now, you, stay safe. bye-bye. now, you, stay safe. bye-bye. this is "options action." tonight -- >> they're cool and available and addictive. the job is almost done for us. >> that might explain why cigarette stocks have been so high. but we have a shocking chart that says it might be time to butt out. we'll explain. plus, missed the rally this year? relax! because we've got the sector that's ready to go from dud to stud in 2015. and ring the bell on retail. >> ugh! as if! >> reporter: retail stocks are at record highs, but we'll give

you a surprising reason why they may have run their course. the action starts right now. >> live from the nasdaq market site in times square, i'm scott wapner in tonight for melissa lee. the show is so big tonight that traders are coming to you from all over the country and here on the desk as well. good to see all of you. we start with a massive bet against the hottest trade of the year. in heavy volume, a trader made a huge bet in the options market that the run in utilities, the best-performing sector of the year, will soon come to an end. let's get in the money and find out exactly why. and dan, let's begin with you. was this a bet on higher rates in the new year and just how large was this trade? >> yeah, scott, great question. it was really interesting, action. because in an otherwise quiet trading session, this was the largest block of etf options that traded all day. there was 37,000 of the march xlu 47 put spots. that's about $3.7 million in premium.

here's the thing about unusual activity. we talk about it on the show all the time. it's not always you can point to the fact this is an outright bearish bet. this could easily be a hedge against a portfolio of utility stocks, but you have to take notice, when you see this sort of volume, because it was massive. and i would just make this one point. when you think about utilities, they're up almost 30% on the year, as a sector that's more than doubling the performance of the s&p 500. when they came into the year, you could definitely make the argument that this was a chase for a yield, right? because most of the components had a dividend yield between 4 and 5%. but that's not exactly the case anymore, and especially as we head into 2015, like you say, where we could start to see rates go higher. >> right, carter. this is a bet on higher rates, yeah? >> that's right. there's also a technical circumstance that's come and gone in the sense that the s&p 500 utility sector has well-defined tops in effect for about 15 years and the breakout is now, if you will, taken place. so fading it here as dan's talking about makes a lot of sense. >> mike? what do you think?

>> you know, this is one of the situations where we've seen a lot of spaces in the equity market, where we've really seen things continue to rally, even well past their historical valuations. that's true for a lot of the components in xlu. it's kind of hard to pick a top in it. but certainly to me, with things trading at slightly above average multiples, it makes a lot of sense to sit there and say, okay, we're going to hedge or maybe make a bearish bet speculating that the prospect of higher rates could drive utilities lower. >> dan, if that is the case, how do you trade it? >> here's the thing, it's not just higher rates. when you think about it, this latest leg in the sector, also, obviously, oil is a big input, two utilities, but also, it can be deemed as a utility sector, because of that yield, but also because of the little dollar exposure they have. we know that a lot of u.s. multi-nationals have this potential earnings headwind from a strong dollar. to me, the way i think about it is valuation at this point too. mike just brought that up. when you look at the top five holdings in the xlu, they're basically trading at 18 1/2 times next year's expected

earnings, with a dividend yield only expected to be about 3.5%. that's versus the s&p with expected earnings growth of 10%, with an earnings or dividend yield of 2, 2.25 sort of percent. so to me at 14 1/2 times earnings, the s&p's a better bet. so i would probably follow that big trade. and the trade i did today when the etf was 48.50, i looked out the to march. i wanted to get a little closer to the money participation and i bought the march 48.44 put spread for $1. i sold one of the march 45 puts at 44 cents. my break-even is at $47. that's down 3%. my max gain is at 44. my gains are capped there. and like i said, between 47 and 48, i can lose up to that dollar and above 48, i lose the full dollar. but with this etf up the way it is, with the potential for some of these sort of tail winds to

reverse in the new year, i like making contrarian bearish bet in the xlu. >> mike, what do you think of the trade? >> i think definitely a put spread is the way to do it. we talk about this a lot. but with indexes and etfs, frequently what you'll see is those out of the money puts actually still have quite a bit to them. and the reason is, people use them to hedge. you probably do want to sell those to help finance those higher strike puts. he's giving himself some time to play out. so i like the trade. >> carter, the only thing is, if you get into the new year and you still have rates low, people are just going to stick with what's working. >> or just stick with equities in general in this perpetual motion machine that's the stock market, just goes forever. but at some point, that's just not credible anymore, and there has to be an end to it or at least a pause. utilities are too far, too fast. >> dan, i give you the last word. >> if you were playing, would you rather, i would rather own the s&p 500, the spy, than the xlu, becauson that differentiator between the yield is that exciting here. and i think the xlu is a very

narrow trade and obviously a little bit crowded right here >> the bottom line, as you said, the gains are capped, but you've also combined your risk, and that's the real story. >> correct. moving on from what's hot to what's not. why utilities have been on fire, housing stocks have lagged the market this year, but our resident chart master sees opportunities in the charts for 2015. that must mean we're going to carter braxton worth over at the telestraiter. >> something that's lagged, so we think that's the opportunity. let's look at charts and try to figure it out together. year-to-date, we know, s&p, and of course, a very important part of the economy, housing stocks have made no progress. in fact, take a look at the same comparative chart, going back over the last year and a half. basically, nothing's happened. we've been stalled, even as stocks have gone higher and higher and higher. 26% versus 4. so, we think that's the opportunity. now, take a look at this setup. you have a well-defined range here. this is key. you have lows at 28 and you have

highs at 34. now, when you breakout from a range, these are rules from the 1930s, what's called a measured move. that's a $6 range. you add $6 on to the top. you add $6 on to 34, you get 40. well, if you break out here, you go exactly to 40, which is the '07 high for the s&p. you can draw the lines this way, as a cup and handle, but either way, we think 40's a good bet based on the long-term charts, based on the breakout, on the here and now, and we like the xhp, right here. >> mike, do you want to give me your thought and your trade? >> this is an interesting one, right? because the housing data that we've been seeing hadn't been overwhelmingly bullish. on top of that, we also have a situation where i think a lot of us would argue that the market's come an awfully long way and valuations are beginning to look a little bit questionable. the interesting thing, though, is as the market has rallied, options prices have also continued to remain exceptionally low.

so for anybody who's inclined to make a bullish bet here, i think options are the only way to play it. number one, we have that valuation issue, but the options are cheap, so it malets us make bullish bet without spending a whole lot. you can spend about $1.20 to buy those, and that's the way you can try to make a bullish bet when a market is looking like, arguably, it's a little bit stretched. options are actually trading about 1.5 standard deviations cheap to their mean. this is one of those situations where we have an opportunity to make a bullish bet, even with those questionable valuations, even with questionable housing data, and not risk a great deal to do it. >> dan, you ready to make a bullish bet alongside him? >> it's interesting. i do think because the prices are so cheap, it does make sense that the $34 range, the breakout level makes a lot of sense. but i would make one point about it, it's not just home builders. we know that, we talk about it a lot. there's also a lot of home-related retailers and

materials guys too. i think the retailers have done a lot of the heavy lifting this year, given the underperformance. i don't really think this is an area you want to go. i think it probably gets rejected at 34 and i think housing has probably put this cycle's top in. >> carter? >> so the pure play is, of course, itv, but they're correlated about 95% and 35% stocks. so you have housing, but you've got carpets, whirlpool, mattresses. the aggregate looks like it's going higher. and the key here is it's gone nowhere. up 1% on the year and up 18 months, the s&p up 30. it's up 4. that is the opportunity. >> mike, people are starting to ask, when is housing going to catch up? and if the overall economy continues to gain some steam into 15, that's going to be it. >> it is a place where you could see people make some bullish bets. valuations on the home builders themselves are actually approaching -- they're not that far off their all-time highs. and names like restoration hardware may not be the first thing you think about with a home builder. but carter's making the

important point, if you're trying to make a bullish bet on home builders, xhp is correlated to that name. >> got a question? send us a tweet to @options action. and for everything options action, check out options.cnbc.com. we've got the hot test options news, videos throughout the week, exclusive trades, and new groundbreaking tutorials starring the one and only mike khouw. so check it out and here's what's coming up next. >> you smoke? >> maybe you should, because cigarette stobcks are on fire, but why it might be time to put them out. plus, some are calling it the best christmas ever. but that could mean your sign to sell retail stocks. and we'll explain why when options actions returns.

welcome back. low oil prices and an improving jobs picture has pushed retail stocks to record highs. but our own dan nathan bet against this sector just last month, although he hasn't lost much money, and here's why. >> reporter: on "options action," it's how we shop for great deals, risk less so we can make more. and that's just what dan tried to do with his bearish bet on the retail etf. dan thought that retail stocks were in trouble ahead of the

holidays. but just going short? >> great bouncing ice bears! >> so to define his risk, dan instead bought the march 90 strike put for $2.40. now to make money, dan needs the xrt to fall below $90 by more than the cost of the trade or below $87.60 by march expiration. but hold on. you're shelling out $2.40? you said we were trying to risk less. >> you sit on a throne of lies. >> reporter: so to reduce his costs, dan then sold the december 90 strike put for 70 cents and created his put calendar. but he did something even better. he made making money easier and here's how. between the $2.40 dan spent on buying that march put and the 70 cents he collected by selling that december put, dan's cutting his total cost down to $1.70. and get this, the short-dated put that dan sold will lose

value faster than the longer-dated put that he bought, allowing him to do something even santa struggles with, turn time into money. so instead of needing shares to fall below $87.60 by march expiration, dan just needs the xrt to fall below $90 by more than the $1.70 he spent on the trade or below $88.30 by march expiration. but there's a trade-off. and if the xrt falls too far, too fast, dan's trade structure could work against him. luckily, that december put has expird worthless, meaning dan now owns the longer-dated put at fraction of the cost, leafing options actions biggest fans with one burning question. >> isn't there anyone who knows what christmas is all about? >> reporter: actually, what they want to know is, what will dan do with his xrt trade now? >> yeah, well, before we answer

that, you might be wondering, why am i watching a show about options the day after christmas? well, here's the answer. had you simply shorted a hundred shares of the xrt, you'd be looking at a $200 loss. but if you bought dan's put calendar, you'd only be looking at a loss of 20 bucks. dan, in order for you to make money here, you need the xrt to fall 7% by march expiration. so what do you do here? >> that's kind of the problem here. it's kind of out of the money. and i want to make one point very clear. this whole trade wasn't actually targeting the pre-christmas, this was targeting the post-christmas. i kind of believe that this is going to be -- while it may be dollar wise the most plentiful retail holiday season ever, it's probably going to be the worst as far as profits are concerned or profit margins, the most heavily discounted. i think that's going to come out in january and february so i want to finance the purchase of march puts.

i own that 90 put in march. one of the things we also wanted to do was buy some cheap options and sell some shorter-dated ones. right now, you have the opportunity. it's not down a whole heck of a lot. you've got to think about selling something else or rolling up. i want to tell you what i did about a week ago when the market was lower, before that fed meeting, i actually sold -- i covered the december put, 90 put, and sold a march 85 put. now i own the march 90/85 put spread. i've reduced my cost basis and i've reduced my break-even, but now i'm kind of far out of the money. and at some point, i'm going to consider rolling this bet a little bit higher, increasing my odds of success. >> so you've got the best holiday growth in three years, discretionary stocks among the best performers year-to-date, the economy starting to ramp. >> the question is a little bit like the utilities, that has this already been priced in to some extent in the security? just in terms of dan's approach, he does not like to pick tops.

i understand that, but he's done that here and i think he's going to be vindicated, but this is too far, too fast, and it's a good bet to take the road less traveled. >> mike, do you want to take the other side or do you agree with dan and carter? >> one run discretionary stocks do so well is because they have more money if their pockets. and anybody who's been to a gas pump has got to realize this. i can still remember when it was about 90 bucks every single time i went. there's obviously been a huge, you know, increase in the amount of spending money that's available. i'll tell you, the malls certainly look full to me as well. but valuations are the things i keep coming back to. folks, if you're going to look at equities, you have to consider yourself with valuat n valuations. all of these names are look at or above their historical averages. to me, that makes it reasonable to begin looking at hedges like these put spreads. >> you are factoring in in where gas prices are, dan, aren't you? >> i sort of have a different sort of view on this. i think in the near-term,

because of the oil decline and the price at the pump dropped so dramatically, i think there's too much emphasis played on how much the consumer now has in his pockets. i think it was a lot of these oil companies, we could see the whole shale business in the u.s. decimated. that would mean a lot of job cuts. it could mean defaults, credit issues and stuff like that. i'm not convinced this is a 2015 boom the way it has been in late 2014. >> up next, 15,000 percent, that's how much altria has returned since 1980. but we'll tell you why. our resident chart master says it might be time to quit the stock. more, when we come back.

welcome back. how's this sound? you make a product for a penny, sell it for $1 and sell it to addicts. that's what warren buffett said about cigarettes and that might explain in part while altria's stock, formerly known as phillip morris, is up 15,000% since 1980. but carter, you say the stock's too hot now. why? >> the long-term charts are what they are. they're very long-term so they're not the here and now. but starting with the long-term, s&p up 1,700%.

now, i've written in procter & gamble here, which has doubled that, up about 4,000. colgate has doubled that, about 8,000, and phillip morris has doubled that, 15,000. so one of the great winners of all-time, no debate about it. now, valuation? when this stock was going to be put out of business by the federal government, of course, it was not, you could have bought it at a p/e of 1/3. now you pay 21. and back here in 2000, the dividend yield was about 30%. it's incredible. one of the greatest trades of all time. get a 30% dividend yield annually and you're buying it at a p/e of 3. now, of course, we have the reciprocal. the p/e and the yield, the yield, 4%, but that's still pretty good. on a relative basis, it's quite poor compared to treasuries. it's the lowest ever. take a look at trend. when you're too far above, you check back, check back, check

back. we're playing for a check back to 45. and the 45 level is where the 150-day moving average comes into play. and it would put you back into the channel. this chart and this chart are the exact same distance, same time frame. we think we're going back to the channel, back to 45. >> mike? >> i am a seller. it's pretty simple. >> and right now, interestingly, although the stock is so expensive, usually options get cheaper. they're not in this case, they're a little bit above their average. so here you'll want to use a spread. and very specifically, i'm looking at the march, 49/45 put spread. you can spend about 80 cents for that. those are very favorable odds, basically, you're going to spend $1.20 for the sell. make a bearish bet that the thing could drop back about 10%. i've been trading this thing actually since it was single listed, and i can remember this thing being put out of business. this faces specular headwinds.

there aren't more smokers coming up. >> dan, do you agree? do you want to fade what had been one of the most resilient of stocks? >> it's hard to find reasons other than that secular trend against smoking, why you pick that stop right here and fade it? but to me, i think the way mike's doing it with a put spread makes a whole heck of a lot of sense. not being too greedy. not being too long-dated and looking for too long of a pullback. i like the risk/reward of the spread of i think it makes sense. >> carter, last word to you? >> all good things come to an end. >> i just wonder if it hasn't to this point, what makes you think it will now? >> the day-to-day relative strength is quite poor. the stock's not keeping up with the market. it might just be the foreshadowing of weakness. >> all right. up next, the final call from the actions picks.

welcome back. let's take a tweet for you now. carter writes @optionsaction, long the coca-cola 43.50 january calls. stick with it, even with the job cuts? mike? >> yeah, the job cuts aren't necessarily going to hurt this stock. the other thing is, these options are incredibly cheap, probably only about 40 cents, less than 1% of the stock price. if you're still making a bullish bet on coke, probably the way to do it. >> time now for the final call, the last word from the options pits. dan, start us off. >> a huge friend from the show, dan from baltimore took a spill today and is watching the show from the hospital. get better, dan. >> mikey? >> calls are still cheap, if you're going to continue to make bullish bets, that's the way to do it? >> in a yield star world, we

think people are overpaying for phillip morris. >> our time has expired. i'm scott wapner. for more options actions, go to optionsactions.cnbc.com. have a great weekend and stay tuned for "mad money." begins right after this. >> announcer: the following is a paid presentation for body beast, the fast, proven way to build muscle, shed fat, and sculpt your best body faster than you've ever thought possible, brought to you by beachbody. >> this is real, as real as it gets. we're gonna learn, we're gonna sweat, we're gonna have fun, and we're gonna see results. >> before body beast, i was just soft and chunky and -- and pudgy, and this is the "after" result. >> it's gonna be amazing. come on. you can do this! >> body beast has completely transformed my body. swimsuit season is here, and i've never been more ready.