tv Options Action CNBC November 20, 2021 6:00am-6:30am EST
that tonight is his lucky night. if you go to south beach thinking you might get laid, i'll guarantee you you'll get screwed. [ chuckles ] -- captions by vitac -- welcome to friday and "options action. live from the nasdaq markets in times square i am courtney reagan in for melissa lee. here's what's coming up on the big show >> run away train? or not carter worth outlines an indication that the economy may keep chugging along on a straight track instead then the covid play that has powered through the stay home, go back to work, stay home, go back to work flip-flop mike plugs you in.
finally -- guy adame is back should check in on his favorite play from last time. it's time to risk less to make more "options action" starts right now. >> there are wildly divergent thoughts on our economic destiny lately carter worth is looking at one indication that the truth already lies literally somewhere in the middle. what do you have for us? i don't think we have carter's mic so we will hold on a second and get that settled out let me ask mike what you think about the action from today as we talk about the economic destiny and why the markets were so fixated on what was happening with the covid cases overseas in austria. why was that a concern for us here today >> obviously, one of the big thesis, i think, that we've seen for a strong market recovery all
of this time is that we were really going to come out of the back side of this. we had that in conjunction with very strong consumer data, very strong consumer checkbooks, and all of that, of course, has been supportive of the rising market. of course, when you start seeing concerns like that, that obviously things could begin to shut down again, that takes an important leg out of that stool. i think that's going to create concerns of volatility combine that with relatively high valuations, and that puts us in a relatively precarious position i'm not sure, necessarily, we need to extrapolate too much we need a little more data first. >> fair enough we've set the scene from what we saw there today. let's get back to carter i think we have the audio issue worked out carter, what is your play for us here what are we looking at when we're talking about looking at the middle >> that's right. this is similar to what was just examined with sort of small cap stocks let's look at a table or two and
some charts. what we know, of course, is that there was a lot of euphoria -- first slide shows this, right -- in the transportation average, the cyclical trade if you look how the dow jones transportation average did from the absolute low of covid, right, the 23rd of march, 2020, to its may 10th peak of 2021, 142% versus the xps. and look at the second slide this is the same circumstance as the market enthusiasm. the iyt that tracks the dow jones is down versus the spy, up 11%. let's look at the data points. the first is a chart of iyt, and it has stalled a great run-up and then a stall. now, many believe it's the pause that refreshes that's fine. some think it's the stall before the storm.
but here and now, actually, i think the trade is to bet it stays where it is. you can make a lot of money in the options market doing that. look at the next slide this is, again, a very well-defined range it's been persisting now for about six months let's drill down and look at even tighter this next slide shows you precisely the ranges that have been in effect 183, high. midpoint is 262. the final chart is bringing it all together what we know is you are talking about 3.5% to get to the high, 4% to get to the mid point i think we will be there between now and the end of the year. vacillating, gyrating, but making no progress the trick is to put on an options trade that can profit from a sideways period >> mike, help us make some money on what carter just laid out >> yeah. so, first, we ought to talk a
little bit fundamentally about iyt, the transportation sector, what it really is. first of all, 34% in terms of this entire index is the rails interestingly enough we are all well aware there have been significant challenges with the supply chain that presum bly is going to affect everybody involved in transportation one way or another the next 20% includes fedex and ups. obviously, we've seen rising fuel costs, rising oil costs that presents a headwind we have seen material labor challenges in terms of rising wages and shortages, especially on the trucking side all of those things, combined with the fact that this really isn't that far off of its all-time highs here, does suggest to me that you wouldn't expect to see a whole lot more to the upside. now, i know a trade on the options side that carter often favors is selling strangles. one of the things he was talking about earlier today was he sort
of sees this range between now and december somewhere between, call it 2.55 and 2.85. if you were selling a strangle, those would be the strikes you'd be inclined to sell. looking out to december, sell the 2.55 put, the 2.85 call. two things about selling premiums that are important to me one, generally, i'm looking to collect about 1% of the risk i am taking in premium that strangle right now would collect about 2.25 that is under the 1% i would look at. the other thing is that generally speaking i don't like to sell naked upside, a naked upside call. i think, instead, one could contemplate selling an upside call spread and selling a downside put by doing so, you limit that upside risk, and, you know, you can still obviously have a risk but you have the downside put to
you, but you're going to be collecting -- actually, when i was looking at this, i was looking specifically at the 2.60, 2.80, 2.85 you collect nearly $3, more than 1% of the downside risk. it doesn't have unlimited risk to the upside in case it breaks out. >> guy, what is your take on the iyt? >> it's interesting. these guys did a wonderful job as a technician, this is cbw's world, but i think he looks at this and says you have a major double top you had a huge move spot spring. iyt made an all-time high around 2.80 subsequent sell-off. wetraded right back up i'm not saying we failed yet, but it looks like we're rolling over a bit mike nailed it in terms of two of these names, union pacific and cfx, are 27% of this index in between the two of them is close to 17%, ups. i mention that because the ups chart and iyt chart are virtually identical.
a bit of a double chop how do i play that i look at federal express and say, wait a second this stock is underperformed it's only 4% of this iyt index, but my valuation alone, this becomes compelling you put a 15 multiple on the $22 you are going to earn, and you are talking about a $330 stock i am not saying it will get there tomorrow, but i don't think it should be $245 either i think ups can break down, but i think fedex can get off the matt a bit that's how i'd look at this and play it. >> okay. you're looking at the iyt, but also you're looking at fedex and ups. carter, when you are thinking about the transport group, what do you make of some of guys thoughts on the technical side of ups, fedex, and what those charts look like >> they diverge. ups is a bigger business and better performer yet the spread is wide enough that betting on the
underperformer, which often is betting on poor relative strength, which can be treacherous, sometimes it gets such a spread that you want to do it. i think it's a good move >> mike, what about you? what do you make of the divergence between ups and fedex? >> what is interesting you can use a structure in both ups and fedex that plays o carter's thesis and guy's too which i would suggest indicate selling an upside call spread in ups and maybe cash inputs on fedex. this is a way to collect some premium and bet on basically some compression between the spread and these two companies >> interesting moves and names we'll be focused on very closely in the next couple of months as we watch the global supply chain and shipping all of our gifts. for every "options action," check out our website. while there, sign up for our newsletter here's what's coming up next >> 'tis the season for emergency backup power, bad weather, covid, whatever it may be.
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welcome back 'options action. 'tis the season for power outages and being inside mike khouw is looking for a way to leave the lights on in your portfolio. hey, mike. >> we are looking at generac it's a large cap name. we frequently end up talking only about the megacap names $28 billion company that is actually a popular pick in the hedge fund community, on the street generally i mean, this is a name that's well loved by the street right now, the average price target is probably about 20% higher than it is, and there is a good reason for that it's seen exceptional top-line growth this year, looking at maybe 48% top-line growth. close to 30% last year full year 2022, probably looking at just under 30% growth so this is one of those names that might fly under the radar if what you're usually looking
at is the microsofts, alphabets and amazons of the world something i wanted to get into, because i know we've used some structures consistently on this show recently because of where implied volatility is, and, specifically, i'm talking about call spread risk reversals, this is a situation when we buy an upside call spread and sell a downside put this is a good structure in this name as well i wanted to talk about why this is why not buy the upside call spread if we were to buy an upside call spread, the stock has to go above the call strike by at least the amount of money that you pay. before you see profits, you will see losses at any number below that if you sell a downside put, financing the purchase of the call spread, if you can get it to pay for all or cover more than the premium of the call spread, then essentially, you're going to either see profits if
it rises or not see losses unless it falls below the put strike in this case, if you were just going to buy -- and i think i was looking specifically at the 3.80, 4.50, call spread, the stock has to rise 5% there is a 31% probability of profit out to february if you did that trade if, instead, you also sell the downside put, you'll be able to put that trade on for just about even that downside put is nearly 13% lower than the current stock price. so for one thing you will see profits on a lower level than if you bought the call spread because you don't have to offset the premium spend. and also you're only going to see losses if the stock falls more than 13% from the current stock price. this means something else, too it means by doing this trade, you actually are risking less money than you would if you purchased the stock.
there must be a tradeoff there is the tradeoff is since you're owning a call spread rather than simply owning the stock, your upside is limited. what does this offer us? it offers us basically less downside risk. basically, as long as the stock stays within 13% for the downside, we're not going to see losses as of february expiration it is also possible that implied volatility sucks a little bit out of those wing options, and we could take profits a little bit sooner i think this is a way to tackle a name i don't think we've discussed on the show before that has excellent top line growth but if you are concerned about a pullback this gives you a material buffer. >> carter, what do the charts tell you in generac? >> this is a beast, double the performance of microsoft let's look at a few charts what we know, and you will see this on the first chart, this, in the past year, has had four
draw downs greater than 15%. you see them on the screen down 20, down 16, down 15 down to 20. this looks, to my eyes, to be a normal correction, dip, drawdown, sell-off, decline, whatever you want to call it, and it looks to be an opportunity to add to or initiate longs this is the same one but includes the trend line that has been in effect the past two years. third of four charts this one just shows the trend line while we are not quite down to the trend line that's been in effect for two years, the final chart, just a one-year chart, shows we are on the trend line, in effect, for the past 12 months what do we know? generac had a high in november at 524, and it is here at 434. we think you get back to 500 in a 15% move like it on the long side for a bounce
>> guy, what is your take on generac? >> i love that this was brought up carter nailed it in terms of the chart. you have seen pullbacks. i go back to earnings release november 2nd when they came out slightly miss on eps, maybe a slight miss on revenue and the stock sold off people had concern about evaluation next years numbers, it doesn't make sense here's my pushback mike mentioned it. talking about revenue growth approaching 50%. you're talking about eps growth, probably 22%, 23%. you've seen the sell-off before. two analysts downgraded the stock after earnings bank of america and ups. both have $500 price targets on the name by the way, which is my want to say, the average price target, according to fact set, is 521. this sell-off to me, and i hate using the word, i typically don't, but it is a bit of an opportunity. i think mike and carter did a great job with generac.
>> that is your trade, mike, so last words >> people talk about valuation they look at companies and say it looks awfully expensive at 30 times earnings or 40 times earnings what matters is that multiple to growth generac is an example. maybe microsoft is these are trading at big multiples. they deserve to do so, though, because their earnings growth justifies them up next, looking back on guy's pick from last time he was on walantir we'll check it out back in two.
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to what we were doing in disney. out of the money december 31 calls, you collect about 65 cents for those when i was looking at it. material portion of the extrinsic you're paying for the january options. that offsets the decay obviously, you know, you could say to yourself, well, spending $1.80 in options premium on a $26 stock seems like a lot when you see how much this can move, you can recognize that, actually, that protection may well be worth it >> since then, big data has been a small problem. what do we do from here, mike? >> yeah, turns out that protection was well warranted because, of course, it got absolutely slayed after those numbers came out of course, we were risking less than 2 bucks on the $26 stock. about $1.85. there isn't a whole lot left to do with the trade. the short options are worthless. probably cover them for a penny. the longer dated calls, if you want to hang on to them, you're welcome to do that at this point, there is little
additional risk in doing so. we obviously were wise to use options instead of simply buying the stock outright >> guy, what do you make of palantir here? anything changed >> the price has been awful. mike nailed it good for mike for having the protection embedded in that. my bad for not realizing maybe the stock was too expensive. i still like it. you've seen downgrades since i've seen a couple $19 price targets on decelerating government and commercial contracts. i get it but their operating margins came in at close to 29% there was a lot to like. adjusted ebida much better than expected. revenue beat i think what people are concerned about are valuation and the potential slowdown what people are missing is the fact that they have a couple aces up their sleeve i think one in the form of this bitcoin security which is not being talked about enough in my opinion. my bad totally i think it was a $26 stock around that time $21 and change now
maybe it gets to the $19 level i hope it doesn't, but i still think palantir is a name you want to be in. >> fair enough up next, your tweets and the final call already stick with us. we'll be right back. when traders tell us how to make thinkorswim even better, we listen. like jack. he wanted a streamlined version he could access anywhere, no download necessary. and kim. she wanted to execute a pre-set trade strategy in seconds. so we gave 'em thinkorswim web. because platforms this innovative, aren't just made for traders - they're made by them. thinkorswim trading. from td ameritrade. (music) meet honeywell forge.
♪♪ welcome back to "options action." time for your tweets. our first viewer asks, colossal call buying in amazon, including who purchases of next week's call for more than 32 $$32 mill. what does my favorite t shrks s -- tv show think about this what is your tackle? >> apparently his or her favorite tv show is "options action." mine, as well. we talked about it on "fast money" earlier the stock was on fire. the price action concerns me we had it high before and similarly it failed. wasn't big volume. i like the name, but the price action concerns me you heard some of the bigger hedge funds trimming their
positions. like the name. i think call buying helped i think the rivian news helped and i think people were looking for stocks that had underperformed and they found amazon take a look at today's price action, and i think you'll find it concerning. >> up about 4.5% this week one more tweet how about bitcoin? looking ahead, they say, it is an inflation hedge but goes down at a risinginflation conditions what are your thoughts on coin options? carter, what do you make of coin based and bitcoin in general here for our viewer? >> coin base general i would be long you can buy the jams for around 31 and sell at 17. stock goes up 10%. 75% gain in the options position i think you want to be long here >> carter, final call. what's yours >> transports for trade to nowhere. >> generac a bounce >> mike?
>> i like call spread risk reversals and generac. take advantage of the elevated options premium. >> guy >> i think tlt goes lower, yields go higher >> that does it for us "options action. we're off next friday, but we will be back necessary 3rd "mad money" starts now - [narrator] the following is a paid presentation for the premium mattress topper by dormeo, one of the fastest-growing sleep companies in the world. what's captured these people's attention? - wow! - oh my god. - wow. - that's it? - wow, i'm impressed. - oh, i never would have thought, never expected that. - it feels like it's a brand new mattress. - yeah. - [narrator] it's not a new mattress that's creating this reaction, they're lying on the same old mattress they've had for years. it's time for you to discover the premium mattress topper by dormeo. we believe it's the world's most comfortable mattress topper.