here's one way to draw the lines. it's a textbook conventional buy juncture a convention, generally agreed upon, a stock that's breaking out is a stock to be bought. you can see at the 600 level, sherwin has already started to poke up above that level we like it a lot finally the same chart really but just drawing a trend line in effect since the march low whether you call it an ascending triangle or wedge or what have you, it doesn't matter what it is is a breakout from a well-defined formation and there's every indication that it
is headed higher. earnings next week, we like it a lot. >> that is pound the table from carter worth, mike khouw so what's the trade here >> so it's interesting sometimes you will see charts where basically stocks are going from the lower left to the upper right and it's largely a technical pattern and we have a hard time justifying it from a fundamental standpoint that's not actually the case here sherwin williams is one of the better and more consistent growers of earnings per share. for the last 12 months we're looking at about $20 per share that's a fivefold increase in earnings right now trading about 28 times forward earnings that doesn't seem terribly unreasonable given that growth but the stock has had a very strong run we might look to make a bullish bet using options so if it gives some of that back, we're not going to take all the same risk.
also at $620 a share this is a very expensive stock some market participants might be reluctant to go out and buy 100 shares of it, which is going to set you back about $62,000. i was looking out to september you could buy the 620-680 call spread and selling the 680 for a net price of $20 per share that's obviously considerably less than the current share price. here's something i would quickly point out, that the month following earnings, the stock has typically moved 5.5% the september options obviously expire considerably further beyond that. it's $20 that we're spending for this options spread. we're really spending give or take about 3% or a little bit more of the current stock price to put this trade on i think it sets up as a good risk/reward into a known
catalyst that has already made a pretty good move to the upside. >> tony, do you like this trade? do you like the story of sherwin williams >> yeah, i particularly like this trade for a couple of reasons. first of all, if you look at the underlying stock, not only is housing one of the strongest sectors and i think one of the brighter spots for q-3 but sherwin williams is also part of the materials sector which carter laid out a pretty nice thesis for a potential breakout of xlb if you look at the chart of sherwin williams, very constructive chart breaking out of that $600 level looking like it's consolidating and potentially moving higher. a debit vertical spread, it's a very efficient way to take a bullish view with a very small amount of risk he's only risking 3% of the underlying stock price even if it misses on earnings,
you're only risking 3% of the underlying stock price >> mike, a lot could happen between now and september, so i'm wondering, in that time frame are ther certain events you're looking at thinking, oh, that might be a catalyst either to the upside or the downside for sherwin >> yes so i mean obviously we have the earnings catalyst, there's going to be a lot of economic data that follows then of course we have the issues that are going to be driving the market more broadly. the other thing is that it is not uncommon to see upticks in volatility as the summer draws to a close going into september. that's when the expiration is. this isn't really a play to tend of the year so much as recognizing we've seen a really big decrease in implied volatility it seems like it might be a better time to be a net buyer of premium than a seller of it. >> there is one group of stocks hit particularly hard this week. it's been turbulent for the airlines
that's got tony betting against the one big aircraft supplier. what's the name, what's the trade? >> so i want to take a look at boeing, because i think there are a lot of elements here at play going into earnings next week i think that the risks here are skewed to the downside if we look at the 737 max recertification, at this point it looks like it's looking unlikely that's going to happen in 2020. if you look at boeing's order book, 13% of that order book has already been cancelled in 2020 i don't see that trend reversing any time soon given the outlook airlines have been giving us every single day you're getting worse and worse guidance for 2020 and looking out to 2021 and the next three to four years. i'm not particularly constructive on boeing going into earnings. you couple that with the chart it's very hard to make a bullish
case here for this particular chart. you have a major resistance level at 185 which boeing has failed to get above. if you look at the relative performance to its sector, it's really starting to underperform here over the past few weeks those are really typically the things i look for for a potential miss here on earnings. if we look at the options here, they are implying a big move here, about 8.7% versus the average of only about 2.9% over the last four quarters so options are implying a big move to the downside the options structure i'm looking to do here is actually to sell premium. i'm going out to the august 28th weekly options and i'm selling the 180-195 call spread. costing about $14.5 for the 180 calls and paying about $9 for the 195.
net-net here i'm collecting about 36% of the width here the spread is about $5 out of the money. it's a nice collection i'm making here on this particular trade. my break-even price is just above 185. i'm expect boeing to guide down. and potentially trade lower here orn earnings >> mike, do you like this trade? >> i do like the trade i would make one quick point about how much the stock is historically moved on earnings since everything that's happened, they've taken on a decent amount of bet the equity market capitalization is lower the net effect i you would anticipate to see higher volatility. all of that said, i agree with pretty much everything tony said here it is hard to imagine exactly how all the clouds are going to be lifted for boeing, you know, in the short-term. let's bear in mind that the valuation for the company is not far off two years ago when they
had a 5,000 deep order book and everything looked brilliant for them going forward it's a very different picture right now. you say, okay, well, would i buy it at this valuation or would i have bought it at that one knowing what we do and what we did. it's kind of hard to see why you'd be a big buyer of it here. about 22 times earnings is the best it is values. the options are quite expensive as tony pointed out. >> how does that chart look, carter >> the word ominous comes to mind it is hovering ominously and well-defined intermediate lows and the presumption is it's going to break those lows. the thing that's so important about this great winner and i say that because boeing is one of the great commercial franchises ever to open its doors, after dropping from its peak, it lost 80% of its value this is a $450 stock that touched 80 on the pandemic low
it looked like a sherwin this plunge, pandemic or not, this has wiped out all of its relative performance to the s&p since inception. to be 80 on the march low, now back to 173. i think it's going to break and it's going to break hard. >> all of the relative gains over the s&p 500 since inception, that's amazing. check out our website optionsaction.cnbc.com sign up for ouz newsletter: here is what is coming up next. coming up, professor mike khouw plays the role of insurance salesman and shows you how to protect yourself in what could be a hazard fraught busy week of earnings season. plus, reach into your pocket and tweet us your question @optionsaction. if it's nice, we'll answer it on air.
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♪ ♪ ♪ welcome back to "options action." take a look at big tech. tesla, facebook, apple all facing big losses as investors rotate out of the space with only amazon escaping in the green. you may be wondering how can i protect myself from further downside lucky for you, mike khouw is here with a call to action mike, take it away >> so this is pretty extraordinary, of course what we've seen so far this year the tech indices are up about 50% off of their lows. some of the most broadly held stocks obviously are one of the
big reasons that might be true you might be thinking okay, now that we've seen these gains, how can i hedge my exposure? identify a decent proxy to use for a portfolio. final of course we need to size the trade. let's try to work through an example together let's imagine that you have $100,000 in your account and a number of the most commonly held stocks represent that 100,000, a couple shares of apple, amazon, facebook, netflix, tesla, things like that. these are the stocks that the top ten of which in the nasdaq 100 composite index represent about 57% of the weight. we could use qqq which is the etf that tracks that index so how much do you need to buy take the $100,000 of overall exposure that you have, divide it by the share price of qqq i'm simplifying it to about
$250 that works out to 400 shares of qqq is roughly equivalent to your $100,000 portfolio of tech stocks since each option represents 100 shares, that would mean you would need four options to hedge if you use qqq options that's going to get you to about $2600 in premium that's how much you would be spending to protect your $100,000 tech portfolio. again, i'm going to make the point that everybody already knows that bears repeating these biggest stocks have had quite extraordinary runs here. of course, they are a big part of the reason why the index has gone up as far and fast as it has. we saw some cracks that something could happen this week they will also be the same ones that will drag it lower. owning options on each of those stocks individually could be quite expensive. this is a cheaper way to hedge
your risk going into september. >> tony, is this how you would hedge? >> yeah. so we actually hosted an education event last night specifically on this strategy. one of the things and i think this is personally a timely time to talk about this because we surveyed over 500 retail investors last night, how many people felt that the market was going to be lower one month from today outpaced the number of investors who thought the market would be higher one month from today almost 5-1 a lot of retail investors feel a down trend is about to come. i think mike did a really good jobbing showing how to choose a proxy for your protection. the one thing i want to add to that is around timing. statistically markets only move more than 5% lower in a month typically only about 12% of the time probability is not quite in your favor. so we always advocate when times are like this and things are starting to turn around but not quite getting ugly yet, it's
time to sell covered calls this way you can generate a little bit of premium that can be used to buy these puts or put spreads. another thing that we also look at as an indicator for timing a particular hedge is actually vix futures. when vix future is elevated or higher than the three-month vix futures, that is usually a good sign that markets are stressed and it's potentially time to put on a hedge. >> they probably caught your segment, carter, about the tech stocks flashing warning signs. but in a nutshell, carter, it doesn't look good for some of these big cap tech stocks. >> well, in the sense that you have the dual circumstance of being extended, overbought, crowded, hysterical in many ways, and then you have now the facts coming out, so to speak. microsoft's earnings, whether you say it's good or bad, there is no such thing as a good or bad earnings report.
there's only an earnings report and it's how the market reacts did the stock go down? facebook, netflix. look at intel. the point is that you are getting fundamental information from stocks that have the precondition of being very extended, priced for perfection. for the most part amd was good, of course, but for the most part the risk is to the downside. up next, we look back on two of our open trades we'll tell you what they are doing next stick around more "options action" comes up turn on my tv and boom, it's got all my favorite shows right there. i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in. now this is what i'm talking about. yeah, it'll free up more time for your...
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it's beautiful, isn't it? yeah. td ameritrade now offers zero commissions on online trades. ♪ welcome back to options action time to take a look back at a couple of our open trade khouw and carter said we were living in a material world last week >> we are toying with the prospects of important breakout type move to new highs that is not the case for financials or energy or industrials. they are not in this position. >> we are looking at trying to play for new breakouts in the index itself, you can keep the trade really simple. i was looking out to the september 62 calls they were about $2.25. when we think about that, that's a relatively small percentage of how much slb costs at this point. that's really the key right here
>> well, gold costs above $1900 an ounce today carter, what are you doing with this carter, we'll start with you what does this chart look like >> i think the key here is in a very sort of sloppy week for the market, materials were up and it is tied to a handful of names. but what we do know is what you just said, of course, is that precious metals, this week silver had its fourth biggest two-day move ever going back to the history of the data. gold, of course, just crossed over at $1900 an ounce i think there's more to come and one wants to be long here versus not. >> mike? >> i think we say with this trade. they're slightly higher now. we're not risking a great deal if things turn against us. i'd stay with it. tony said opportunity was calling in t-mobile.
>> as we stare down 35 million unemployed people in this country, i think what we're going to see is a lot more price sensitivity to your wireless carrier going forward. this is something t-mobile is not shy about going after both at&t and verizon customers and competing with them based on price alone. i'm going out to the august-september call diagonal where i'm buying the september calls and selling the august 7th call against that for about $1.92. >> tony, this is doing exactly what you wanted it to. so what do you do now? >> yeah. so at this point we're still holding onto this call diagonal as you said. as long as t-mobile stays around this particular price i'm looking for that call option to roll off and then potentially sell another one going forward and holding onto that september
105 call and potentially rolling that higher if the stock continues to move higher >> up next, some tweets to answer and the final call. 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. oh. their award-winning content is tailored to fit your investing goals and interests. 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 ♪
tony any thoughts >> i like roku here. if you're bullish, roku reports earnings here on august 5th. i would hold onto a call vertical like this going through earnings. >> carter? what do you think of tony's chart work >> that's exactly right. two things we know, in a week where this is the kind of stock that might have gone down substantially with other names, it held in very well there is a well-defined level from which the stock can break out here so a conventional buy juncture buy. >> it is time for the final call tony, what do you say? >> gray skies ahead for boeing sell a call credit spread. >> carter braxton worth? >> sherwin williams. i think it's a great way to play the housing theme. the 600 level has authority. up and out from here. >> mike khouw?
>> i like sherwin williams for those of you really benefitted from this strong rally in the tech names, maybe now you could consider hedging by september puts. >> that does it for us summer school is in session. (male announcer) up next, how would you like to get the celebrity secret for ageless skin? (female announcer) find out how in this paid presentation for meaningful beauty. (male announcer) as cindy crawford unveils her newest youth activating breakthrough. (female announcer) and watch what happens when cindy invites grey's anatomy star ellen pompeo to try the evolutionary secret that's kept cindy's skin looking so youthful for so long. when you see the pictures of cindy at age 31 and then now at 52, her skin actually looks more radiant now than it did then.