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tv   Options Action  CNBC  August 15, 2021 6:00am-6:30am EDT

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there's a marriage that's on the line. kevin: i try and keep emotion out of business. there is a lot of stuff going on that he's not mentioning right now. you're making absolutely no sense. somebody is not telling the truth. this is my final verdict. now get out there and keep growing this business.
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all stripes, out with their quarterly numbers and their guidance next week the rates or reopening pause, all are facing fresh headwinds and carter worth thinks that one may be destined for a new low. so to speak, i guess, carter. >> well, that's right, we're going to talk about low, the ticker, the name lowe's an let's get right to the charts. to the first of two comparative charts, the chart you're looking at is a two panel, the top is lowe's itself and the bottom is relative performance to the s.p.y., and what jumps out, and you can see it very clearly is that the stock has gone on to make new highs since basically september, october last year, but look at the relative in the
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lines i've drawn it's basically, in terms of performance, relative to the market, relative to other choices, it peaked ten months ago and it continues to struggle now look at the same chart, if you will, but instead of lowe' relative to the s.p.y., this is relative to the home builders etf xhb. in this case you see very clearly, as the stock has gone on to make new highs, look at th relative performance we are, in fact, toying with 52-week low relative performance. something's not right. home depot also very heavy don't like the name. let's look at the charts for lowe's itself. first chart. a break in trend, and see the trend line and the break, you can see all breaks do all breaks net out as lower prices, no, but that's the bet that i think you make. the second chart, where might lowe's go? there's support at the 180 level, the stock is 190 right now. so put the last two charts
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together, final chart, this shows the break in trend and it shows where support comes in to play at 108. we closed at 190, we think you have a clear ten-point down move ahead, likely in response to an earnings report that is light or in some way disappointing. >> yeah, look at that chart there. okay so mike, i mean, it really hasn't done a whole lot in about a year's time how, if at all, are you trading lowe's right now anyp with so, you know, it's interesting, we're talking about the price action on the stock versus the fundamentals of the stock because on the fundamentals side they've done quite lot, actually. if you take a look at full year eps for fiscal year 2019, we were looking at a company that was making about $5.76 a share full year 2020 last year, during the pandemic, they grew that eps by approximately 60% and right now the street's expecting full-year eps to grow this year and next
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year as well right now, it's trading round about 18 times forward earnings, maybe slightly under it's trading at a discount to the market that said, one of the things carter pointed to was the fact it's underperforming the home builders that's interesting, of course, because part of what propelled these companies to the heights that we saw was the fact that there was a lot more people doing home improvements. and lowe's, this is more true than home depot because home depot gets roughly 40% of their sales from contractors, and the like, professionals. their sales per square foot, lowe's tends to lag home depot home depot appears to be the better operator, although i will say from a fundamental point both of these companies have done exceptionally well in the past if we're looking at technicals and think we might be looking at weakness and looking into earnings next week, the options market implying a move of about 4.6% that's a larger move actually than it's averaged ove the last eight quarters. one way you could either hedge
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if you're long this stock or take an outright bearish bet if you're so inclined, look out to october. i was looking at the 190 165 put spread now, the reason i was using a put spread here is because the implied volatility, that is the price of options on lows is actually relatively high compared to the realized volatility that put spread run i was looking at earlier today was round about $6 frequent viewers will know, but we might as well remind everybody, that oftentimes whe we're looking at debit spreads we're looking for payoffs in the neighborhoods of 3-1 or better so on a $25 wide put spread, spending about $6 makes that math work for us, and also notice that we're spending relatively small amount of the share price so $6 versus $190 share price, that's essentially the total risk you're taking in the event that lowe's finishes above that $190 strike price by october expiration but, of course, if it dips below that, before then, you could take your profits
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early as well. >> good stuff there. tony, your take on mike's trade on lowe's? >> yeah, so if you look at consumer spending in the home improvement category, we've seen a deceleration here over the past couple months, but it remains fairly elevated. i expect home depot and lowe's to put up strong numbers here next week. as mike said, lowe's is trading at a pretty reasonable valuation, about 17 times next year's earnings and they are doing better as an operator, they're doing better in terms of online digital sales in terms of margin expansion, but the on thing you cannot get away from, which is what carter showed you, is the underperformance of the stock relative to the market, relative to the sector, and relative to its peer group here in home depot. for those reasons i do like this trade that mike is taking, which is limiting his risk to just about 3.3% of the stock's value to take a bearish bet using a put debit spread the one thing i will add is because our expectation on this particular trade is a fairly short holding period, you can
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just think about buying the outright october 190 puts without selling the 165 puts against it it will only cost you a little bit more, about a dollar and a half more to buy those october 190 puts for about $7.50 that's still only risking 4% of the underlying stock's value if you do get a significant move to the downside quickly, you'll take profits fairly quickly on that and have a higher return on the outright puts versus a debit spread that's a minor adjustment you could make depending on your views of how fast you think lowe's will drop on earnings. >> all right, tony and mike, thank you very much. all right, so let's stay kind of with the consumer retail theme, but from the other side and that is consumer spending with the double whammy of a consumer slowdown, and business travel potentially slowing down, tony zang is expressing concern about american express stock what are you seeing, tony, and what might be a trade around amex >> yeah, exactly
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right now what i'm concerned about is the valuations around american express which was justified based on the fast growth we've seen first half of the year, but as we star to see consumer sentiments sour and as we start to see travel slow down here, that's the concerns i see if we look at the chart here for american express, first half of the year, extremely strong and the stock price reflects that, up 37%, year to date, and if you look at the charts, it's a strong, steady up trend, but today we saw a break of that trend line and i think that's a potential signal for weakness to come going forward into the second half. but more importantly, you know, as a sign of what's to see next, here is a relative performance of american express to its sector, the financials we have recently seen the give back all of its outperformance and some more that we've seen, here since june. and if we look at the business itself, it's currently trading at about 18 times next year's earnings, that's about a 33% premium to its five-year average
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and even if you apply the highest multiple we've seen since prior to covid at 16 times, that's still going to imply a stock price of about $150 and that's where i think american express is headed going into the second half of this year so the trade structure that i'm going to use is very similar to mike's, one for lowe's, but i'm going to use it in the money debit spread here, i'm going out to october and i'm buying the 170, 155 put spread here, spending about $9 for the october 170s, and then collecting about $2.94, or just under $3 for those october 155s, net/net here, i'm paying about $6 for this debit spread but this is a debit spread that's about roughly $4 in the money already. the stock only has to move about 1% lower before this strategy is profitable i'm doing that because i don't have a catalyst event on the horizon the same way he does for lowe's i'm expecting more of a slower move here to the downside, and an in the money debit spread in
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my opinion is a better way to play that. >> only a 1% move there, you don't need a lot of action you're not going to retire on that trade, mike, but you also don't need a big move as well. do you like the trade? would you tweak it in any way? >> yeah, so i think one of the things, and tony has done this, i think, fairly well in the number of instances, you know, we tend to think about trading options that are out of the money oftentimes when we're placing directional bets around catalysts. of course, when you're trading on money that's at the money, that's going to have the most extrinsic premium, that's how much decay the option can give away between the day that you trade it and the day that it expires. and when you use in the money options or far out of the money options, the extrinsic premium is going to tend to be less. he's using one of each in this case, the out of the money option in this case is helping to offset some of the decay that you will experience and in total between now and october, that's just $2, which is relatively small percentage of the stock price. you know, this is basically one
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of those situations where you're going to also improve your probability of profit, why is that it's because the break even, where this trade will begin to make money, if american express begins to decline, will be closer to its current share price than if you choose out of the money options to do your trades i think it's appropriate when you consider that he is not identifying a specific catalyst that's likely to move the stock very sharply when you consider the fact that the stock, although it's trading at a relatively high value relative to its history, isn't overly expensive relative to the rest of the market. it's a way you can commit a small percentage of the stock price to make a bearish bet and risk far less than you would if you consider shorting the stock which carries unlimited risk. >> mike and tony, thank you very much a look at amex there. for everything options action, you know, check out the website, while you're there, sign up for the newsletter while you're poking around, and in the meantime, here's what's coming up next.
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>> coming up, the professor' twist on game theory, a big move on the institutional only chess board. but there's a way to simulate it even if you're stuck playing checkers the home team will tackle that one, and checkers is more fun anyway. plus, calling all "options action" fans, reach into your pocket, grab your phone, and tweet us your question @optionsaction 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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♪ welcome back to "options action." hope you're having a great friday wherever you may be well, there is some unusua activity on the institutional side of the options playing field, but mike khouw can coach on how long to play the long side mike, what are you seeing happening now? >> so -- and i don't think i'm the only one that was seeing it and obviously there's a lot of institutional activity in the product we're going to be talking about, and the product we're going to be talking about is euro/dollar futures and fo viewers who are not familiar, what are euro/dollars, we're not talking about the euro currency dollars, but what we're actually referring to are dollar deposits held in banks overseas
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euro/dollar futures are used b institutional market participants generally to speculate on what the short-term rates on those deposits are likely to be over the course of this week and a little bit of last week, we've seen a lot of interesting flows going on there right now, and it's important to understand that when with the euro/dollar future go up, kind of like a bond price, that's usually a bet that the interest rates are going to fall for the relevant period what was the activity that we were seeing? so there's going to be two expirations we're talking about here, the march 2022, 99.5 call strike on the march 2025 euro/dollar futures. a lot to unpack there, but really what's going on is, somebody is going out and buying upside in that march 2025 future but, of course, because th options they're using expire in march of next year, they're expecting this move to happen some time between now and then and essentially what we can read into this is that while
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throughout much of this year there's been a lot of gnashing of teeth and speculation that the economy could potentially overheat as a result of a large fiscal stimulus package in addition to easy monetary policy betting on these eurodollar futures is actually speculating that rates could be lower for longer and that could be a potential tail hedge. in any event, it would be a be that rates would not be rising and that obviously is expressing some concern. >> all right some concern there carter, do you have any concerns, any supporting evidence that you are seeing about this in the charts >> well, what i have actually is the same chart we just looked at, and let's look at it begin -- again we know that in many instances, key levels can be identified and what we're looking at here is the ten-year treasury note futures and, therefore, we're looking at the yield of that instrument and what we know, and there's
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sort of no way around this, is that each and every instance where we've come to the top or bottom of the channel, this being the channel since rates declined from 1.77 we've responded to it, and so the thinking here is that rates are going to drift lower, and that's against consensus, which remains that rates will go higher. we are not in that camp. >> carter worth, carter, thank you. look at that chart on rates, truly remarkable most people said 2% by the end of the year. not sure if we're going to get there. it would be a heck of a move if we did tony, mike and carter explained what is happening on the pro-only institutional level, but you've got a way to kind of simulate this for maybe the less pro, you know, the retail options trader, or whatever it wants to be, how do you do it? >> that's exactly right, if we translate what mike said in the euro/dollar futures to the yield charts that carter showed
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you, let's take a look at tlt, a product that viewers can trade, which is going to be an inverse of the ten-year yield that carter just showed you. so if we look at a chart of tlt, recently we've seen this etf break out above $146, and just yesterday it came back to retest that level as support, just like the yield chart that carter showed you, the inverse of it, and it came off and bounced off of that level and i think that bond prices are headed higher here, just as yields are heading lower and i think the important part to remember as what mike said about the trade is it's more likely a tail hedge, it's more of like an insurance policy rather than an outright bullish bet here on bonds. so the trade structure that i'm going to use is reflecting not necessarily a very strong bullish view on bonds, but a non-bearish one, if you will, so the trade structure i'm going to use here is by selling a put spread i'm going out to october 1st, weekly options, and i'm selling the 148-143 put vertical earlier today, i was able to
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collect $3.05 for the 148 puts, paying about $1.19 for the 143s. net/net here i'm collecting $1.82 for this put spread. since then tlt moved up by about 50 cents or so so for investors trading this on monday, you might want to look at adjusting your strike prices 50 cents higher to the 148.5 and 143.5. but here i'm collecting a little over 33% o the width and trying to collect on the implied volatilities which we're currently seeing on tlt, which are fairly elevated. >> mike? okay, by the way, that may be the banner of the week, tlt-a-whirl, i don't know if you saw that tlt whirl, whoever back in engelwood cliffs, nailed it. what's your take on the trade itself, mike, not the banner. >> yeah, so what's interesting here for us is this is a way you
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can make a bullish stance on tlt while doing two things and i think both make a lot of sense here one of them is by selling this spread, one of the things that he's going to be able to do is essentially collect premium over time if you own bonds, one of the things you like to do is clip coupons, and effectively that's one of the things that this trade can do the other thing, though, is that rather than simply going out and buying tlt, when you sell a debit put spread on an instrument your losses are capped at the distance between the two strikes, which i think was $5 in this case. less the premium that you're collecting or about $1.80 so he's risking about $3.20 per share of the tlt etf, obviously less than you would be risking if you just went out and bought tlt outright given the thesis that carter was talking about, but also just taking a look at the trade structure, i think this is a trade that makes a lot of sense, given what we've discussed. >> all right, mike, thank you very much. all right, up next, we are answering some of your tweet questions. and while you wait, though, check out our podcast.
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"options action" will be back in two minutes. 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. ♪♪
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welcome back time now to take some of your tweets here we go, our first viewer has a question for tony. get ready, tony. your mohaw industries play from july 1st is nicely profitable, but with a week to go, what percentage of the max profit would be a reasonable exit? >> yeah, so this is a trade that took quite a while to come back around, but we did in the last week here. the general rule o thumb here is we want to start taking profits off the table once we've made about 75% to 100% of the premium we've paid so far this trade is up about 71%. we're just shy of that threshold. but because we only have one week left to go, i think it's time to take some profits early next week and move on to the next trade >> all right our next viewe asks this, what do you think about micron for the next two to three months micron to mike.
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>> yeah, you know, it's -- this is a tough one right here, anybody who is following micron knows that it had a very bad week despite the fact that you would think this is a company that had tail winds and looks like it's trading relatively cheap valuation. i would point out that in addition to morgan stanley downgrading the stock we also saw a lot of bearish activity. both institutional and retail on this name and a couple others in the space including western digital and ewt, the taiwan etf whose largest constituent is taiwan semi, it should be said, so it seems on a fundamental basis there would be reason to like the stock here but somehow the street and retail investors don't seem to it's probably a better question suited to carter, but i can't get behind it. unless we look at that support level, which looks a little bit lower to me. >> okay. well we have a question for carter on something -- actually, carter, you want to comment on micron very quickly? >> yeah, it's terrible. >> there you go. >> was that quick? >> that's it perfect, that does it for us
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here on "options action. i can't top that we'll be back next friday. 5:30 don't go anywhere, very special 6:00 p.m. hour of "fast money" coming up right after the break with kevin o'leary and many, many more. we'll see you there in a couple of minutes >> announcer: "options action" is sponsored by think or swim by td ameritrade. th 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 ♪ i know a thing or two about cars. and, sometimes, buying them can visit make you tight in the chest. but with carvana, i can finally breathe easy, buying my car 100% online without any tense negotiation. smells like the internet. shop now at
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