tv Options Action CNBC April 11, 2015 6:00am-6:31am EDT
hey, we're back after a two-week break. mike, did you miss me? >> absolutely. >> that's the right answer. while they're getting ready for the show, here's what's coming up. hemlock holmes calling dick tracy. >> i read you, hemlock. >> that's one fancy watch, but could it be enough to lift apple to all-time highs? the answer will surprise you. plus, there's one mega cap tech name that's about to break out. want a hint? >> i am the architect. >> that's close, but we'll tell you what it is and how to make money. and it's a bull market no one is talking about. >> oil, that is, black gold. ♪ >> and it's about to bubble up a lot higher. we'll tell you how to cash in. the action starts right now. ♪
we're going to start off the show with a massive bet on volatility when the vix broke below $13. someone made a series of trades on the vix that are most profitable if the vix sees a super surge by june. was this a hedge or an outright bearish bet that markets could be in trouble? let's get in the money and find out and start off with the desk skeptic. who would that be? >> i think you could draw straws here. i think they're all the same size. but here's the thing, this trade was very interesting. i was looking out to june, and it was a scenario where the trader was closing out of some june calls but then also sold some out of the money june calls, then bought a lot more of the further june 23 called. and so, it does, to your point, if you do see a massive spike this trade could be a massive hedge against long equities. >> you know, this is a situation where i think this trader already had a hedge on. that was one of the partial we saw was that person closing it, and i think they were taking a slightly different view than the one they had before. before, they were saying i'm
willing to spend premium, i'm essentially buying puts on a big portfolio. instead, i think what they're doing is, you know what, maybe we're going to stay like this or we're going to get some bad news and get a big spike, kind of like we got in late summer 2011. that was a situation where we saw, you know, basically stable volatility and then a huge spike close to 40 on the vix. that kind of a move is a situation where a hedge like this would absolutely crush it. >> what we do know is that equilibrium isn't part of markets, but it does not last. we've been a very quiet and it's churning and something's got to give. so, the bulls think it's going to break out and it's very possible that it's stalled and rolled over, but either way, there should be a pickup in some sort of directional move, rather than this sideways stuff. >> so, you think there is going to be some volatility -- >> oh, there has to be something. because after periods with a perfect standoff, bulls and bears are matched up, somebody ultimately is in the ascendancy. >> and i think when we have a chart, when you look back over the last year, the first month of the first quarter, which also actually corresponds with earnings season over the last year, we've seen some volatility, downward volatility, on average in that first month
or five weeks or so, we've seen a decline of about 5%. so, to me, that does speak to fact -- there's the chart right there -- that investors get bulled up into corner ends. this is also lower left to upper right. so, we've had some really good price action during this period and it could be your quarter-end marking into earnings season where people are taking profit. >> we also have to take into consideration that most people think a rate hike is going to happen in june, and that's exactly -- i mean, that's what this trade lines up with. i mean, if you sort of overlay. >> well, i think one of two things is going it happen. either they expect a rate increase in june or they expect the market to anticipate a september hike, right? >> right. >> and either way, you're going to get the move in the markets to the downside and a spike in volatility. >> can we just be clear, this trader is short 180,000 of the june 17 calls -- >> how unusual is that? >> that's unusual. this is massive value. they're short 180,000 of the june 17 calls and long 382,000 of the june 23 called. like mike said before, if you do have the massive volatility spike, this trade's going to kill. but between 17 and 23, it
probably loses money. >> it's interesting you were talking about the rates. basically, the way utilities are acting, the way reits are acting, regional banks are sensitive to higher rates. the assumption is rates are going higher. >> okay, so, interesting. dan, you have a trade on the dow? >> yeah, this goes back to the kind of first five weeks of the first, you know, the period of the quarter that corresponds with earnings. you know, the dow jones industrial average is not something that you're going to hear the guys on this desk quote too often, and not too many institutional traders really look at it. but to me, i think the dow 30 is interesting because of the fact it is so heavy with large u.s. multinationals. and so, if you're looking for a vehicle that actually to trade the sentiment towards that group, i think the dia, that is the etf that tracks the dow, is really interesting. and i'm just going to say this, there's about five stocks on the dow that are powering. it's only up 1% on the year. when you look at some of them -- apple is obviously a big one -- unh has no overseas exposure, home depot has very little, pfizer is defensive. it's also acted really well. but then you have this whole group of stocks. obviously, the energy names have not done well this year, but you
have cat, a lot of industrial and that sort of stuff. it's not acting particularly well. so when you go into this q-1 reporting season, obviously, q-2 guidance is going to be key here. we know that the dollar has been amazingly strong and we know we've already had preannouncements from dow components like intel. to me, if you're looking for a hedge or large-cap multinationals, you can use the dia. options prices are very cheap. today i looked a month out. i looked at may expiration in the dia, and what it was $180.50, you could have bought the mid-$180, $170 put spread for $2.65, selling the may puts at 65 cents. between 178 and 180. you can lose up to two. you lose the full $2 above $180, but you have protection. looking at the dow jones industrial average, 18,000 seems like a really big level and 17,000, that is what you'd be targeting on the down side, that is the spot where it stopped in january. it seems like it's support. >> i feel like i don't know what's going on.
are we we talking about the dow? why did you choose the dow versus the s&p 500, if we're seeing the trades in the vix, which is the measure of the s&p 500. why not use -- >> i think the multinationals are the most vulnerable in the market, they're concentrated bets. >> you want the concentrated bet. >> yes, exactly. >> what's your take on the trade? >> multinationals will have more exposure. if we see rising rates in the united states, they're the ones that are going to face the dollar pressure that accompanies multinationals as the dollar strengthens versus other currencies. so, it would make sense when you look at it that way. one quick point is that this isn't the kind of trade you want to continuously roll because it's costing 1%, essentially, of the underlying in one month's time. and that's i think one of the things that the guy doing the vix trade was trying to avoid, structure trade where you didn't have to pay -- >> i guess the point is that if history repeats itself, as it has over the last four years, we could see a 3% to 5% downdraft, and this could be some very good cheap protection. >> carter. >> the dow's been held back by big financials. and in fact, goldman is now the biggest weight in the dow. we like goldman long side. we think that will contribute to it. >> interesting.
moving on to a well-known name that is quietly ready to break out. carter, what are you watching? >> i'm watching oracle. so, it is a large name, top 25 name in the market. and it's lagged its sector, it's lagged the market, and the presumption is, it's actually going to come to life. a comparative chart over the past year. of course we have the laggard here, oracle, which has lagged the s&p and worse, its own sector. so, a lot of catch-up if and as this trade is right. here's the long-term picture from the low. oracle quite the laggard. i want to show you a couple other pictures and then put this into perspective. this is our all-time peak, in march of 2000. and oracle is flirting with that right now. we're about $2 off that high. the principal here is a well-defined uptrend, an approach of a past top. i want to put the valuation in perspective, talk about the fundamentals here, just for fun.
these two levels, then, now. stock was $46. and here we are again brushing up against it. but look at this, 45 cents versus now, and of course, this. your multiple here and your multiple now. we're thinking it breaks out. so, here's your daily chart. this was your last earnings beat. it's a big move up with a gap. we've pulled back to the point from which we broke out right here, and nice wedge. we think up and out, and that will take you to and above the all-time high. so, we're thinking 50 bucks, $52. >> $50 or $52, so breakout to the upside. mike, what do you think? >> there's two things i would say about oracle. number one, revenues have not really been growing that fast, but this stock is relatively cheap. when you compare their earnings per share growth versus the market, it actually is not trading at an unseen multiple. that said, given the fact that
options prices are fairly low, i think the way to play a breakout at this point is not to try to chase a stock that has just rallied as much as oracle has. instead, i would just simply look out to september. you can buy the $45 strike calls for about $1.70. and i would point out that that price of $1.70 is actually at or below the mean level for prices of options in oracle. so, i think this is a cheap way to make a bullish bet on a breakout. but if it doesn't, you're not putting nearly as much money at risk. >> you see a breakout in oracle? >> well, listen, the consolidation has been really nice, but it's had actually two failed breakouts when you look at the results of the last two quarters. those two gaps you've seen, they've given them all back. to me, you have a stock here that is actually performing pretty decently in a nasdaq that's up 5%, you know? it's not gangbusters, but remember that intel, microsoft, two of its large-cap peers, are both down 10%. so, what i would caution here is that in their last quarterly results, they didn't kind of fly a red flag about overseas sales. they have a lot of dollar exposure. more than half their sales come from overseas. this could be coming to a theater near you.
if we see the dollar and euro at parody in the next few months, and these guys will not report again until june, i think investors are going to start to extrapolate that a bit and i think you have a stock that's probably range-bound. i'm not sure you see $50 over the next few months. >> so you don't like the trade. >> well, i -- >> let's not mince words, sam. >> i don't fundamentally like it. if you didn't tell me what it was or where the exposure was, i would say it's fantastic. >> play on prior highs. >> that's the point of the chart, because i don't know what they do and don't care. >> the first point, is if you see a down draft like in microsoft, 10%, that's not what you're risking on this trade. let's also assume that oracle tracks sideways. you have 30 days where you're essentially renting up side because these september calls are not go to decay that rapidly. got a question out there, tweet us @optionsaction, and check out optionsaction.cnbc.com for great articles, fabulous tutorials. and let me ask you something, what more could you want?
so, check it out. here's what's coming up next. is the apple watch too complicated to be a hit? >> you've got to have it up here to know how to start these things. >> we'll have a special report. and guess what the hottest trade is this month? >> plastics. >> it's not that, but it is taking traders by storm. we'll tell you how to cash in when "options action" returns. when the world moves, futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. all on thinkorswim. from td ameritrade. he♪oes charge!
apple debuted its highly apple debuted its highly anticipated apple watch and josh caught up with apple ceo tim cook. hey, josh. >> reporter: melissa, tim cook describing the launch to me in his words as incredible, says he's been looking at reports from all over the world, from germany to japan, said that the orders are going great. of course, i also had to ask him which watch he's wearing right now. here was his answer. >> i'm wearing the apple watch with stainless with the white floral lastimer band and i love it. i exercise in it and wear it most of the day, but i have a couple other bands, too, because i also like to change them out, but i'm wearing this one the most. >> reporter: now, under cook's leadership, apple has prospered. that stock is up nearly 140%. revenues have surged more than 80%. but a new challenge now, the first new product category for apple in five years. there has certainly been a lot
of hype and buzz about this product. you've seen celebrities like drake and pharrell wearing the watch, katy perry also wearing the watch, posting a photograph on instagram. but now the hype is over and it's up to consumers. analysts on the street have pretty tempered expectations. on average, they think apple ships 14 million units in 2015. that is a drop in the bucket, of course, compared to iphones, but bulls like piper's jean muskers think that within just a couple of years, apple watch could generate a full 10% of the company's total sales. melissa, back to you. >> all right, josh lipton, thanks so much. so, we've heard it all, and also, this happens to be a week in which apple got two downgrades in the stock. what did it do, if you had to guess? it was up 1.33% or so. so, what's the deal here? >> i felt like a real tool this morning at 9:00. >> and that's different how? >> well, it usually -- [ laughter ] -- starts later in the day when i feel like a tool. >> couldn't resist. >> but i was at my local apple
store west 14th street and i was the only one there 8:58. and they had about 50 salespeople, clapping all five of us in. >> five of you? >> yeah, i'm not lying. it really felt anticlimactic, and you couldn't walk out and buy it, either. to me, this is going to be a massive, massive category. i think like muster thinks, in ten years, it will be 10% of revenues, but wearables will be around for a very long time. i think they should have gone fuel band and reinvented that. like the tablet computer existed before the ipad, the smartphone existed before the iphone, but they just came out with this clunky, rubbery, goldy sort of thing and i don't think it will be massive option consideration. >> what do the charts say? >> apple's sort of north by northeast, very steadily, orderly. the thing is, this has gotten so big, but you know there are three sectors in the s&p that it's bigger than.
it's bigger than all 30 utilities in the s&p. all material sectors, dupont and monsanto. it's got its own sector, and right now, those who doubt it, it's not a profitable thing. i would just stay long. >> the fact that this stock actually responded reasonably well in face of those downgrades, but to me, it does look steady as she goes if you look back a year, but looking back two months it actually looks like it's going sideways from here. i think you could take advantage of the fact that the options premiums are relatively elevated for a stock that is essentially a big bucket of cash at the bottom of its balance sheet. and if you own the shares, i would seriously consider selling some covered called against it, because i think you're going to get to just collect that premium. >> yeah, i think it's important to note that you think about what the next catalyst is, earnings on april 27th, and hopefully, you're going to get some color about watch sales and the capital return, and these are all well known. but here's the thing, the options market is implying a 7% to 8% move between now and may 1st. when you think about it in market cap terms, we could probably fit a bunch of stocks. it's probably close to $70 billion in market cap. so, to mike's point, options
market is expecting movement. you may not get it. so, if you're long the stock, you could think about adding yields by selling calls. >> and if you're not long? >> you could sell cash-covered puts. >> and you're saying according to the charts, it looks like a buy still. >> think about how poor google has acted, microsoft, intel. in terms of supercap, very important tech names, this continues to perform and that's the principle of relative strength. just stick with winners. >> by the way, i don't think dan's a tool at all. >> no. most of the time she doesn't. >> to clarify that. right now i don't. coming up next, the hot trade no one is talking about. we'll tell you what it is and how to profit. plus, your tweets when "options action" returns. when the world moves, futures move first.
believe it or not, crude oil believe it or not, crude oil has entered a bull market, up 20% from its march low. and dan is taking a look at one name that should benefit. dan? >> it's exxon. and you know, i got thinking about exxon this week. we had this blockbuster deal where royal dutch bought the bg group, a $70 billion deal. when you think about exxon, it's down 7.5% on the year, down 18% from the 52-week and all-time highs made last summer and it's really trying to make a bottom here.
when you look at the chart, this is the year-to-date, it's been trading between $84 and $86 over the last month here. and crude oil has had this big move, so it's trying to stabilize. one thought by some oil investors is that maybe these guys spend themselves out of recession. maybe they could pick up some cheap assets while the commodity is lower. and i'm just going to make another point about exxon here. you know, this is the price of options, implied volatility. it's relatively low. it's been basing here as the stock's been basing. so, for those looking to make defined risk directional plays, the options market is one way to do it. so, today i looked at it when the stock was about $85.50. you could look out two months to june expiration. the june $85 calls were offered at $2.50, about 2.5% or give or take a little bit of the underlying stock price. you're going to have earnings on april 30th here. the stock on average over the last four quarters has moved about 2.5%, so you're risking about $2.50 over the next two months when oil's trying to stabilize to make a bullish bet on one of the premier names on the planet.
and if you do have a stabilization in crude or more m&a, this stock should benefit. >> what's your take? >> one of the things i would say everybody should think about is that the integrated oil companies at the end of the day are basically priced on their reserves. and if you take a look at how much oil has declined off of its highs, the integrated oil names have actually declined a lot less. so, i'm not exactly sure that there's huge value here. i do think, though, that oil may have stabilized a little bit. and some of the producers can be economic at these levels if the land drillers are willing to come down on price the way the offshore drilling has on the day rates. so, i actually think, you know, maybe we have found a little bit of a floor here for energy, but in terms of buying cheap assets, they're going to be competing against the blackstones of the world, kkr. private equity has raised a ton of money to buy these types of assets, so they've got other people to compete with if they're going to try to buy cheap energy resources now. >> i think carter's hands' palms get itchy when dan's drawing lines all over the charts. >> anybody can choose a price target fundamentally, anybody can go over there and draw their lines.
>> ooh! it's pick on dan night. >> but here's the thing, it's not nothing that exxon has been unable to bounce. meaning, the energy sector in the s&p is virtually unchanged on the year. exxon cannot get a bid. whether it's what you're talking about, of course, in terms of asset value, or the fact that the thing's just so big that it is unbuyable here almost because it's already owned by everyone, we would stay away from this. there are other stocks in energy that look more exciting. >> you know, i would add one other point here. sentiment has gotten really bad. this was a stock that has gone neck and neck with apple for the largest market cap company in the world. analysts have cut earnings estimates for 2015 in half. sales expectations have gone from $410 billion to $255 billion. so, sentiment's really low here. so, i guess the trade is simple. if you think the commodity is stabilizing and you think sentiment could turn, also remember, warren buffett closed out his entire 40 million share position in the thing. it could be setting up for a sentiment turn.
all right. coming up next, we are taking your tweets, so grab your phone, think nice thoughts and tweet us. back after this. when the world moves, futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. all on thinkorswim. from td ameritrade. time and sales data.
you'll bust your brain-box. all on thinkorswim. from td ameritrade let's take a tweet, shall we? let's take a tweet, shall we? frank asks, "is mike still short celg april 115 puts?" mike? >> we've got expiration rapidly approaching on those puts, so i'm still comfortable being short puts, but those ones are about to expire, so one of the things you could consider doing is actually rolling out to july, same strike, could collect 6 bucks. >> claudio asks "with the move in ge, would you trade this with options and how?" dan? >> we've detailed a lot of options activity. open interest has exploded. there's been a lot of institutional interest leading up to this event. so, this is a well-rumored sort
of thing. i suspect the stock probably consolidates a little here. i would be very surprised to see it go straight up, 20%. so, one thing i would think about doing, though, is if you do see it come in, obviously, you could buy some stock and maybe think about overwriting a little bit, just to add a little yield. this buyback is not going to get full gear any time soon. and i would expect once it does get into full gear for them to accelerate a bit of it, and that's probably what you want to get in front of. >> carter, are you bullish? >> it's such a massive reset. i mean, for an asset of this size, 350 million shares trading hands today and closing at the high, i think the momentum cars it higher sort of immediately. >> to what? >> close at $28.50? probably $31, $32. >> taking it to highs it hasn't seen since june 2008, well before the credit crisis. >> kind of amazing. >> this is a name, where if you're going to make a bullish bet, kind of like the other breakout stories being long calls. i may be taking the other side. >> here's the layup entry, $27. that's is level it gaaped to this morning. that's where you buy it. >> final call, carter? >> i think you've got to get yourself some oracle. well, that's it. buy some oracle. >> get some oracle, he says. >> the september $45 calls are a good way to make that bet
because you're basically renting upside, not taking all the risk. >> dan? >> how about this, if i see ge with a $27 handle, i buy it. >> our time has expired. i'm melissa lee. thank you for watching. see you next week for "options action" at 5:30 p.m. on a friday. "mad money" starts right now. >> announcer: the following paid program is sponsored by great healthworks. the opinions and views expressed are those of the program's sponsor and do not necessarily reflect the opinions and views of cnbc. the following is a paid advertisement for omega xl. >> my name's larry king. a few years ago, i had to have open-heart surgery. when i recovered, i established the larry king cardiac foundation to help people like me avoid heart problems with proper foods, medication, and a healthy lifestyle.