Transcripts For CNBC Options Action 20161210

Lets get right to it, because tech has finally joined the trump rally. The nasdaq surging more than 3 this week to a record high. This as we saw big moves from tech titans, alphabet, microsoft, facebook, and apple. So is tech your best bet . And which stocks can go have been higher . Lets get in the money right now. Not a moment to spare. Dan . Those four stocks, we spend an awful lot of time talking about them. And oddly, over the last month, we have not been talking a whole heck a lot about them. But whats interesting there, when you look at amazon and facebook, they have not really participated. Theyre still down about 10 from their alltime highs. Possibly a valuation thing, possibly some of the issues in the quarter that they just reported like october. But the other two, the once that actually have very reasonable valuations, the apple and the alphabet have started to join the party. This week alone, lets talk about google here. Its up 5 . It had a really nice bounce off of what looks to be some support at 760. I think they have a fiveday chart. Look at this rally, this stock, its just joined the party, and apple did too. But this is very interesting. Theres a company thats expected to grow. Earnings next year, 19 . Trades at 19 times that expected earnings growth. Valuation wise, i dont know that apple seems like the same kind of story that alphabet does. Its a hardware company. We dont really know if their system is basically what the future holds. But for alphabet, it definitely is. Its a battle basically going on between oracle, amazon, microsoft, and alphabet competing in cloud space, for example. But this is where the future is at. And thats one of the few places that you can say, this is what the future holds. The weakness or underperformance, is it sincratic to google or something else. People have basically been trimming their amazon, facebook, google, and microsoft. Weve had 1,100 basis points of relative underperformance versus the bottom 250 in the s p. And now perhaps theres a little bit of money going back in there. But theres also this. Its almost directly correlated to your tax rate. The tax cuts not going to help them. Whats going to help, they have 84 billion in net cash. This is alphabet, okay . And that is certainly going to help them. They Just Announced a 7 billion buyback in october and they are now going to have this cash that they can go and do some stuff with. We know that the linkedin microsoft deal just closed. That was a 26 billion deal. Alphabet has never made a sizable deal. Maybe that happens in not chasing a late rally. This stock is trading exactly where it was five months ago. And trades at 12 times next years expected earnings. The stock just rallied. We had that oneweek chart here. I dont chase stocks that do that sort of thing. But i want to look out and target the next identifiable catalyst. Thats going to be q4 earnings, thats either going to come in late january or early february. I think you want to look to february expiration and use a risk reversal here. Thats going to give you some time to not just be naked long premium, and the stock could bang around a little bit between now and february. So today when the stock was trading about 805, you could sell one of the february 7th 60 puts and use the proceeds to buy one of the february 850 calls for 13. 50. It doesnt cost you anything. You make money above 850, that would be a new alltime high on february expiration, thats up about 5. 5 . The worstcase scenario, youll put the stock down at 760. We identified that as a Technical Support level. It bounced off twice over the last couple of months. Thats also down 5. 5 . But this straight strategy, if you have to get involved now, it gives you a little room to the downside, leverage to the upside. Youre not exactly chasing it here. And on a markettomarket basis, you will have losses. Higher toward the long call strikes, you will have gains. This is a value play. This stock has underperformed the market for the better part of a year. Theres that relative underperformance in opportunity, or is it a trap . And thats to be 760 being the recent low, im assuming thats basically while you were choosing that lower strike. Thats basically where it was just a few weeks ago. But look, the company is very cheap here. And 5 , one way or the other, doesnt really make that much of a difference. I will say that any strategy, though, that gets you long, this is one of the places you want to be long. Makes sense to me. Can i make one point . One point. Its really a big point, though. People talk about facebook. Theyre coming at em, right . 1. 7 billion users. Bob pec told us this after their earnings. Google has seven properties. When you think about the ability to monetize that and put some stuff together, i think thats a story in 2017. It seems like tech gained this week and not necessarily at the expense of the financials. Thats right. Maybe to this point, its been rotation. Coming out of here to go there. If its new money entering the market, you can get a real lift. But i think the issue is this. All of the things that you have just cited about google were also in effect a month ago. And the stocks been worse. The question is, is the underperformance at an end. But to get new highs, i dont know. Yeah, i think the burden of proof is on the bull. Okay. Turning now to the president elect. Donald trumps cabinet taking shape with a Common Thread among his picks. A Goldman Sachs resume. John harwood is in washington with the latest. Hey, john. Hey, melissa. Its san intriguing Common Thread when you think about all the times during the campaign that donald trump described himself as a populist on the side of the working person in the country, as somebody who was going to take on wall street. At one point in the campaign, he said that Hillary Clinton and ted cruz are both totally under the control of people at Goldman Sachs. Well, guess what . Gary cohn, the coo of Goldman Sachs, is slated to become the head of the National Economic council, actually becoming the third Goldman Sachs alum to hold that role. Bob ruben was the first under bill clinton. Steve friedman under george w. Bush. Now gary cohn. And when you look broadly across the administration, youve got gary cohn at the nec, steven mnuchin, goldman alum, as treasury secretary, and steve bannon, also goldman alum, as the chief white house strategist. Now, theres one cabinet post that has not been filled. Theres still a lot of mystery around it. And that is secretary of state, Rudy Giuliani is now out of the running. Donald trump put out a statement this afternoon saying that he respected Rudy Giulianis decision to stay in the private sector. He would have made a good cabinet secretary. He said he would call on him for advice as appropriate. But thats got to be a big disappointment for Rudy Giuliani, who put in so much work as a surrogate for donald trump in the campaign. Just like chris christie, who did the same, Rudy Giuliani is finding he is not getting the job that he wanted in this administration, guys. All right. John, thank. John harwood in d. C. For us. The trump rally has given Goldman Sachs a more than 30 boost since the election alone, but the chart master over here says the stock is priced to perfection. What are you looking at . 30 a month is a heck of a thing. And its not specific to almost goldman, its almost every other financial, in anticipation of what we know is going on at the long end of the curve or prospecti prospectively, fed activity. Lets rye to put this current move in perspective. A moving average, all it is is just that. It tries to smooth out price and you can use shortterm, longterm. What ive found over time that has a lot of efficacy is the 150Day Moving Average. Either way, lets look at the sheer angle of this. The issue is, is that sustainable . And its frankly almost so steep that its going back this way and youre not allowed to do that. Its got to go out to the right every day. Anyway, this is a chart with a 150Day Moving Average. Lets put this in perspective. Now lets do it going back a bit further. In fact, going back to the high of 2007. Were within a hairs breath of that. But how far above if we were to plot this and plot that and plot this and say, what is the actual percentage above or below trend right now . Well, heres a chart going back since the inception of data when they ipod. Now, Goldman Sachs has only been this far above its hundred Day Moving Average essentially twice. Once was 1999. Actually, it was march of 2000. That was the end of that. And the second time was coming off of the financial crisis low. This was in late 09, early 2010. Here we are now right at that thing. The issue is, an angle like that, an angle like that. Is that something, if youve owned it, god bless, or do you take money off. Or should someone take new money on monday and buy more . I dont think so. All right. Now im going to do a little bit of fundamentals and turn it over to mike. Just for fun, in 07, this stock is about to hit its alltime high. Its p e in 07 was 7. 2, and its p e is now twice that. Return on equity. This is the key thing. The ability to profit. 21 times, 7 times. The whole operating business is different. Its not as robust as it was. Price to sales, 1. 7, 2. 9. The angles steep. I think you let this go. If youve made money here, and if youve done a short selling book, i would try it on the short side. Do you want to let it go, mike . I do. This has been an extraordinary move. I have a hard time believing that any stock is really going to roll over between now and inauguration, right . So i think the way to play this is by selling an upside call spread. The one i was looking at is the january 240, 250 call spread. At the time, goldman was just under 240. The price might be a little higher on monday. Heres the thing, if the stock goes higher, the most youre going to risk is six bucks. But we would need to go straight through it and well through it. If it stays right here or declines, and i have a sense it could trade sideways through the inauguration, youre basically going to be paid, in the meantime. Im not interested in laying out premium to make sure well, heres one thing. Listen, this move is extraordinary. And i was looking at a consolidated 215 for a week, a couple weeks ago, ah, its going to roll over, and now its up another 10 or Something Like that. Its going to 250. Its going to make a new alltime high between now and inauguration. You dont come this far and not like the old saying is, you go to the prom and not prom queen or something but its who you are in the market. If one has the ability, dexterity, ie, implied, the moneys not that big or you can do options. But if youre sitting there in a major endowment but im saying this is the long trade do you have to . Or do you take some measures. Whether its through options or something. But just to stay blindly long with an angle like that, over time history shows thats lets assume it gets too big. Lets debate the parade. If it gets to alltime high at 250. Some time between now and the third week of january, are you inclined to run out and buy puts between now and christmas or between christmas and new years . I dont think the answer to that is yes. Weve talked about that, the likelihood well see a steep selloff, you need some kind of catalyst to make that happen. What would that possibly be . Look at how traders go for these big, round numbers and go for prior alltime highs. I think its a certainty its going to trade 250 between now and january 20th. So if youre going to sell that selling the upside call spread, its almost right there, right now. Were talking about, its got another seven bucks, eight bucks to go. Where do you think its going . Its really not about whether it goes down. Its ability to go much higher is very low. Got a question out there . Send us a tweet to optionsaction, and for everything options action, check out our website, options action. Cnbc. Com. And while youre there, check out our news letter. What are you waiting for . Heres whats coming up next. Look up in the sky its a bird its a plane now, its just the Dow Jones Industrial average. But if you missed the move, weve got names you can still buy. Well break it down. Plus, heres how it feels to own bonds. But if you lost money, relax. Weve got a way to get some of it back and well explain when options action returns. Hey nicole. Hey i just wanted to thank your support team for walking me through my First Options trade. We only do it for everyone gary. Well, i feel pretty smart. Well, were all about educating people on options strategies. Well, dont worry, i wont let this accomplishment go to my head. Im still the same old gary. Wait, you forgot your french dictionary. Oh, mucho gracias. Get help on options trading with thinkorswim, only at td ameritrade. Oh hey john, im connecting our brains so we can share our amazing trading knowledge. Thats a great idea, but why dont you just go to thinkorswims chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders . I know. Your brain told my brain before you told my face. Mmm, blueberry . Tap into the knowledge of other traders on thinkorswim. Only at td ameritrade. Welcome back to options action, as the major indices continue to make record highs, more and more stocks are continuing a higher rally. Dom is in the newsroom to explain. Lets focus on breadth, that major of range and scope rather than the air in and out of our lungs. One of the more positive signs is not only the upward direction of prices but how many stocks are rising in this tide. This chart shows the couplelytive advanced decline line for nyse traded stocks. Its a measure of breadth, it goes up when the net number of traded stocks goes up and vice ver versa. The upward trend shows there are more net gainers than decliners. And were getting other encouraging signs, as well, how many stocks are making new 52week high. We had around 112 of them in the s p 500 yesterday make new highs. Today there are 40 to make new highs, including record highs for consumerrelated stocks, like Darden Restaurants and transportation stocks like southwest airlines, alaska airlines, and u. P. S. As well. Melissa, that positive breadth is whats giving bulls that breath of fresh air. Can it stay that way . Thats the question. Have a great weekend. Out of all of these stocks setting up record highs, whats the one that has more room to run . Im actually taking a look at u. P. S. But first of all, were going to take a look at buying a call as a strategy. Youre obviously going to be bullish on the stocks. You might want to worry about downside risks. Secondly, the sock is trading at a higher than average valuation multiple. Youre hoping that the fundamentals pick up with the stock price. And finally, when the options prices are actually lower than average. Here we are, u. P. S. Trading very close to the 52week highs right now. Obviously, valuations, as well, looking pretty stressed here. You can take a look at where were trading probably 10 higher than we normally would. But interestingly, as all of this is going on, interest prices are not far off the lows of the year. Very simply, what we can do, take a look out to april. Thats four months away. We can buy the 120 calls, which are essentially at the money, for 1. 95. Thats less than 2 of the stock price. If the stock goes up a mere 2 , youre breaking even. Everything above that is gravy. But if it falls, youre risking a very small percentage of the stock price to make that bullish bet. What do you think of u. P. S. , that hit a new 52week high. Its in the context of this thing that lags but then comes back live. The dow theory was triggered, just finally getting back to where it was. Still a major laggard relative to the s p. Im not sure theres much difference between this chart and fedex, or some of the other names. Theyre all pretty stretched. Im a fader their margins are a little bit better. U. P. S. , fedex is their primary logistics competitor. This is a company a little bit caught over their skis. 2013 was bad. 2014, they had a lot of investment to make up for prior mistakes. Will 2016 actually be the time they mauk it all come together . Well see. But thats why you want to use a call to make a bullish bet. Its up 35 from its january lows. Its up 25 on the year. Its trading above a market multiple. To me, this is a company thats growing earnings and sales midsingle digits. Heres the best thing about this whole segment. Mike can look out to april, buy an active money call, have exposure above 1. 22 or Something Like that. Its 2 of the underlying stock price. Thats how you should be chasing things if you are in my camp where you think its just absolute insanity right here. Options are giving you the opportunity to do that. You dont want to litter your portfolio with that, though. You make a 2 upside bet, and you would have otherwise bought the stock. Dont do that, first and foremost. You buy this call, and lets say this thing falls 10 , falls 15 , youve lost 2 . Now you can actually sell a put right about where the thing was previously trading. Error . No, youre basically recollecting the premium and not going to have exposure to the stock, except a 15 discount to where its currently trading. That absolutely makes sense if you have a bullish view on it. Fair enough. Dan, obviously, does not. Still ahead, the bond bloodbath continuing ahead of next weeks big fed meeting. But if you lost some money, we have some ideas on how you can get that back. Well explain when options action returns. Guyhey nicole, happening here . This is my new alert system for whenever anything happens in the market. Kids a natural. But thinkorswim already lets you create custom alerts for all the things that are important to you. Shhh. Alerts on anything at all . Not only that, you can act on that opportunity with just one tap right from the alert. Wow, i guess we dont need the kid anymore. Custom alerts on thinkorswim. Only at td ameritrade. Hey nicole. Hey i just wanted to thank your support team for walking me through my First Options trade. We only do it for everyone gary. Well, i feel pretty smart. Well, were all about educating people on options strategies. Well, dont worry, i wont let this accomplishment go to my head. Im still the same old gary. Wait, you forgot your french dictionary. Oh, mucho gracias. Get help on options trading with thinkorswim, only at td ameritrade. Time for total recall. We take a look back at some of our open trades. Last week, carter made a bullish bet on potash. A rare circumstance only happened five times. The spread is extreme. And everyone loves this. And everyone hates this. I think im going to take the other side. Potash, i think a really simple way to handle this is to sell the january 18 puts. You could collect about 75 cents for that. The stock hit a 52week high today. Carter . What do you think . I guess with everybody else, maybe. Zbls true. But, anyway, longer term, you stay. I dont know what you think about the options at this point, but its a big bottoming out formation. Weve collected most of the money that we can. I think were still comfortable being short this probably for another week or so. To dans credit, he had say, why not buy a call, and it turns out with this sharp move, that probably would have been a better play. I think it would have been a much better play. This guy is saying this stock is going to explode. Dont sell a put. 10 in a week, it did explode. That was a great call. And a great call on your part switching now to the bond market, dan thought the tlt could move higher. Heres the trade, looking out to february, being a bit contrarian here, taking advantage of high option prices, i would look to sell the february 116 put. This is when the etf was trading about 122 and a quarter. And using the proceeds to buy the february 127 call. Now, as you know, dan, there is more than a 90 chance the fed is going to hike next week, what are you going to do . Listen, i think this trade is a loser right now. That february 116 put is about 250. Thats what your loss is in this position right now. Thats about 2. 5 of the underlying stock price here. The stock is down 5 . Thats one of the reasons why i thought the risk reversal strategy was a great way to play it. I think if you get a move back up in the texas tlt, a move lower in rates, then you can probably wiggle out of this. One of the great adages of markets is buy the rumor, sell the news. Its quite possible that move to 2. 5 already priced in. Up next, tweets and the final calls from the options pits. Hey gary, what are you doing . Oh hey john, im connecting our brains so we can share our amazing trading knowledge. Thats a great idea, but why dont you just go to thinkorswims chat rooms where you can share strategies, ideas, even actual trades with market professionals and thousands of other traders . I know. Your brain told my brain before you told my face. Mmm, blueberry . Tap into the knowledge of other traders on thinkorswim. Only at td ameritrade. Guyhey nicole, happening here . This is my new alert system for whenever anything happens in the market. Kids a natural. But thinkorswim already lets you create custom alerts for all the things that are important to you. Shhh. Alerts on anything at all . Not only that, you can act on that opportunity with just one tap right from the alert. Wow, i guess we dont need the kid anymore. Custom alerts on thinkorswim. Only at td ameritrade. Time to take a tweet. This first one comes courtesy hidden cash. Whats your thoughts on straddling major binary events. Brexit, u. S. Election, opec meeting. This is interesting, brexit and the election, we saw slightly elevated options premiums going into these events. But the outcome, if you got a surprise, turned out to be much larger than you expected. Youll be paying up to get those options, so just make sure youre doing so with an eye towards getting that surprise on how big a marketmoving event you think that should be. In this case, two very large ones. Time now for the final call. Last word from the options pits. Great on Goldman Sachs. Take profits or use the Options Strategy to get sort. If you think its going to go down or trade sideways, selling trade stocks is a good way to play. Google had this big run. Maybe look at february risk reversal. Looks like our time has expired. For more information, check out optionsactions. Msnbc. C optionsactions. Cnbc. Com. Dont go anywhere. Mad money with jim cramer starts right now. 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