tv Options Action CNBC December 5, 2021 6:00am-6:30am EST
-oh yeah. -okay. (jay) oh. bears eat bananas. okay. well, hey, you learn something new about nature every day! (iliza) is it weird to give a bear a tropical fruit? (jay) now, if we can just remember where we left her car. (playful music) (raptor cries) greetings and salutations. "options action" fans i am dominic chu in for melissa lee tonight. we're live right here in times square, new york city, with a very big show coming your way. here's what's on tap >> buckle up as another major sell-off slams wall street, the chart master sees a rough ride ahead for one name why carter worth is slamming the brakes on tesla. plus -- we're trading the tech rack professor khouw out with a big
update on how you can use options to protect your portfolio. and later, tony zhang is breaking out his grinch suit why he sees a big down side ahead for one retailer this holiday season it's time to risk less and make more "options action" starts right now. >> all right there it is. your agenda. we kick things off with a major sell-off in technology, specifically on wall street. the nasdaq, as you can see there, plummeting nearly 2% today. closing well off the lows of the session but still, finishing roughly 7% below the all time high as tech continues to tumble, the chart master says it is time to slam the brakes on one high flying name. carter braxton worth kicking it off tonight. carter, we teased it, but you're looking at tesla why? >> let's look at it. it is a question of, it is a beta trade it is now down 20.
three simple charts. what do we know? we know that tesla gapped up on that news day that hertz was going to buy cars or tesla was going to sell cars to hertz. it ended up going up some 30, 40% from that point. but we're in the process of giving that back you can see the wedge is drawn look at the second of three charts so often after breaking out the well defined top at a common level, you will check back to it if you simply take the highs from which the stock gapped up on the hertz news, that gets us back to the 9, 10 level. that's about a 10% from here the final chart of three is all the lines together so we're down 19% from the peak. that would make sense for such a high flyer it's got some beta the question is, do we fill that gap from that euphoric knee-jerk reaction on october 25th on the hertz news my hunch is yes. if you fill that gap, buy some tesla. if you have tesla now, sell it >> all right cbc, it closed the day down 6.5% call it 10-14. it is in the extended trade now. if it really is a 9-10 target, what exactly is the trade on tesla? >> it depends a little bit on
how much capital somebody wants to allocate to a trade just speaking about tesla generally, you know, normally when we talk about stocks we'll often have a valuation conversation that follows carter's technical directional view i would quickly point out that carter had two very good bullish calls on tesla back when it was sub 800. we followed along with that. we were not making the valuation case i think tesla is a remarkable
company. it's doing remarkable things it's high flying stocks. and if you see some high flying stocks start to exhibit some weakness, and we certainly have, there's reason to believe that could be an affliction that would affect tesla as well anybody following today's moves in stocks was probably also following what they were seeing in the vix and it closed above 30 despite the fact that the s&p was only down fractionally. that exhibits how much anxiety is being exhibited in the options market right now and that anxiety is magnified many times when you look at the price of tesla options so in a situation like this, i think we want to take advantage of that by selling options in this case we'll do the exact opposite of the trade that we did when we were making bullish calls. when we were buying call spreads. we'll sell one this time i was looking at the january, 11 -- 1120 call spread even though this stock is $1,000 a share, you can find smaller ways to make bearish bets. by selling the calls for about 87 bucks and then buying the $11.20, you'll collect about $7. that's about 33% of the distance between the strikes. relative to where it traded, it would need to rise at least 9% before you saw losses and then, of course, your losses would be capped at the difference between the strikes, $20, less the premium you collect, 7, so $13 a share since each contract
represents 100 shares. i think that's the way that you can play the stock's weakness, give yourself a little buffer to the upside it seems unlikely the stock is going to recapture the recent highs between now and january given the way the market is behaving >> so the maximum made if it moves lower. you've capped it off you've reduced the risk on both sides of it. tony, what's your take is that the way you would be playing that tesla side of things? >> yeah. i think mike has the right trade. to go back to carter's chart here what is interesting about the flag formation that carter showed you, is that it's typically used as a continuation
pattern which would imply further upside but what's interesting about this particular flag is we see declining value of that gap level. that means we're likely to fill that gap that carter is referring to, the 10% down side rather than the upside if you look at the business, tesla is by far one of the strongest as far as car marrer -- manufacturers, the only one seeing year over year growth despite the chip
shortages in october i think it is difficult to wrap your head around the fact that this stock is trading at nearly 100 times 2023 earnings. that's an incredible valuation that it's currently trading at so a 10% decline is more than reasonable if you look at mike's call spread trade structure, he's collecting almost 35% of the width here yet this call spread is 8% out of the money typically that far out of the money we're collecting only about 20, 25% and that's because of the elevated applied volatility before the 59% in volatility percentile. >> there is such a magnet effect of tesla, right? if it's not one of the, it is the most trafficked single name in terms of the options market overall. so tesla getting attention and drawing in some of that interest and bidding up of those implied volatility numbers as well so that's the tesla side of things we should note that retail stocks are getting hit
hard today the spyder retail etf, the ticker srt, call about it 1 3/4. it is now down nearly 10% over the course of the last month with the holidays very fast approaching, tony zhang says one mall based retailer may leave investors out in the cold shivering. tony, which retailer is it that's going to be putting coal in investors' stockings? >> yeah. this retailer has been in business for 120 years nordstrom. unfortunately, i think this is a retailer that is heading in the same direction as another old retailer that has gone bankrupt. sears. so if we look at the chart itself if we look at the long term chart, a line in the sand that you can draw here is around the $25 mark we recently broke below that level. this suggests that there's further down side going into the holidays if we zoom in we see the stock
gapped higher last november from $13 to $15 a pretty big turn-around for a stock that peaked in 2015. that leaves an unfilled gap here similar to the tesla where we have an unfilled gap my target to the down side is the unfilled gap around $15. if you look at the business itself, it's difficult to overlook the debt load they have, about ten times their cash position nearly $3 billion in debt. what that is doing is squeezing the operating margins down to 2, 3% i think it is hard to justify the 28 times next year's earnings that it's currently trading at for a retailer. so the trade structure i'm using to take advantage of what i think is potential down side for nordstrom is to go out to january past the holiday season and buying the 20 put vertical spread, paying about $2 for the january 20 at the money puts and then collecting about 38 cents the sell for the january 15th puts against it. net net i'm paying about $1.60 for the vertical spread. that allows me a risk ratio if nordstrom does decline >> an interesting way to play
the risk define profile for the down side on this. michael khouw, this is the similar move you're making with tesla. what's your take on tony's trade? >> yeah. it's interesting that you mention that there's a relationship between selling call spreads and buying put spreads. they're equivalent to each other. if you sell an out of the money call spread basically out of the three things that can happen, the stock can rise, stay where it is, or fall, two of them are good, one is bad if you buy a put spread you need the stock to move. we would say that two are bad and one good the difference is that the payoff changes in this case, paying off 2-1 normally when i'm trying to buy debit put spreads, i'm looking for a relationship more like 3 to 1 but he referenced why they would be more expensive in a name like nordstrom's. that is actually the fact that the balance sheet is pretty levered, a little over $4 billion worth of debt by my work nordstroms is an interesting case because they've always done a very, very good job on inventory management through a lot of crises that we've seen. it's one of the few retailers that we can look to in the past ten years and see they've made some growing that said, with the weak, we can -- with the weak cash position it's understandable why wall street doesn't like it right
now. and it is pretty much universally disliked by the analysts at this point >> i'm just looking at one for the last 15 to 20 years of nordstrom. you can see there is a very cyclical type name of this maybe it is not destined for failure, but it could be a value trade at some point. for everything "options action" check out our website. and while you're there, sign up for our newsletter here's what's coming up next still to come. short sellers taking aim at draft kings. how can you gamble on the name
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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. welcome back to "options action." draft kings deal ing investors a losing hand today. that stock falling nearly 10% as you can see there as big drama breaks out over the future of this sports betting stock. our own contessa brewer is on the front lines of that fight and joins us with the details. what can you tell us >> reporter: i'm just watching it like a tennis match, back and forth, back and forth. jim reveals his short position in draft kings trash talks the amount of money spent on marketing draft king's ceo, jason robins said chanos forgot how to do math >> we are not trading anywhere near 30 times revenue. it's less than half of that. i'm not sure what he's doing other than, jim is a smart guy i'm sure he knows better and we all have to get up in the morning and look in the mirror and some people will say anything to make a buck. we're not really interested in people selling short we're focused on the people who are believers. >> chanos responded, pulling out
the third quarter for draft kings. his premise rests on the third quarter results. and the third quarter is the weakest seasonally with a margin of just 20%. if you run chanos' hypothetical scenario, so four times the revenue, marketing spend gets reduced to 10%, but then you use the annualized margin of 40%, there you come up with an operating income of more than $300 million again, this is the drawn out version of what would happen if they made revenue four times what it currently is but of course, chanos is standing by his math and his short. and after the last segment he tweeted that draft kings has lost 1.48 billion in the last month. i totally understand it. jason robins is also standing by his numbers. and his outlook. he said draft kings will be profitable in each state where it operates two to three years after it launches in that state
and he said it's already happened in new jersey so in this situation, dom, it looks like patience would be a virtue >> i also see the back and forth volleying that you referenced. contessa, thank you very much. >> if you share jim chanelos' view, the negative one on draft kings, you could always go ahead and short the stock. or you can use the power of options to express a bearish view without the risk of losing your shirt michael khouw is here to explain how to in the call to action >> first of all, i have to give a lot of credit to jim chanos. he's one of the most well known short sellers. and selling stock short over the long term is a challenging thing to do. and there's a couple of reasons for this number one, stocks generally rise so you're basically fighting the tide the other thing is when you short stocks, the potential gains are finite that means the most you can make is whatever you've collected maybe it happens to go to zero and you basically collect all of what you sold it for that's very unlikely on the other hand, your potential losses are infinite, as we saw particularly in some
of the meme stocks over the course of the last year and a half or so and the other thing is that the market can remain irrational longer than a lot of short sellers can remain solvent that is to say, missed pricing on stocks, if that's what you're seeing, can basically exist for a long time. so as we try to take a look at ways that we can trade this using options, there's a couple of things you want to think about. first, is yours a short term catalyst you're thinking of? or is it a longer term thesis? also, how high are options premiums often times style options premiums are quite high. and what are acceptable risk and reward tradeoffs so taking a look at draft kings, if you were thinking this is a stock that could see further weakness, but you don't want to face unlimited upside risk, i was actually taking a look at
the january/may 25 put calendar. when i was looking at this trade earlier today, those may options, the may 25 puts cost about $3.60 a contract that's a lot when you consider that the stock itself is less than $30 a share but also near dated options are quite expensive. you could sell the january puts for $1.65. this would make the most money if the stock drifted down to that $25 strike by that january expiration so this is a way that you can take advantage of the fact those very high premium options will decay more rapidly now in the event that the stock basically lingers within the profitable range here, you can then go ahead possibly and sell another put when the january 1 expires. but this is a way where you're essentially targeting a downward move and you want to limit your risk to the upside now, of course, if it overshoots then you have some potential losses on the down side as well. one of the reasons we use diagonals for these types of trades but i think a move before 20 is unlikely >> so there's the range. so carter, i wonder what your take is on draft kings as you look at these charts.
i'm looking at it. i'm not a technician by trade but it feels as though these are some levels where some people you could argue want to take that leap in and maybe buy it. some others would say the momentum is still to the down side here. what is your take on the draft kings chart? >> well, doing that, it would be characterized as catching the falling knife. i would be inclined not to but let's move through some charts quickly. no annotations or judgments by me we know it is cascading. look at the second chart i've annotated the importance of the $27.50 level keep that in mind and look at the third chart. this wide ranging channel, the lower bend is also 27.50 next chart is it a massive head and
shoulders chart? of course it is. but that 27.50 level is key. look at a table to put this in context. does it have anything to do with draft kings? of course it doesn't penn is the same percent decline. zoom peloton. zillow it's a type of stock under pressure and a final chart is a comparative chart with the tickers. it's the same. >> all right okay they're not even in the same industry for some of them. they are very characteristically moving in similar fashions i wonder, tony, what's the thought here you saw the charts that carter laid out and you saw what he mike did with his particular
trade. what do you think of draft kings? what would you be doing here >> i think what we're seeing is, healthy from the market. to remove the froth and excess the head and shoulders pattern that carter showed you, i think a reasonable target. the one metric everybody is paying attention to is revenue growth when you have unprofitable companies like this growing, that's a concern for me. when you look at mike's trade structure, he's collecting 50% of the premium in the january options, that's a large amount of premium to collect in 45 days and with the calendar spread you have some losses to the down side this has to go down about 28% before this happens. >> an interesting move for sure with draft kings up next, we are playing out some of the protections plays as technology tanks our traders are using options to limit that damage. check it out we're back after this.
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i was looking at january at the 380, 350 put spread when i was looking at that earlier today, you would spend a little over $5 in premium to buy that spread, which is about 1.25% of the current level of qqq now nasdaq is up 26% year-to-date now if you annualized that expense, 1.25%, that would be about 6% in terms of of premium spent. >> all right that's down nearly 2% since that trade. what do you do now >> obviously, this put spread is up a bit since we spent the 5 bucks for it here's the thing we didn't buy it as protection for the qs to go to it, we bought it as protection in case the qs go through that long strike if you have this position, i think you keep it and you can sleep at night and enjoy the holidays if you don't, believe it or not, it's not overwhelmingly expensive still to buy this as a bit of protection if you need some >> insurance for sure. all right. up next. the final call
keep it here thanks for watching "options action." it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. oh yeah, we gotta take off. you downloaded the td ameritrade mobile app so you can quickly check the markets? yeah, actually i'm taking one last look at my dashboard before we board. excellent. and you have thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪♪
thanks for watching "options action." we'll see you next week, everyone have a great weekend "mad money" with jim cramer starts right now >> announcer: this is a paid advertisement for csn. >> you know, many times, i've been out here with a new coin release, and i have asked for a drum roll. and in all honesty, in the past, it's really just been nothing but hyperbole. but this time, i really would like a drum roll. i don't think i'm gonna get one, but i really think i should have one. this is, i think, the singular most important numismatic event certainly of the last quarter century, perhaps in my entire professional career, in terms of interest, in terms of
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