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 it's time to risk less and make more "options action" starts right now. >> let's get right to it consumer staples making a comeback from the march lows and now hovering close to all-time highs. carter, what are you looking at? >> i thought we'd target proctor here proctor is the biggest weighting we know in the sector, but it's just a bit hot to my eye and let's 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 consumer staple sector versus proctor. the staple up 10% and proctor has doubled that up 24 on a two-year basis, the sector is up 25 proctor is up 77 on a five-year basis, the sector is up 33 and proctor is up 93. now let's look at a chart of that five-year 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 i'm thinking it's 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 i've 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 it's ahead of itself and relative to its peers just a bit too good. >> mike, what's the tradeoff of this >> so proctor is an interesting case, of course, because one of the things that we've certainly seen is just in terms of the fundamentals the pandemic hasn't 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 yield-starved 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 it's trading at 28 times trading and 27 times forward. these are ten-year highs and it hit a 52-week high today although it didn't 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 i'm 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. net-net, you'd be spending $4. collect the elevated premium that you would see in the near-data 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 out of earnings out of the last 44 reported quarter, there have only been two where the stock is down 10% and that's why i'm comfortable with the put we're not vetting that it will collapse, and we're 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 i'll 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 it's clocking in in the near single digits and it's 5% to 6% and the stocks have 11% this quarter alone, so i certainly agree that it's 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 doesn't use a whole lot on earnings and he's using the 140 strike price that's 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, it's interesting. that's one of the things they've talked about with proctor with closures and things like that. the biggest risk there is probably in the supply chain it isn't necessarily on the overall product. they have a wide array of products and some have been negatively affected by what's going on and it makes them one of the companies that if you'll pardon me is most immune amongst publicly traded companies to what's going on, and really what we're doing here is we're fading the aggressive move that we've seen to the upside and the aggressive valuation on a company that's conservative and grows steadily and not justifying valuation multiples at this point. >> let's switch gears to another name that reports next week. that would be snapchat next week's earnings could propel the stock even higher and he's got a way to play it on the cheap. take it away >> yeah. so i want to take a look at trying to capture thissa bei acceleration of social media use next week. if we take a look at the chart of snapchat, we've gotten a recent breakout of 26.5, and you couple that with the strong relative strength we've seen with snapchat in comparison with the sector this puts snapchat to targeting the 29.5 which is the all-time high in 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 what's compelling for me if you look at sensor tower data for snapchat it's 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 we've 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 it a very strong user growthst story for q3 which has been driving the stock performance after the announcement >> so if you look at the earnings itself, snap chat moves quite a bit, 12.9% on average over the last four quarters. >> i'm sorry 15.8% over the last four quarters and the options market are currently implying a 12.8% moves. the trade product you astructurg to use is to use a call debit spread, and i'm buying the 28-32 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 net-net here about $1.25 which is 4.5% of the underlying stock price, and i'm 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, it's 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 deb id spreads into events like this and we think it's expensive, limit the amount of money on a stock that experiences volatility like this is the way to expoesh yourself to the upside and limit your down side risk i'll leave it to him if it makes sense whether or not to be bullish. >> carter, how does it look like snap >> this is a good instance, when it breaks to all-time highs it has unlimited potential. >> the stock in march of 2015, and within moments of there or two it hit 29 and it's been straight down ever since and it went to five and we've been climbing back, climbing back and we are basically right at the peak two days after the ipo and this puts you into blue sky, when a stock gets to that level, people want to get their money back 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 we have to take a break here for everything options action, while there sign up for our newsletter here's what's 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 near-term 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 it's nice, we'll answer it on air when "options action" returns. ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ welcome back to "options action." a bumpy week for stocks ended on a brighter note thanks to a huge retail sales beat and today's 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 he's here with the call to action mike >> yeah. so here we are we're taking a look at ten-year rates right around 75 basis point, not absolutely as low as they have been and if the german boon and other places are examples of how well they could go, one could suggest that they could go lower and i don't think that's what's going to happy we have an aggressive monetary policy although it's hung up in d.c., we do have the possibility of significant fiscal stimulus, as welcoming 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 call for options and how volatile it has been, that spread is quite wide we can interpret this one of two ways and either options are overpriced and they're telling us something and i suspect it's the latter options markets are telling us that there is some danger ahead for people who hold long term u.s. treasurys my inclean asian here is to try to fade this here, and we can get cart are's technical view of the rate market, and i think what you will do is keep the trade very, very simple. the 155 puts, you can have their 2.5 dollars, sometimes when it starts to move is between the highs and the lows and the yet that by owning that you can look to spread it and you can look to roll it and a lot of things you can do and it's a precarious opportunity. >> the first is the yield chart that you see on the screen there. for the first time in a year and a half the 150-day 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, that's 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 of the hall marx 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 they're giving you exposure to versus the specter of fixed income and it's 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. they're looking for riskier assets so this is a net negative, in my long duration bond 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 200-day moving average for me, i'd like to see that break below the 200 day moving average for me to go outright short on tlt i do like mike's perspective of slightly out of the money and it's about a 30 delta put. it's a relatively low probability of success trade and it's only risking 1.5% of the ets value and it's a cheap way to play. >> something new we are trying on options action. video tweet questions and what better than a hot work from home stock. 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. ♪ 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 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 asha 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, what's 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 that's a real good bet meaning you've got a lot of time the stock closes, of course, at $37.95 and big day today, news-related, 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 it's 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. i'm 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 all-time 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 limited chart options. >> your take on the chart, carter >> tony was on this zoom months and months and months ago. it's been a one-way train, but it's a bit hot i think it's 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 it's 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 they're just looking at a specific catalyst and they might buy options that expire in two weeks, a week or even a month and the bet we talk about in pfizer makes a lot of sense. you want to go out and give yourself some time i like options that expire 90 days and beyond if i'm going to be buying them because you also have an opportunity in case your view changes chances are you're not going to be risking as much as you would be by purchasing the stock or shorting the stock give yourself some time if you'll be buying options to make bets on stocks >> tony, your advice >> i completely agree. that's 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 than if you're starting with a buy or a put. >> it's that time of day, carter, kick things off for us. >> it's the biggest one in the sector, but too good. >> tony zhang. >> i think snapchat is doing a really good job of engaging users. i think they'll have a strong quarter from the earnings growth perspective. i would like to call a call vertical. >> professor, michael khouw. >> yeah. so following along on quarter's procter & gamble, i think you can use diagonal put spreads and take advantage of the short-dated volatility and also the fact that the stock doesn't tend to move that much following earnings and then if you're 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 i'll be back here next friday at 5:30 p.m. eastern time don't go anywhere, though. we have another special edition of "fast money" coming up next i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. 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 ♪ but before we sign i gotta ask... sure, anything. we searched you online and maybe you can explain this? i can't believe that garbage is still coming in. that is so false! frustrated with your online search results? call reputation defender today to join tens of thousands who've improved their online reputation. get your free reputation report card at reputationdefender.com or call 1-877-866-8555. ♪ ♪ ♪ ♪ ♪ ♪ welcome "madmoney" fans, jim is off tonight we are calling it the "fast five." we are counting down the top stories of the week. with us tonight, tim seymour and brian kelly. coming up at number 5, did amazon rewrite the count down until christmas. that's right 69 shopping days until christ s christmas. amazon hosted its prime day in october for the first time ever. the move sending other retailerc

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