Who is out. Khouws house, not his house per se more like his housing stock. Mike drops the mic with one play its time to risk less and make more options action starts now. And lets get right to it, health care having a bit of a hangover this year up just 6 and the second worst performing sector of the year behind energy. Names like biogen. Centene. The space down double digits in the cross hairs of late as the 2020 president ial election draws closer but our chart master carter worth has a positive prognosis at the space and he is at the plasma he is not yet at the plasma. Not yet. Are you going there. Im waiting for permission. You have my permission. Banished from the desk. Thank you this has obviously been a dud. Whats interesting is it was a year of risk off in highly defensive areas of the market, specifically utilities, reits, staples winning. Health care is the other area thats defensive but offensive in which i think at this point its a hedge you win, tails you win. Lets talk about it. So since data is available back in 1989, this is a chart showing health cares weight as a percentage of s p its been higher, 16. 5 and obviously its been lower right now at 13. 5 the average is about 12 and my thinking here is that not necessarily depend on this but that there is surprise potential in health care lets look at a few charts so this is well just to show you this is how Important Health care is. With the exception of tech, the sector is the second biggest sector in terms of weighting in the s p. Whats remarkable is that its second biggest and yes its been the second worst in terms of performance. And well look at that in a bit. Here is the all data chart going back to 1989 and this is the relative performance to the s p. The top is the sector, the bottom is relative performance we have this circumstance obviously where the sector has continued to advance over the past three years but the relative performance to the market has been very, very poor. Now, at this point, though, im thinking we have the following circumstance were down to the relative trend line and im going to make the bet that we just just as we have in prior instances have bounced, bounced, bounced, that this is the point at which this relative performance comes to an end and health care is actually able to come to life in terms of the ability chart itself, what you see here a couple of lines, this is the chart over one year. And this is the opportunity. On a oneyear basis actually flat versus the market up ten. Now lets draw lines on the sector itself. This is the xlf. Here is the 5year chart and i think the way to draw the lines is as follows. Here comes the setup take a look. And what youve got here is you can call it an ascending wedge or triangle. But its all very precise. The levels are not random. And ultimately a lot of tension here im making the bet we are going to break out again an offensive defensive area of the market that perhaps will serve its purpose in any market environment from here the charts are very interesting, mike. Whats the trade you put on here. Yeah, so look at the Health Care Sector, its interesting. Because if we compare the sector to a lot of others and obviously we are very close to if not at the alltime highs in the market, a lot of that is coming obviously from some increased valuations we have seen higher multiples. Were not seeing that in health care actually health care multiples is looking at the Health Care Sector index what the etf is based on actually hit the zenith in 2015 and essentially going down ever since. Why is that because the Health Care Sector has seen Earnings Growth but not corresponding increase in prices here. We also dont see very high prices for options in xlv. We are talking about implied volatility for january options of 15 that puts that basically look where the vix closed closed today at about 14 and change this is a fair value trade to be able to buy optionality. I was just looking out to january. You could buy the 92 calls for 2. 60, round about 3 . Consider this. What do you think the chances are that overall this sector could move 3 or more between now and the third friday in january in thats how long we have to make this bet. I think the short answer is its very reasonable to assume it could move 3 and probably considerably more in either direction. In either case that makes this a reasonable way to basically limit the risk and play to the upside here. Karen, you have a thought here. I mean its interesting to me the idea of the relative strength if one didnt want to make a market bet it would look like you would say long the market, short equal weight of health care against for outperformance. No . No, i see im thinking at this point its such a relatively underperformer. Its been dragged down by big name j j struggling and the managed care stocks. Others fine. But the totality of it looks as though its had the threeyear underperformance at this point that is coming to an end thats my thinking id rather be long. Thats what im saying. I didnt get that at all. I agree. I agree. I agree with you. I agree with. Mike tie it off do you have a final thought. No, no thats it. Youve been validated youve been validated youre cool. Yeah. I mean we have j j was idiosyncratic issue we saw they had the bad news and the recall thats a bit of a headache the managed care space i think we understand. We have the Election Year fast approaching. This is in the cross hairs we could safely say but its priced as such. I think thats the important thing. This is an outperforming sector i cant think of another sector maybe technology is one before we move to the next thing thats as sprawly as this. It includes everything we have drugs in it. Its got the hospital stocks in it i want got the longterm care. Think about this. Managed care. Tech is speculative biotech to it most speculative of all its the most defensive speculative something for everybody. Really something. Lets move to the stock story of the day. That would be boeing taking a leg lower today. And shaving a big chunk off the dow. The faa saying boeing withheld quote concerning pilot messages about the safety of the 737 max jet but that didnt stop shares of American Airlines from taking off today. And as that stock gets ready to report its profits next week Karen Finerman says it hasnt quite reached cruising altitude yet. Whats the trade here. Im long the stock. But here is the option overlay which is a calendar. Looking at the jan 29 long the jan 29 call short with the october 25th expiration these are the weeklies that expired next friday after earnings and those look pumped up to me if we look at the volatility chart thank you that mike provided we can see how expensive the nearer term volatility is relative to longer i want to take advantage of that and be selling the shorter dated calls to be pumped up to be long the 29 calls they release earnings that are not great and the stock goes sideways to down thats fine. Those go away, the weeklies go away to zero and im left with the longer dated call for a stock that i want to own and we have some time. We have time to see how the market does. And i think that the collapse of the near dated ones we may still have value, more than we paid possibly for the longdated one even if the stock if you own the stock its a way to amplify profit. Exactly, not putting up a ton of money and if you dont own it and dont want to buy it i think its a cheap way to leg into it. Mike. I use calendar spreads all the time i like these kinds of trades its interesting we were talking about this before the show actually today american is implying a move of a little over 5 if you look at the last eight quarters you might say thats reasonable thats what we averaged part of that actually is because last quarter we had a big move and if you think about what the catalyst could be consider this, we have results first guidance and then results from delta. We had results from united all of the news that might be impactful as far as boeing is concerned, thats wellknown already. There is no surprise really likely to come from that area. And thats really the issue with calendar spreads are you expecting that some news could come out that would blindside the market or do we think its baked in and a lot it baked in thats why it makes a great deal of sense to collect the premium for the weekly which is maybe elevated at least as much as it should be. Carter you want to dip the oar in here. Independent of all the news and this is news related you have a circumstance this was perhaps the best performing stock along with caterpillar basically a four fold increase of 100 to 400 off the 2016 low the past three years its been biding times news notwithstanding i think ultimately the biding time is the setup. The rest before the next major up leg in the stock. So American Airlines youre long the stock, you like the long dated calls. Right long the stock also long delta as well. You know they had had somewhat disappointing earnings but i like the space and i want a little bit more invested in it without owning the stock. All right there is deltas chart and it was well up for the year and up to today everything options action check out the website options action. Cnbc. Com and check out the supercool newsletter here is whats coming up next. Announcer its been a sturdy week for the Home Builders but our mike khouw says one name in the space could get nailed when it reports earnings next week well tell you what it is and how to trade it. Plus calling all options action fans reach into your pocket, grab your phone and tweet us your question at options action. If its nice, well answer it on air, when options action returns. Options action is sponsored by think or swim by Td Ameritrade here, hello starts with hi mple. How can i help . A data plan for everyone. Everyone . Everyone. Lets send to everyone [ camera clicking ] wifi up there . Ahhh. Sure, why not . Howd he get out . a camera might figure it out. That was easy glad i could help. At xfinity, were here to make life simple. Easy. Awesome. So come ask, shop, discover at your xfinity store today. What do you look for when i want free access to research. Yep, Td Ameritrades got that. Free access to every platform. Mhm, yeah, that too. I dont want any trade minimums. Yeah, i totally agree, they dont have any of those. I want to know what im paying upfront. Yes, absolutely. Do you just say yes to everything . Hm. Well i say no to kale. Mm. Yeah, they say if you blanch it its better, but that seems like a lot of work. Now offering zero commissions on online trades. We charge you less so you have more to invest. And welcome back to options action. Where is that, thats chicago. A beautiful i love chicago, i got to say windy city a lot of options trade there in chicago. Im not sure which street that is anybody know. Lasalle, wacker. Man, chicago is nice this time of year back here at new york city it was a hot week for the Home Builders with the xhb etf that tracks the group up 4 closing out the best Weekly Performance since june names like lennar, d. R. Horton which i want to call dr. Horten and pulte group at fresh 52week highs. But mike khouw says one name in the space could get nailed when it reports earnings next week. Mike. Well, nailed. Thats a little bit harsh. Im not sure nailed is the way i put it well look at selling a call spread in pulte homes which is reporting. When you sell a call spread its not a bet that its going to crater its really more of the stock may hit a pause kind of a thing. So why we sell a call spread this is a way you can express a neutral to bearish view. Obviously its had a terrific run. This is also a situation where you look to collect premium. And this is a situation where going into earnings sometimes we see elevated options premiums and trying to collect that a nice thing like these out of the money credit spreads they tend to have a better than 50 probability of profit. And the reason for that as we are about to demonstrate is that you can have three things happen to a stock we can see here what happened with pulte my bet is we have had a strong run coming in here and that maybe we just hit the pause button on earnings and you know im going to also admit that its not a terrible environment for the Home Builders here we have 30year Mortgage Rates around 3. 5 thats a positive. But what you look to do here is bet its hitting the pause button and i sell the upside call spread specifically the call spread i was looking at was the november 3940 call spread today you can sell that and collect a credit of 35 cents 35 of the distance between the strikes. Now im just demonstrating quickly why the probability of profit is better than 50 50 on trades like this why . Because three things could happen after earnings. One is it could go higher thats not the bet im making but the other two things it could go sideways or lower and of the three things that could happen two good for the trade. Basically, if it stays below 39. 35 by november expiration this is a profitable trade the most im risking is the 65 cents. But actually if the stock does surprise to the upside and runs through 40 its not likely it goes to a dollar that might be representing at least in the shortterm more risk than is actually faced. These are the kinds of situations with elevated options premiums you are looking for ways to collect money. Calendar spreads like the one karen talked about is one way. Selling credit spreads is another. As you walk back to the desk im asking you a question here for viewers who may be turning in for the first time describe what you mean when you say a call spread. In other words there it was graphic. It was clear youre selling one and youre buying another is that the fundamental definition of it yeah, generally when we talk about spreads more often than not what were talking about is buying one option and selling another. On the same stock in the same this is a vertical spread but wouldnt have to be. The trade karen talked about is a calendar spread is a call spread in her case it was an october weekly call versus the january call on American Airlines. So that is also another form of a call spread. Typically when we spread it out in different expirations we call those calendars. In this case going up and down in the same expiration we call it vertical. Carter what about this. Looking at the group or the itb or xhb, the group recovered back to the well defined former top in each etf in january of 2018 this stock has blown through the highs. Its one of the most extended. I think you have downside to 35 plus or minus about 7 its the kind of thing where this is steep, uncorrected and asymmetrical could it eek out a point or two . Sure but you trade off the risk it would have a swift downrun. Even though bullish the space, the chart is. You said that earlier. The stock is up close to 50 for the year thats a little scary. Obviously mikes trade is a bearish to bent on it. It also is capped which is superimportant you know the most you could possibly lose, right is a buck and i think your scenario where even the stock goes up that spread doesnt immediately go to a dollar why would you pay a dollar for something that could only be worth a dollar on the last day you wont lose that buck. If we used weekly options and only had the opportunity to address that next friday, then of course its either in the money, out of the money somewhere in between but this one expires on the third friday of november so there is a time to address this in the event the stock moves sharply higher like i said im not suggesting the fundamentals for Home Builders are completely broken the stocks arent immensely expensive. But they have had a good run, dont typically trade at the same multiple for the rest of the mechanic for good reason. Its cyclical and shouldnt. It makes sense if you ever bet that something might fade the rally this is something to do that. Look at utility and reits also rate sensitive done well. Even staples but pulled back of late thats the nature of the uptrend you have the setbacks which are healthy allow it to reassert and go higher these the circumstances where a dip is likely. Karen you said offline you like the group homemade builder confidence was good earlier this week make the case why you like the group as a group. There are so many things actually rates are you know at alltime lows. Almost everyone buying a home they need some financing and people are employed. The home builder space we do see it does have some tariff repercussions because they do import a lot of things we use. A lot of materials. Materials right. Thats one thing that weighs on it but the macroenvironment is so good. And the space i mean, never recovered even remotely close to where it was in financial crisis. And theyre better managed business now than before the credit crisis by far. All right why dont we move on from here up next one of our traders is spying big gains in the market and well go deep undercover with that trade. Its friday and you know what that means tweet us the burning questions only burning ones at options action and you might get your answer on air. Dont change that dial because weve got more options action coming up. But when i started seeing things, i didnt know what was happening. So i kept it in. He started believing things that werent true. I knew something was wrong. But i didnt say a word. During the course of their disease around 50 of people with parkinsons may experience hallucinations or delusions. But now, doctors are prescribing nuplazid. The only fda approved medicine. Proven to significantly reduce hallucinations and delusions related to parkinsons. Dont take nuplazid if you are allergic to its ingredients. Nuplazid can increase the risk of death in elderly people with dementiarelated psychosis and is not for treating symptoms unrelated to parkinsons disease. Nuplazid can cause changes in heart rhythm and should not be taken if you have certain abnormal heart rhythms or take other drugs that are known to cause changes in heart rhythm. Tell your doctor about any changes in medicines youre taking. The most common side effects are swelling of the arms and legs and confusion. We spoke up and it made all the difference. Ask your parkinsons specialist about nuplazid. Quug and welcome back to options action. Its time to look back at one of our open trades. Two weeks ago mike told us he spied thats the hint gains ahead for the market despite the volatility that we saw this week, options premiums to me remain relatively low. You can actually spend less than 1 of the current price of spy to buy a call option, specifically i was looking at the 2. 95 calls 2. 70 is what you would spend to buy those. Well the spy up just about 2. 5 since that call and that is a good enough move for mike to escape the trade in the green by the skin of his teeth. Whats your next move. I mean if you put this trade on earlier this week the call worth about 4. 50. And some may have taken profits then if you carried to expiration today that means you own the stock that isnt something i want to do id rather own calls than spy here i think it would be wiser to unload that. Unload. And get out. You can buy longer dated calls theyre inexpensive. Up next your tweets and our or their final call. Well be right back. Announcer options action sponsored by think or swim by Td Ameritrade tunity. I see bestinclass platforms and education. I see awardwinning service, and a trade desk full of experts, available to answer your toughest questions. And i see it with zero commissions on online trades. I like what youre seeing. Its beautiful, isnt it . Yeah. Td ameritrade now offers zero commissions on online trades. Im not really a, i thought wall street guy. Ns. Whats the hesitation . Eh, it just feels too complicated, you know . Well sure, at first, but jj can help you with that. Jj, will you break it down for this gentleman . Hey, ian. You know, at Td Ameritrade, we can walk you through your options trades step by step until youre comfortable. I could be up for that. Thats taking options trading from wall st. To main st. Hey guys, wanna play some pool . Eh, im not really a pool guy. Whats the hesitation . Its just complicated. Stepbystep options trading support from Td Ameritrade welcome back to options action a few seconds before the final call tweets how would you trade apple into earnings. Id be long into earnings buy the 240 calls month end. They close at 236. There is pop potential. The next tweet, the riddle what was that street we saw in chicago . It was options action, michigan avenue. We thank eric for that, thats nice we appreciate that all right lets get the final call there it is options action view of michigan avenue. In the great midway. Carter final call. I Like Health Care here and i use xlv to express that view on the long side. Karen next. American airlines expressing bet for more jan 29 october weekly call spread. And mike the last word. I like selling credit spreads into pulte homes into earnings and i like calls on xlv. A very busy and interesting week, that does it for us here on options action. You can catch us back next friday at 5 30 in the meantime do not go anywhere because you know who is right around the corner. Mad money starts now [narrator] the following program is a paid advertisement for the nuwave bravo xl sponsored by nuwave, live well for less. Is all the clutter in your kitchen starting to look like an old junkyard . Sick of spending hours cooking, only to serve mediocre meals lacking in flavor . Wish your family would spend less time whining and more time dining . Well, now they can with the new bravo xl, the worlds First Digital smart oven with flavor infusion technology. 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