Or down . Or up . Professor khouw breaks it down, why rates could be in for a bumpy ride, and how to ride that out with options its time to risk less and make more options action starts right now. Lets get right to it Consumer Staples making a comeback from the march lows and now hovering close to alltime highs. Carry the says there is one stock despite the staple surge carter, what are you looking at . I thought wed target proctor here proctor is the biggest weighting we know in the sector, but its just a bit hot to my eye and lets try to figure it out together so first a simple table and you can see it there on your screen and this is just looking at the performance of the consumer staple sector versus proctor. The staple up 10 and proctor has doubled that up 24 on a twoyear basis, the sector is up 25 proctor is up 77 on a fiveyear basis, the sector is up 33 and proctor is up 93. Now lets look at a chart of that fiveyear comparative chart and you can see that there on your screen. So to be this ahead of your peers, meaning the sector is composed of names that we know coke and colgate and church and dwight and clorox and General Mills and proctor is so far ahead of its peers and of its sector that im thinking its right to harvest gains to take profits and do what one can to reduce exposure. So one last chart, it is a chart of proctor on a longer term basis and we know it had the strong advance in 18 and 19, and then you have the pandemic plunge and then, of course, this breakout and ive drawn a line along the top of where the stock broke out, but this move from 125 to 145 in a way has it leaves the stock too far above the pivot point and too far above the breakout point and the premise is to reduce the exposure to proctor, both absolute and its ahead of itself and relative to its peers just a bit too good. Mike, whats the tradeoff of this so proctor is an interesting case, of course, because one of the things that weve certainly seen is just in terms of the fundamentals the pandemic hasnt affected the company that negatively they sell a lot of grooming supplies and a lot of other things that they sell obviously have been in high demand in this environment and people like the stability of the company and the other is that in a yieldstarved environment, a dividend yield of 2 that yield is also attractive, but one of the things i would allow people to focus on right now is that a lot of that price appreciation has come because of valuation expansion. The multiple has increased right now its trading at 28 times trailing 27 times forward. These are tenyear highs and it hit a 52week high today although it didnt quite close on those high levels going into earnings, options premiums are slightly elevated and options premiums are elevated slightly generally and the election has something to do with that, as well what im looking at is the diagonal spread and you can pay 6 and a quarter of those when i was looking at them today and sell the november 140 puts at 2 1 4. Netnet, youd be spending 4. The idea is to collect the elevated premium that you would see in the neardata expirations and make a bearish bet. One of the things i would also ask people to consider this is not a stock that tends to move violently following earnings. Out of the last 44 reported quarter, there have only been two where the stock is down 10 and thats why im comfortable selling that 140 strike put. Were not vetting that it will collapse, and were looking for softness and then that also helps finance that longer dated put that i own, so if i do see further weakness in the space overall and in this stock specifically i would help finance that and this is the situation using a diagonal where if it does happen to overshoot to the down side ill have upside in my bearish trade. What do you think about the fundamental thesis in the trade and the trade structure . I completely agree. Even though Procter Gamble has a pretty strong history of consistently beating on earnings, if you look at year over year Revenue Growth its clocking in in the near Single Digits and its 5 to 6 and the stocks have 11 this quarter alone, so i certainly agree that its gotten ahead of itself and if you look at some chart, there are hallmarks of the recent breakout above 140 of the resistance level you are seeing momentum no longer confirming these highs and you have the higher probability of a pullback especially going into an earnings event like this as mike said, the implied volatility is very low and using this diagonal strategy is a great strategy because he can buy the january puts for relatively cheap, and i specifically like that the stock doesnt move a lot on earnings. And hes using the 140 earnings and hes using the 140 strike price thats 3. 5 out of the money and the stock moves 2. 5 after earnings over the past four quarters so i think that the strategy makes sense and the strategy is smart. Does the backdrop of the trade, mike, change as we see a rise in covid cases and potentially, you know, slowdowns around the world with more lockdown measures . Well, its interesting. Thats one of the things theyve talked about with proctor with closures and things like that. The biggest risk there is probably in the supply chain it isnt necessarily on the overall product. They have a wide array of products and some have been negatively affected by whats going on but others have been positively affected. Its probably one of the things that makes them most immune gons publicly traded company and whats going on. And really wha were doing here is were fading the aggressive move that weve seen to the upside and the aggressive valuation on a company thats conservative and grows steadily and not justifying valuation multiples at this point. Lets switch gears to another name that reports next week. That would be snapchat next weeks earnings could propel the stock even higher and hes got a way to play it on the cheap. Take it away yeah. So i want to take a look at trying to capture this acceleration of social media use ooze be snapchats earnings next week. If we take a look at the chart of snapchat, weve gotten a recent breakout of 26. 5, and you couple that with the strong relative strength weve seen with snapchat in comparison with the sector this puts snapchat into targeting 29. 5, which is the alltime high put in on the week of its ipo. And we can tag that level and potentially go higher on earnings. If we look at the user data, this is whats compelling for me if you look at sensor tower data for snapchat its clocking in 83 million downloads for q3 which is the third highest quarter its ever had with its ipo. So what this shows me is weve had a pretty strong turnaround in terms of user downloads because last quarter we saw a 13 year over year decline in terms of downloads and we saw a big turnaround of a 25 increase in year over year downloads and i think that will speak to a very strong user growth story for q3 which has been driving the Stock Performance after the earnings announcement. So if you look at the earnings itself, snap chat moves quite a bit, 12. 9 on average over the last four quarters. Im sorry 15. 8 over the last four quarters and the Options Market are currently implying a 12. 8 move. It moves quite a bit on earnings. The trade structure im trying to use is to use a call debit spread, and im buying the 2832 call debit spread going to november collecting about 95 cents, about half the value of the 28 call option for the 32 call option paying netnet here about 1. 25 which is 4. 5 of the underlying stock price, and im trying to capture a fairly sizeable move to the upside because i do expect snapchat numbers to be fairly strong. Do you like this trade, mike . Yeah. You know, its interesting he was talking about how much the stock moves. If you take a look at the reported quarters in the months following earnings this thing moves at an average of 18. 5 while we look at debit spreads into events like this and we think its expensive, limit the amount of money on a stock that experiences volatility like this is the way to expose yourself to the upside and limit your down side risk. I think thats what tonys trying to do here. Ill leave it to him if it makes sense whether or not to be bullish. But the trade makes sense. Carter, how does it look like snap this is a good instance, when it breaks to alltime highs it has unlimited potential. If we know, abnd we 0 do, that the stock ipo back in march, 2017, it was at 17 and it hit 29. In the last year and i half we have been climbing back, climbing back. We are basically right at the peak two days after the ipo and this puts you into blue sky, the concept of overhead supply represents shares above that when a stock gets to that level, people want to get their money back once youre at alltime highs, you dont have that. Anyone who has the stock has an unhappy experience and the only person that is happy is the short seller and that ultimately represents someone who has to cover. This is a very powerful set up all right for everythings option action check out our website. While youre there, sign up for our newsletter. Heres whats coming up next. Coming up, our final contestant likes long walks down the yield curve, impacting monetary decisions and pina coladas. Professor mike khouw helps match you up with the warning Options Strategy to navigate nearterm volatility on the rating game. 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. That selling carsarvana, 100 online wouldnt work. But we went to work. Building an experience that lets you shop over 17,000 cars from home. Creating a coast to Coast Network to deliver your car as soon as tomorrow. Recruiting an army of customer advocates to make your experience incredible. And putting you in control of the whole thing with powerful technology. Thats why weve become the nations Fastest Growing retailer. Because our customers love it. See for yourself, at carvana. Com. So youre a small bor a big one. You were thriving, but then. Oh. Ah. Okay. Plan, pivot. How do you bounce back . You dont, you bounce forward, with serious and reliable internet. Powered by the largest gig Speed Network in america. But is it secure . Sure its secure. And even if the power goes down, your connection doesnt. So how do i do this . You dont do this. We do this, together. Bounce forward, with comcast business. Welcome back to options action. A bumpy week for stocks ended on a brighter note thanks to a huge retail sales beat and todays rally is unlikely to meet headwinds in the near future stimulus hopes hang in the balance and the election is rapidly approaching. So if you want to know where stocks can go next, where should you look Professor Mike khouw says the answer might be in the bond market hes here with the call to action mike yeah. So here we are were taking a look at tenyear rates right around 75 basis points, not absolutely as low as they have been and if the german boon and other places are examples of how well they could going lower, but i dont think thats whats going to happen. We have an aggressive Monetary Policy although its hung up in d. C. , we do have the possibility of significant fiscal stimulus, as well coming in the near future. And of course, you know, this is the situation where these bonds have essentially been supported in large part by basically the flight to quality and the flight to safety. Right now if we take a look at the Options Markets such as tlt and it tracks long term bonds and the options premiums are quite elevated to their historical level and if you take a look at the spread with the price for options going out three months ago and how vol tight the tlt has been, thats spread is quite wide we can interpret this one of two ways and either options are overpriced and theyre telling us something and i suspect its the latter Options Markets are telling us that there is some danger ahead for people who hold long term u. S. Treasuries. My inclination here is to try to fade this here, and we can get carters technical view of the rate market, and i think what you will do is keep the trade very, very simple. I was looking out to january. The 155 puts, you can have their 2. 5 dollars, sometimes when it starts to move is between the highs and the les. And by owning that put, theres a lot of flexibility. You can look to spread it, you can look to roll it. Theres a lot of things you can do. But right now its a very precarious situation for long term treasuries. The first is the yield chart that you see on the screen there. For the first time in a year and a half the 150Day Moving Average is now flat. Taking your average price over a longer period of time 200, 150, what have you helps to sort of measure changes in trend and by all accounts while this is an uptrend, thats not the point. The downtrend has abated and are rates going to 1. 5 or 175 that they were in the beginning of the year of course, not, but can they go to the june level where they were 90 basis points, absolutely the second chart is tlt which is the reciprocal and you see just that this has all the haul hallmarks of not bottoming out, but a topping out and a rolling over and so the play here would be to be short tlt. Tony, what do you think of the trade . So when i look at tlt, i look at the strength of Long Duration bonds which is what theyre giving you exposure to versus the specter of fixed income and its one of the worst performing sectors within the fixed income space compared to high yields or Investment Grade and this speaks to the flight to safety that michael was referring to that investors are not flying to safety here. Theyre looking for riskier assets so this is a net negative, in my opinion, for Long Duration bonds. This is where i get a bit of a mixed picture here because it is trending lower here over the last couple of months and the momentum off of that bounce has been fairly low, and i think that you could potentially see another retest of that 200Day Moving Average for me, id like to see that break below the 200 Day Moving Average or the tenyear yields to get back above 80 basis points for me to go outright short on tlt. I do like mikes perspective of slightly out of the money and its about a 30 delta put. Its a relatively low probability of success trade and its only risking 1. 5 of the ets value and its a cheap way to play. Coming up next, something new that were trying here on options action. Video tweet questions and what better than a hot work from home stock. Click here to join meeting after this. Its a thirteenhour flight, thats not a weekend trip. Fifteen minutes until we board. Oh yeah, we gotta take off. You downloaded the Td Ameritrade mobile app so you can quickly check the markets . Yeah, actually im taking one last look at my dashboard before we board. Excellent. And you have thinkorswim mobile so i can finish analyzing the risk on this position. You two are all set. Have a great flight. Thanks. Well see ya. Ah, theyre getting so smart. Choose the app that fits your investing style. Beautiful. But when i started cobra kai, the lack of control over my business made me a little intense. But now i practice a different philosophy. Quickbooks helps me get paid, manage cash flow, and run payroll. And now im back on top. With koala kai. Hey more mercy. Save over 30 hours a month with intuit quickbooks. The easy way to a happier business. Its got all my favorite shows turn oright there. Boom, i wish my Trading Platform worked like that. Well have you tried thinkorswim . This is totally customizable, so you focus only on what you want. Okay, its got screeners and watchlists. And you can even see how your predictions might affect the value of the stocks youre interested in. Now this is what im talking about. Yeah, itll free up more time for your. Uh, true crime shows . British baking competitions. Hm. Didnt peg you for a crumpet guy. Focus on what matters to you with thinkorswim. Welcome back to options action something new for you we are trying out hand and video tweets first up, a question on pfizer hello options team. My name is ayksha sharma, and i would like to thank you guys for all of the insight and knowledge that you bring to our viewers. My question is on pfizer with the essential vaccines coming out in november, whats your take on a january 40 call option thank you. And thank you for sending that tweet in, the video in. Carter, what do you say . I think thats a real good bet meaning youve got a lot of time the stock closes, of course, at 37. 95 and big day today, expanding volume newsrelated, of course, and given where the stock is now and the time allocated to that position i would be comfortably long mike . Yeah. I like the trade as well and the timing of it too, and its implied volatility and the options themselves tend not to cost that much up next, by now you love it or despise it. Our next question is on zoom hi. My name is parker. Im a Young Investor here at East Carolina University where we handle most of our classes on zoom so my question for you guys is with purchasing call options be a smart play before the election i like that guy in the background waving the flag tony, what do you say about zoom i think call options is one of the only ways to play for continued upside here for zoom i like the stock i like the fact that it broke out above the 520 level to alltime highs and strong relative strength and i do think the stock is ahead of its own fundamentals and i would like to take a Long Exposure through limit risk strategies like the call options. Youre taking the chart, courter . Tony was on this zoom months and months and months ago. Its been a oneway train, but its a bit hot i think its overdone. All right and to back things up a bit, our final is on options trading fundamentals. Thank you for having me on and giving me the opportunity to ask you guys a few questions the questions i have for you are how do you determine which Expiration Date you should choose when buying an options contract we have to go to professor khouw for this mike yeah. This is a really important question, and its one of the mistakes that a lot of people who were first starting up and buying options make is that they buy options that are too short dated and oftentimes theyre just looking at a specific catalyst and they might buy options that expire in two weeks, a week or even a month and thats a very low probability bet. If you want to go out, give yourself some time. I like options that expire 90 days and beyond if im going to be buying them, because you also have an opportunity in case your view changes. Chances are youre not going to be risking as much as you would be by purchasing the stock or shorting the stock give yourself some time if youll be buying options to make directional bets on stocks. Tony, your advice i completely agree. Thats one of the mistakes that i think a lot of beginners make is they buy very short dated options and i go out 60 days and with strike prices, you have to buy at the money as a starting point if youre buying a call or a put. Its that time of day, carter, kick things off for us. Proctor gamble is the biggest one in the sector but i think its too good. Tony zhang. I think snapchat is doing a really good job of engaging users. I think theyll have a Strong Quarter from the Earnings Growth perspective. I would like to buy a call vertical going into earnings. Professor, michael khouw. Yeah. So following along on quarters Procter Gamble, i think you can use diagonal put spreads and take advantage of the shortdated volatility and also the fact that the stock doesnt tend to move that much following earnings and then if youre inclined to short rates you could go out to january and the 155 is the one i was looking at that does it for us on options action ill be back here next friday at 5 30 p. M. Eastern time dont go anywhere, though. We have another special edition of fast money coming up next im searching for info on options trading, and look, it feels like im just wasting time. Thats why Td Ameritrade designed a firstofitskind, personalized education center. Oh. Their awardwinning 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 its like my streaming service. Well except now youre binge learning. 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