caterpillar. and that's no bulldozer. and professor mike khouw is >> this is an interesting situation. >> is running through duelling option exercises on how to play nike going into next week's earnings. if you already own the stock or not, you can just do it. it's time to risk less and make more "options action" starts right now. welcome. i love doing this show, but i've got to take an issue with that deep-voiced guy. he says barrel of cheeseballs like it's a bad thing. really come on. well, it has been a maybe not bad but tougher year for the consumer space the xlp consumer staples is up but just over 1% so it's underperforming the broader market carter worth, a man who maybe has seen a barrel of cheese balls in his day, says there could be an even bigger consumer crackdown ahead. carter, what are the charts telling you? >> a bunch of things going on. one thing to consider is that the dollar, which has been very, very weak, has started to stabilize. second only to technology, the staples sector is dependent on foreign sales. were there to be any strength i the dollar, that's a headwind. we know much selling has been done as people stockpile things for covid and a lot of that pull forward is likely at an end. a few charts the first of several. the first, here is the xlp you'll see they have a small head and shoulders top formed in this particular chart. if you look at the next chart, i've kept the head and shoulders top and also included the trend line in effect since the march low. we have two circumstances. we have a reversal formation, a head and shoulders top and we have a break of the trend that's been in effect since the march low. third chart, another way to consider the facts, this is now a line across the top connecting the january and february peak pre-pandemic what we know is the xlt did break out, but now it's fallen back below the level from which it broke out take a look at one more chart. this is the head and shoulders top in relation to the line drawn along the pandemic peak before the selloff anyway you slice it and dice it, we have distribution and it looks like there's more to go. two more things. take a look at this table. one thing we know about the sector is while it's 34 stocks, the top five stock are 52% of the sector. it's highly concentrated you see those prominent names there, proctor, coke, walmart, pepsi. the final chart, this is a comparative chart year to date of the sector as we know it, xlp, versus the equal weight sector what's starting to happen is a divergence that is typically foreshadowing negativity we want to be cautious here. we're sellers of consumer staples. the vehicle, xlp >> my colleague and your former colleague and good friend herb greenberg always used to say know what you own. it's so true you're buying five stocks. you think you've got good exposure you really don't what is the trade here, if any, on the consumer and the xlp? >> i think that's a really good point. actually, when you start taking a look at the sector, you recognize that the same thing that carried this whole group higher is a handful of names, then presumably it could cause some weakness for the sector overall. when we look at xlp, the etf, one of the things that you'll observe is tha consumer staples are not typically high data, high volatility stocks. when you group a bunch of them together, the volatility tends to be even lower that said, xlp has an implied volatility of about 20%. that's nearly double what it was at the tail end of last year we understand that given the current market conditions. this isn't exactly a high growing sector either. we take a look at the multiples. you might say in some areas 23 times earnings isn't that expensive, but for this sector over the course of the past ten years, that's pretty close to the peak valuations recognizing that you have higher implied volatility and higher than average valuations for the entire sector and there's a lot of volatility the baked into the election right now, i'm looking at the put spread. you could buy that $4 put spread for about $1.05 net. paying $1.75 and then selling the others against it for about 70 cents. that is just over a quarter of the width between the strikes. that's usually the kind of risk/reward we like for strategies like this that 63 put is very close at the money. >> tony, are you happy with that wid snth are you happy with that spread would you do this trade? >> yeah. i actually had to do a double take when i looked at this because mike is only risking 1.6% of the etf's value to take this bearish bet that's an extremely low amount of capital to be risking as a percentage of the underlying etf value. i particularly like the directional view of this trade. you have a breakdown of the xlp in that head and shoulders pattern. if you look at the individual constituents proctor & gamble making up 17% of this index is really the only stock holding up this index. coca-cola 10%. relatively weak relative stock. pepsi broke below 135, 10% of the index. costco, 5% of the index. you have a lot of these constituents starting to break down i like this trade. i especially like the fact that mike is risking a very small percentage. >> there you go. mike you're getting a boost there from tony. meantime, check out the industrials. they've kind of been quietly chugging higher over the last month despite some choppy trading. along with the rest of the market. now is it time to get in on the action ask tony he'll tell you he's got cat scratch fever. >> i want to take a look at playing a bit of defense here as the markets a little soft. we see rotation out of technology into industrial and mining i have a few charts to share the first one i have is xli, the industrial etf i have a chart of industrials relative to the s&p 500. we know this is a sector that has been underperforming the market for multiple years. but since the march lows it's been putting in this bottoming formation. just today it recently broke out above that bottoming formation and the 200 day moving average this signals a potential end to this underperformance for industrials and potentially start to see a rotation into this sector. the other sector i wanted to look at is xme, which is the metals and mining etf. this is a sicktor that's also providing a lot of defense here. when the markets are down about 1% today, this sector is up about .5%. not only is this stock recently breaking out above that $25 level which is a line in the sand which has been in place since 2018 but if you look at xme relative to the s&p 500, we have the same bottoming formation as we saw in industrials since the march lows which recently broke out above that bottoming formation similar to xli we have the confluences of both sectors which caterpillar happens to sit at the intersection of both industrials and mining i'd really like to take a look at caterpillar breaking out above that 150 level which happens to be the november highs. i think this is a potential continuation higher here for a name like caterpillar. especially if you couple with the fact that this is a stock trading at a fairly reasonable 28 times forward earnings. it's got a very stable dividend that's fairly well covered by operating cash flows. this is the type of stock i'm looking to play defense in this type of weaker market. due to the weak market, i have a relatively neutral outlook on caterpillar in the short run but long-term i have a much more bullish view for caterpillar so the trade strublingture structure is a call diagonal. going out to the october-december 155-160 call value. i'm selling in october 160 call against it, collecting about 3 dollars fifteen. net-net i'm paying about $7 for this call diagonal which risks just a little bit over 4% of the underlying stock price i specifically got a little bit more aggressive on that october call, selling that 160 call because i am short-term fairly neutral on the stock and i want to collect as much premium as possible here that october 160 call offsets about one-third of the cost of those calls. i'm looking to sell another one in october, in november and possibly another one in december and really offset the cost of these long calls. >> mike, are you happy with the risk profile in tony's trade >> yeah. whenever you start dealing with spreads of different expirations and different strikes, it might seem complicated but it is pretty basic we often take a look at vertical spreads and we often look at calendars. this basically combines the benefits of both of those. one thing interesting about selling the october calls is that right now implied volatility is pretty high. that include the october options which are about 31% in volatility along the longer dated ones which capture the election, and the earnings which takes place on october 7th. he is selling an option that expires before all of that he's actually collecting a meaningful amount of premium given that the next major catalyst for the stock isn't captured by the option that he's short, but it is captured by the option that he's long. that's the kind of structure we like to see. es sperkly when the term structure is relatively flat like we have right now. i think this particular trade structure makes a lot of sense. >> carter, what's your take? >> two things that are so important here first of all, cat has been a big laggard. either that's an opportunity or a trap once you start to get the good relative strength that cat is showing as the market stumbles, that confirms that it's something to continue to come to life second, its correlation with john deere is as high as 75-80%. john deere has broken out to big new all-time highs i think caterpillar is likely to do the same. >> all right. carter likes the charts, tony's got the trade. remember, for everything "options action" check out our website optionsaction.nbc.com. here's what's coming up next. >> announcer: professor mike khouw goes for a walk in two types of investors' shoes to game out how to play nike's earnings next week. plus, calling all "options action" fans. reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air. "options action" is sponsored by td ameritrade. ♪ ♪ ♪ ♪ ♪ the big events are back. xfinity is your home for the return of live sports. ♪ ♪ ♪ ♪ ♪ welcome back to "options action." hope you're having a great friday wherever in the world you may be. if the market is rotating out of big tech, what might it rotate into? cyclicals, the consumer, small caps, bitcoin, gold? lean hogs? where should you place your bets those are questions it seems like every investor has right now. luckily, mike has some answers and he's got two different ways you can lace up your trargd boots and do just that. he's here with the call to action. what'd you got >> we're taking a look at nike obviously nike has been doing a lot of things right and probably a lot of people who are watching right now may indeed hold the stock. they've been continuing to innovate their move to digital has been very effective the stock is essentially trading at all-time highs. it is also trading at all-time peak valuations. as we go into earnings, this is a stock that has typically moved about 4.7% over the last eight quarters or so right now the options market is implying a significantly bigger move of 7.3% or so. how are you going to take advantage of the valuations being high and the options price also being high? sell covered calls if you own nike stock, right now you could take a look at selling to calls in october. you could sell some calls for about $3.60. the 120 strike calls in october. when you do that, you're taking advantage of the fact that the options premiums are elevated and you're going to collect that premium and you still have a little bit of upside right now it's trading just under $115, so you still have $5 worth of upside plus the $3.60 that you collected. you still have plenty of potential upside if the stock would continue to rally. if it just sits there, then you just collect that and it creates a little buffer on the downside. what do you do if you don't own the stock? can you take advantage of it we don't recommend selling calls naked, which is what that would be you can buy the 125 calls against it, those cost about 2 dollars. net-net you're going to be taking in $1.60. that's nearly a third of the distance between the strikes that's the kind of math we're looking for. trying to take advantage of the fact that the stock may run into near term resistance and that options are trading at implied vol tilts. you could take a look at catalysts like this, valuations like these and try to collect a little bit of premium. >> well, tony, come at it from someone that owns nike and will do the covered call. or the second trade where you don't. is there one of those, if you had to pick one, you would prefer >> the one you choose is based on whether or not you own that stock. if you own that stock, you would definitely sell the covered call what i like about mike's trade here is the high implied volatility you're collecting 3% static yield on this covered call with still give iing you $5 upside. that's rare for a big name stock like nike to be able to collect that amount of premium that gives you a fair amount of downside buffer on this earnings report that credit spread, that 120, 125 credit spread, that's about 4% out of the money and he's still able to collect one-third of the width. that sets you up for a decent risk to reward credit spread to be selling if you look at nike going into earnings, we have consumer discretionary showing a little bit of weakness here, but the stock that i really want to point investors to is lululemon, just last week reported earnings beat on both to top and bottom line and the stock is down sixteen%. granted nike is not as overextended as lulu, so i don't expect such a significant move to the downside. but i think there's a fair amount of risk here. i like mike's trade because he's collecting a lot of premium on nike. >> chart master, how does the chart look to you? >> sure. and we might have a chart here to pull up. what we know is it's a fairly conventional setup in terms of the stock broke out. you can see the authority of the 105 level, that's the pre pandemic high. that's the june high. finally, in textbook fashion exceeded those highs. after basically printing a 15% gain, you often fall back to a level from which you broke out so you can see the hooking over, the rolling over now i think we're going lower and i think taking measures like this if one is already long makes sense or putting on the strategy that mike has outlined if you're not long looking to collect premium. >> good stuff on nike. especially if you own the stock and you're getting a little bit nervous. right up next, speaking of a run, shares of gm up more than 3% this week. we'll tell you why that's great news for one of your traders plurs of plus, we're taking some of your tweets. we're taking your questions here on action and we'll throw them up on the commentary as well. we're back with "options action" right after this. it's a thirteen-hour flight, that's 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 i'm 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. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪ that selling carsarvana, 100% online wouldn't 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. that's why we've become the nation's fastest growing retailer. because our customers love it. see for yourself, at carvana.com. it's 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, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in. now this is what i'm talking about. yeah, it'll free up more time for your... uh, true crime shows? british baking competitions. hm. didn't peg you for a crumpet guy. focus on what matters to you with thinkorswim. ♪ welcome back time now as we want to do, t take a look back at a couple of our open trades. last week mike said opportunity was calling in verizon. >> at&t and verizon. at&t right now has a dividend yield north of 7%. verizon's dividend yield is north of 4%. all of that while a ten-year treasury is going to yield you about .66% options obviously don't pay dividends but the price of dividends is incorporated in them ooze using an investment strategy, ithink if you're looking at verizon, you could look at selling the october puts. you could collect about $1.80 for those. >> mike, it looks like the trade has made some money. what are you doing now, sticking it out, cashing in >> i think we could stick it out here the puts that we sold for $1.80 you could have bought those back for $1.25. is this is more of an investment strategy, not so much a trading strategy. we're comfortable getting long we still have a decent amount of premium relative to the stock price to collect before october expiration, which isn't that far away i think if you're still short these, you can be comfortable with that. >> tony said that gm shares could be about to take off watch this kb >> the stock itself is really underperformed the market for multiple years, but it recently put in a bit of a bottoming formation and recently broke out above that $30 resistance level on the news of this deal it recently retreated back on the short seller piece back to that $30 support level but that's actually the attractiveness that i see for a long opportunity here, the fact that $30 has held. the trade structure is going out to october and selling the 30 put options. that's collecting about $1.55. that represents a little over 5% of the underlying stock price. >> tony, if the viewers did your trade, they made about 3%. pretty good in a short amount of time. what's the plan now? >> so gm is still a stock that i like for the long run. these short puts are not meant as a trading strategy. these are more of investment strategy so i would hold onto these puts. you made about 2% of the underlying stock price as a result of collecting premium if you really want to own this stock, you can roll it up to the 31 puts, collecting about 1.20 or so. that increases your probability of owning the shares for the long run >> all right. up next, it is some of your tweets and your final calls. this is "options action." we'll see you back in two minutes. we'll be back. stick around. searching for info on options trading, and look, it feels like i'm just wasting time. . >> announcer: "options action"s is sponsored by think or swim by td ameritrade. oh. their award-winning 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 it's like my streaming service. well except now you're binge learning. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn ♪ ♪ ♪ ♪ ♪ ♪ ♪ welcome back time now to take your tweet because we have time for one one viewer asked this, despite the tech pullback, is there still a 5g play still on the table for the fourth quarter tony, maybe qualcomm december 110 calls. >> i think qualcomm is a suitable stock to play for this 5g i particularly like the december 110 calls because the stock is trading just at that 110 support level which allows you to play for upside as the stock breaks below 110, you can cut your losses pretty quick. >> time for your final call on a friday carter, why didn't you kick it off. >> consumer staples have started to roll over the trade is being short xlp, the spiders. >> tony? >> i'm playing defense with industrials and mining, buying a call diagonal on caterpillar >> yep. all right. no time to get to mike's thoughts. mad with jim starts now. - [man] the following program is a paid presentation for the oxypure air purifier brought to you by nuwave, llc. asthma and allergies are at an all time high, and it seems to get worse every year. it's not your imagination. allergy season continues to get longer and more intense as temperatures rise, and airborne viruses are becoming an epidemic problem worldwide, with the changing environment, and unseen dangerous air pollution surrounding all of us. you need clean air more than ever. if you suffer from mold, dust, pet dander, smoke, odors, or sleeping problems. discover the nuwave oxypure air purifier.

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