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tv   Options Action  CNBC  October 3, 2021 6:00am-6:30am EDT

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azing. thank you. okay, now i got to change my gloves. [ laughter ] welcome to friday and "options action" we have a big show coming your way. here's what's on tap >> announcer: the s&p ended september by breaking a seven-month win streak and posting its worst monthly performance since march of last year when something like that happens investors jettison two types of stocks, the first performers, the second, let's leave that to carter werth then sometimes things get so bad they're good tony hops back on a past
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favorite that's been taken for a rough ride and finally a promising new covid treatment has merck in the spotlight. but tonight it's also spotlight several important lessons about surprise market events and how you should treat them. professor khouw has the prescription it's time to risk less and make more "options action" starts right now. let's get right to it. stocks are rallying to kick off the first day of q4 following the market's worst first month of the year and the chart master says after a big flush like we had in september, investors habitually sell two types of stocks carter, what are they?
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>> sure. before we get to the charts, conceptually, not a type by sector or market cap or business, but by pattern, which is to say, stocks that are especially weak, preceding a selloff, they go down the most often, because people know in a way they shouldn't have been there, they're not working anyway, they're like, what am i doing? i've known this is wrong for a while and now it's really getting worse, there's no bid. at the exact opposite end is a stock that's quite extended. where the sentiment is, i've got a lot of money in this, i've made great gains, i know i've been overstaying my welcome. that second circumstance we're seeing right now in a lot of high flyers like costco, certain financials take a look at blackstone, bx. look at this table blackstone, bx, was $33 on the pandemic low and it hit $136. that's the best single financial performer in the entire sector from a pandemic low. and on a five-year table that you see there, the numbers are straightforward, compared to a broker like morgan stanley or an
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asset manager like t. rowe or credit card company like american express or traditional bank like j.p. morgan best performing five-year. let's look at a few charts here is a standard two-year chart. we have this as a log logarithmic scale. we have it at the covid low. what's important, you can see it clearly, presents itself, we have failed to the penty at the top of the upper channel, we're right at the midpoint. second chart do we stop at the midpoint or is the 150-day moving average where we're likely headed? i think that is what you see there. and that is my objective so, third chart, remove the parallel lines and look at the chart of bx with just the 150. that comes into play at around $100 we have 15% decline from here. stock is down 17 already when financials in the sector are only down 3. finally, look at the fifth chart.
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it's the same chart. it's with the 150 moving average going back 10, 12 years. this is one of the longest stretches in terms of magnitude without a checkback and duration we think there's more downside >> all right so mike, what's the trade on bx based on carter's charting >> yeah, so blackstone obviously one of the most well-known private equity companies founded by steve schwartzman and pete peterson, some time ago, obviously one of the most successful financial startups that we've ever seen they've really been operating very well. they've seen their fee related income grow consistently seen their assets under management grow consistently while a lot of financial
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companies have seen pressure on fees, on fee margins more specifically, you know, this is a company due to the nature of their alternative investing end, of course their diversification, that isn't seeing quite as much exposure to that that said, this is a company that has also benefitted from the accessibility of cheap debt from the increase in asset prices generally and most importantly, it has benefitted from basically an increase in its valuation multiple its historical valuation multiple is closer to 22 times earnings relative to the 27 it's trading right now. at its more historical multiple, that would put the stock right around $97 i think to play carter's technically bearish thesis right here, we could look out to december i was looking earlier at the
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115, $95 put spread. bear in mind, i was saying that it was historical valuation multiple that would put the stock around 97 bucks a share, i'm sort of targeting that on the downside that put spread would cost a little over 5, $5.15, mid- to mid, when i was looking at it earlier today, very close to 25% of the distance between the strikes which when we're looking at debit spreads, and this one is very tight, very close to at the money, the stock was under 116 bucks at the close, and we own the 115 put strike here. i think this is the way that you can make a bearish bet look, obviously if stocks get hit in between now and year's end, that would affect this. if we see rates rise, that of course is a fundamental headwind potentially for them i think there are a lot of reasons why it would be hard to
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believe they're going to go back to the prior highs and we want to take advantage, though, of options to essentially make a downside bid on the name >> tony, what's your take on the trade? >> yeah, so i agree with both. both on the technicals and the fundamentals if you look at the chart, we've seen the broken trend line, and not only have we broken the trend line, we've broken through some short-term moving averages. 50-day moving averages have been broken momentum is negative i think we're moving back to the 100 to 150-day moving average that carter referred to. and when you look at the business itself, fundamentally the business looks quite strong. we saw almost 20% growth in au last year. they're pretty much on pace for similar type growth for aum this year the valuations are what's concerning we've seen that 15% drop in the stock price over the past two weeks. i think that also has to do with the fact that interest rates have risen, and that's a headwind for this name when you look at the pullback that we've seen here over the past two weeks, implied volatilities are extremely rich on blackstone. that's why i think using a put spread like mike does, mike has going out to december, makes the most sense because he's able to use the put spread, the short 95 strike to offset some of the premium that he's paying for those at the money puts which are quite expensive and by going out to december he's also mitigating some of the short dated implied volatility we currently see here
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on blackstone. a news alert on rivian let's get to phil lebeau on the fast line with that. >> reporter: we have a filing from rivian for an initial public offering, melissa the importance of this cannot be understated or overstated, i should say, importance because rivian is, when you look at the electric vehicle startups, it is considered to be the one company that potentially could grow from idea phase all the way through to being a large automaker, at least as large as potentially what tesla is looking at nobody's saying that's actually going to happen but they have a number of strategic investors from amazon to ford and rj skiringe, the ceo and founder of rivian and who is widely viewed in the auto industry as one of the visions in terms of the
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potential for electric vehicles. so this ipo filing, long expected, it has now happened. we don't have other details in terms of exactly what's going to be coming out through the ipo. but this has been expected and it has now been filed. now we get to see what rivian can do as a publicly traded company once this is completed >> we get to see more information about the company, phil i'm wondering from your standpoint what's the biggest question you think investors and analysts would have at this point when it comes to rivian. >> reporter: really, the size of the market potentially beyond. we know that they are developing, building they've already started working on building electric delivery vans for amazon. and a lot of people say, that's great, that's your big backer
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there, and it should do well look, they have a couple of models coming up, the r1t, an electric truck, the r1s, an electric suv both of them, the people that i've talked with who have seen early versions of the r1t, give it very high marks and we will see first deliveries of those coming up later this year so i think the big question is going to be, okay, what do you see happening beyond the amazon customer relationship? and that's when you talk about the r1t and r1s and deliveries to the public. >> phil, thanks. phil lebeau with the news that rivian has filed for an ipo. mike, i'm wondering you know, is this a case -- we had a screen up of different ev makers or different companies that are trying to be ev makers is this a case where tesla will be sort of the register, the source of funds for rivian
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investment >> i don't think it would have to be necessarily. we've seen a little bit of appreciation, first of all, in the big u.s. oems, gm and ford i'm kind of hoping as a ford backer that that doesn't necessarily happen but, you know, tesla has a lot more going on than just vehicles and in terms of the size of the market, phil was just talking, for example, about amazon delivery vans. the vehicle market for electronic vehicles in the united states is as big as the vehicle market itself, frankly, because i think we can all agree that whether it is a commercial vehicle, an suv, a sports car, whatever, chances are, within the next decade, they're all going to be electric it's a big market opportunity. but tesla's market opportunity is a little more than just the things with wheels on them >> we've got a lot more ahead here on "options action. and don't forget, "options re fon what's happening right now. and thinkorswim trading™ is right there with you. to help you become a smarter investor.
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♪ ♪ welcome back to "options action." as we discussed last half hour, merck bouncing today after surprising the market with news of an effective covid treatment. the news also presents the opportunity for a special call to action on the action. professor khouw, why don't you explain. >> yeah, so we're going to take a look at selling covered calls. now, for people who haven't traded options, selling covered calls is the investment strategy -- and i'm making sure to call it an investment strategy rather than a trading strategy, that is very often the first option strategy that people will embark on.
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and that is selling calls against stock that you already own. and this is a situation where the stock's largely been moribund for the last two years. in fact was significantly higher this obviously created some significant upside we saw a big sharp upside move today. if you're selling covered calls against stock you own and you do this usually somewhat consistently to try to generate a little premium or additional income against the shares you own, there's a couple of things you want to bear in mind one of them is you want to watch out for potential cat lifts out for potential catalysts, because those are things that can move stocks around. obviously we had a catalyst in
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the news around this treatment for covid, but of course they also have earnings coming up at the last week of october that also can present an opportunity. this isn't a stock that typically moves that much on earnings but it can elevate options premium somewhat another thing to take a look at is that when you sell options, nearer dated options decay more rapidly than longer dated options do so when you're selling covered calls, try to keep it inside of 90 days, even 60, even 30 days sometimes if you can finally, remember what you're doing is you're trading yield for upside when you sell an upside call, you're giving somebody else the right to buy your shares from you, usually at a higher price so you want to make sure you're getting enough yield to justify giving away that upside. and also that the upside you're giving away is one you can live with you want to choose a strike where you're comfortable selling your shares. i was looking out to the november 87.5 calls. that you could sell against the stock which closed around 81.5 today. those closed just under $1.40. when i was looking at that today. what that would offer you is a stand still yield of about 15% which means that if the stock
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did nothing and you consistently sold premium of about that during for about that amount you would collect about 15% of the current stock price over the course of the year in premium. of course it will never work out exactly that way but i usually try to make sure i'm collecting enough premium that it justifies taking some equity risk and still gives me some upside participation. usually a minimum of about 1% per month. >> carter, you say today's move in merck illustrates exactly how price discovery works inform in what way >> that's right. so just think about the volume number of shares changing hands, 100 million shares largest day on record. how did that happen? because people took the matter casually no there are people who own it who when the news is released, had to figure out, wait a minute, should i add to this should i double it wait a minute, this is no good, i need to dump this. thousands of man-hours, as the expression goes, have gone into figuring out what's it worth
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and when the stock gaps up like that and sets a range, that's what price discovery rate is which is to say that markets are inefficient. but they're very efficient the day of a newsprint to get the stock to where it belongs. remember what happened on pfizer, when they announced their news, it gapped up like this and was dead flat, in fact sort of drifted for multiple sessions, weeks in fact, afterwards you have price discovery here. it's not random, but right to its 52-week high and stopped selling premium is the way to play >> all right we've got a news alert we want to get to out of d.c kayla tausche has the story. >> melissa, the biden administration's economic policy toward china will come into view beginning on monday when the u.s. trade representative gives a speech outlines her views and the conclusions from her agency's top to bottom review of china. i learned from sources familiar with the matter that in that speech, the u.s. trade representative will declare that china is not in compliance with the phase 1 trade deal that was signed in january 2020 under that deal, china had two
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years to buy $200 billion in additional u.s. goods over the course of each of those years. and china's purchases have fallen well below that target. what is unclear, melissa, is how exactly ustr is going to respond to that. in the text of the deal, if one of the parties is found to be out of compliance with the deal, that would open up for additional tariffs or additional actions taken by the other party. we know that the ambassador has been calling for consultations with beijing directly and with allies over that it will be a critical speech to watch especially as we near the end of that first two-year period, where china will need to make good on those purchases and now we know the administration will say officially in the most forceful way yet, it has not melissa. >> kayla, thank you. kayla tausche in washington for us up next, bringing a beat-up old favorite back into play, it's just like riding a bike we'll be right back.
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forged from decades of industrial experience and insights. meet honeywell forge. analytical software that connects assets and people to deliver a cybersecure record of your entire operation. so that everyone, in your boardroom and beyond, speaks the same language. honeywell forge. industrial grade software. welcome back to "options action." sometimes massive market flushes create opportunities that are so bad, they're good. tony is taking a spin on a past favorite tony, what's the name? >> the name here is peloton. and as you said, it's looking so bad that it looks good if we take a look at the chart of peloton, this is a stock that was $18 at a pandemic low. it rallied up to $170 in january of this year
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and so far it has pulled back 50% since that peak. this is really where it starts to approach some prior support here where it tested the $80 level just a few months ago. we're approaching that level and i think this is where it could potentially bounce but also when we take a look at the peloton chart relative to the market, it's also attesting a prior support, as carter would say, to the penny. this is really where i think peloton could see a bounce higher and if we look at the subscription business of peloton, it is extremely profitable, especially when you couple it with term rates that are under 1% and it's consistently held that for multiple years when you couple that with the fact that they've recently launched a lower priced bike, a new treadmill, and a new commercial business, this really allows them to start selling substantially more subscriptions in the next year or two. so as peloton has fallen so much over the past even just past three weeks or so, we've seen implied volatilities increase by a substantial amount to try to take advantage of that implied volatility i'm going out to november and i'm trading a call spread risk reversal where i'm selling the november $80 puts and i'm buying an 85-100 call spread with the proceeds of that short put
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and for viewers who may not be familiar with this particular strategy, you can think of it as two separate strategies, where i'm selling the november 80 puts for roughly $5 and i'm taking those $5 to buy the 85-100 call spread for roughly $5.30 net, net here i'm only spending 40 cents for this call spread risk reversal. it does have the obligation of buying the stock if peloton is below $80 by the november expiration but i effectively have an 85-100 call spread for virtually zero cost so if we start to see a substantial rally here, the max reward here is about 15 bucks if peloton is above 100 by the november expiration >> carter, what do you think of the chart and the trade? >> sure. so conceptually, think about it, it's the exact opposite of what we just did. uptrends, really good ones, have countertrend moves selloffs.
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>> sure. so conceptually, think about it, it's the exact opposite of what we just did. uptrends, really good ones, have countertrend moves selloffs they punctuate the up move downtrends have countertrend rallies. playing for rally here makes a lot of sense we're right at a well-defined low and that's exactly what tony's doing it. it doesn't mean you have to marry it, but i think you can trade it up next, we're taking your tweets back after this. 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 ♪
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♪♪ ♪♪ ♪♪ welcome back to "options action." we've got time for a tweet one viewer asks, i'm short fedex $250 puts expiring october 15th. i'm bullish in the low to medium term due to low pe but think buying an in the money leap and selling calls against it may be better than selling it at a loss any ideas, mike? >> actually she has some good ideas here we're going into a critically
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important time for fedex into the holiday season but coming off a relatively disappointing earnings we've seen quite a few of those, actually, from fed ex. i think buying long dated calls, but selling shorter dated ones to offset that decay and also to have a structure that mitigates your downside in case of further disappointment is the right way to play this name. >> carter, on the chart for fedex? >> it's pretty darn bad. >> tony, your thoughts tony >> oh, sorry the charts look quite terrible right now i think the issue is the fact that amazon is
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squeezing into their space and i think this is not -- this does not look well going into the holiday season for fedex >> yeah, mike, any sort of cautionary words when it comes to fedex or ups for that matter, since it's sort of in the same category, and facing the same challenges chart's a little better there though >> yeah, so i think that's definitely true. ups is looking a little bit stronger this is a name that has chronically disappointed me going into the season. we've seen a number of disappointing earnings results and so i definitely think her structure hedges bet downside. >> all right mad money 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


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