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. carry the says there is one stock despite the staple surge 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 performance of 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 trailing 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. the idea is to 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 following 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 selling that 140 strike 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 move a lot on earnings. and he's using the 140 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 but others have been positively affected. it's probably one of the things that makes them most immune gons publicly traded company and what's going on. and really wha 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 this acceleration of social media use ooze be snapchat's earnings 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 into targeting 29.5, which is the all-time 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 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 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. >> i'm 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 i'm trying 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 debit 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 expose yourself to the upside and limit your down side risk. i think that's what tony's trying to do here. i'll 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 all-time 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 you're at all-time highs, you don't 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 everything's option action check out our website. while you're 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. ♪ ♪ ♪ 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. so you're a small bor a big one. you were thriving, but then... oh. ah. okay. plan, pivot. how do you bounce back? you don't, you bounce forward, with serious and reliable internet. powered by the largest gig speed network in america. but is it secure? sure it's secure. and even if the power goes down, your connection doesn't. so how do i do this? you don't 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 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 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 don't think that's what's going to happen. we have an aggressive monetary policy although it's 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, that's 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. treasuries. my inclination here is to try to fade this here, and we can get carter's 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, there's a lot of flexibility. you can look to spread it, you can look to roll it. there's a lot of things you can do. but right now it's 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 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 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 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 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 200-day moving average for me, i'd like to see that break below the 200 day moving average or the ten-year yields to get back above 80 basis points 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. coming up next, something new that we're 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. 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. ♪ 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 i'm 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. 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 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, 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, expanding volume 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 limit risk strategies like the call options. >> you're taking the chart, courter? >> 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 that's 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 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 directional 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 if you're buying a call or a put. >> it's that time of day, carter, kick things off for us. >> proctor gamble is the biggest one in the sector but i think it's 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 buy a call vertical going into earnings. >> 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 ♪ vwhen it comes to the quality of our cars: the highest. it's why only 1 in 10 cars we look at qualify to sell on our site. if it's been in a reported accident, we won't sell it. and at our state-of-the-art facilities our ase certified mechanics roll up their sleeves and get to it. inspecting, dialing-in, and fine tuning every single car inside and out, bringing all of it up to our high standards. by the time we're done, our cars are beyond "certified." they're carvana certified. so whether you have it delivered or pick it up, we do it all so you can rest easy. ♪ ♪ ♪ ♪ ♪ ♪ 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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