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

surprise 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 for melissa lee. the show is so big 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 trade 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 a end. let's get in the money and find out exactly y.dan, let's begin with you. was this a bet on higher rates in the new year, and just how large was this trade? >> yes, scott, great question. real interesting actually pause in an otherwise quiet trading session, this was the largest block of etf options that traded all day. there were 37,000 of the march xlu 47 put spots, $3379 r.7 million in premium.

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

seen a lot of spaces in the equity market where we've really seen things continue to real, even well past their historical valuations. that's true for a lot of the components in xlu. hard to pick a top in it but certainly for me with things trading at slightly above average multiples makes a lot of sense to say okay we're going to hedge or even make a bearish bet speculating that the prospect of higher rates could drive utilities lower. >> dan, if that's the case, how do you trade it? >> here's the thing, not just higher rates when you think about it. the latest leg in the sector, obviously oil is a big input to utilities but it could be deemed as a defensive sector as a yield but also because of the little dollar exposure that they have, right, because we know the u.s. nationals have a large potential, headwind and i think about valuation, too. mike just brought that up. when you look at the top hide holdings with a dividend yield

expected to be 3.5%. that's versus s&p with expected earnings growth of 10%, okay, with an earnings or dividend yield of maybe 2%, 2.25%, so to me at 14.5 times earnings the s&p is a better bet. so if i was playing would you rather i'd probably follow that big trade. the trade i did trade when the etf was 48.50, i also looked out to march, wanted to get a little closer to the money participation and i bought the march 48.44 put spread for a dollar. paid $1.45 and sold one of the march 44 puts. dollar is the max risk, break even down at 37. max gain at 44. my gains are capped there, and like i said, between 47 and 48 i could lose up to that dollar and above 48 i lose the full dollar. with this etf up the way it is, with the potential for some of these sort of tail winds to kind of reverse in the new year i

like making a contrarian bearish bet in the xlu. >> mike, what do you think of the trade? >> a put spread is the way to do it. talk about this a lot and with indexes and etfs, what you'll see is the out of the money puts actually 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 the higher strike puts. he's giving himself time to play out and leaving out to march so i like the trade. >> carter, only thing is if you get into the new year and still have rates low, people are just going to stick with what's working. >> well, or just stick with equities in general in this per pet successful motion machine that's the stock market but at some point that's not credible anymore. there has to be an end to it or at least a pause so utilities are too far too fast. >> dan, i'll give you the last word. >> dan, if we were playing would you rather, i'd rather own the spy than the xlu because i don't think the differentiator on the xlu is exciting here and i think the xlu is a very narrow trade

and obviously a little bit crowded. >> bottom lines, the gains are capped but have also defined your rusk and that's the real story. >> correct. >> all right. moving on from what's hot to what's not. while utilities have been on fire, housing stocks have lag the market this year, but our resident chart master sees opportunity in the charts for 2015. that must be we're going to carter over at telestrator. >> here we go. something that has lag and we think that's the opportunity and look at some chorts and tray to figure it out together. year to date, we know s&p and 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 has happened. we've been stalled, even as stocks have gone higher and higher. 26% versus 4. so we think that's the opportunity. take a look at this setup. you have a well-defined range here, and this is key. you have lows at 28, and you have highs at 34. now, when you break out from a

range, rules in the 1930s, what's called the measured move, that's the $6 range, you add $6 on to the top and add 6 on to 34 and you get 40. well, if you break out here, you go exactly to 40 which is the 'a 7 high for the s&p. you can draw the lines this way as a cup and handle and either way we think 40 is a good bet based on long-term charts and the breakout here and now and we like the xhp right here. >> my, want to give me your thought and your trade? >> this is an interesting one, right, because the housing data we've been seeing hasn't been overwhelmingly bullish. on top of that we have a situation where i think a lot of us would argue that the market has come an awfully long way and valuations are looking a little bit question. a the interesting thing though is as the market has rallied options prices have also continued to remain exceptionally low, and so for anybody who is inclined to make

a bullish bet here options are the only way to play t.number one, we have that valuation issue but the options are cheap so it lets us make a bullish bet and i'm looking specifically at the march 34 calls. you can spend about $1.20 to buy those, and that's the way can you try to make a bullish bet when a market is looking like arguably it's a little bit stretched. options are actually trading one and a half standard deviations cheap to the mean and this is an opportunity where we have a chance to make a bullish bet, even with questionable valuations and housing data. >> dan, you ready to make a bullish bet alongside him? >> it's interesting. because prices are so cheap in xhp options that makes a lot of sense to play for. the xhb, not just home builders and we know that. we talk about that a lot, home-related retailers and a lot of materials guys, too, and you know what? i actually think that the retailers have done a lot of the

heavy lifting this year given the underperformance. i don't think this is an air yaw want to go. you think it probably gets rejected at 34, and i think housing has probably put this cycle's top in. >> yeah. carter? >> well, the pure play, of course, is itb, but they are correlated about 95% xhb, 35 stocks here and equal weight xhb. no more stock in 3%. housing and carpets and whirpool and mattresses. aggregate looks like it's going higher and the key is it's going nowhere, up 1% on the year and over 18 months s&p up 30. >> a lot of people asking when is housing going to catch up and if the overall economy continues to gain steam in '15 that's going to be it? >> it is a place where you could see people make bullish bets. valuations on home builders themselves are actually approaching -- they are not that far off the all-time highs and names like restoration hardware, might not be the name that you think about with the home builder. really carter is making the important point, make an

important point on home builders xhb is correlated to those names so it's an easy way to make the bullish bets. >> got a question and send us a tweet to @optionsaction and check out our website, optionsaction.nbc.com. a lot of news throughout the week, exclusive trades and new ground breaking tutorials starring the one and only mike coe so check it out and here's what's coming up next. >> do you smoke? >> maybe you should because cigarette stocks are on fire. we'll tell you 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 action" returns.

welcome back. low oil prices and an um proving jobs picture have pushed retail stocks to new highs. our own dan latham bet against this sector last month though he hasn't lost much money and here's why. 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 reretf. dan thought retail stocks were in trouble ahead of the holidays, but just going short?

>> great bouncing iceberg. >> so to define his risk dan instead bought the march 90 strike put for $2.40 and now 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 let you. >> sit on a throne of lies. >> so to reduce his costs dan then sold the december 90 strike put for 80 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 costs down to $1.70. and get this. the short-dated put that dan

sold will lose value faster than the longer dated put 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 needs the xrt to fall below $90 or more than the 77.70 he spent on the trade before march expiration and 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 expired worthless meaning dan now owns the longer dated put at a fraction of the cost, leaving "options action" biggest fans with one burning question. >> isn't there anyone who knows what christmas is all about? >> actually, what they want to know is what will dan do with his xrt trade now? 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. have simply shorted 100 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? >> yeah. that's kind of the problem here, kind of out of money. 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 really believe that this is going to be -- while it may be dollar-wise the most plentiful retail holiday season ever it will be the worst as far as profits are concerned, profit margins. one of the most heavily discounted, and that will come out when we start to get q4 results in january and february from a lot of retail, so what i wanted to do is finance the purchase of march puts. here we are with the xrt at 95.5

and i own that put. volume has increased. buy some cheap options and sell shorter dated ones and we did that. right now you have an opportunity. not down a whole heck of a lot. think about selling something else or rolling up. let me tell you what i did about a week ago when the market is lower before the fed meeting. i actually sold and covered the december 90 put and sold a march '85 put and now i own the march 90-85 put spread. i've reduced my cost base and break even and now i'm far out of money and at some point i'll consider rolling this bet a little bit higher increasing my odds of success. >> the best holiday sales growth in three years. discretionary stocks among the best performers year to date. >> right. >> the economy starting to ramp. so there's the contrarian bet. >> a little bit like the utilities, has this already been priced into the security? in terms of dan's approach and he's very adamant about this, do the not like to pick tops.

he's done that here and i think he although be vindicated, too far to fast and it's a good bet to take the road less traveled. >> mike, take the other side or do you agree with dan and carter? >> the reason discretionary stocks have done so well because consumers have more money in their pockets and anybody who has been to a gas pump remembers this. i remember when gas was 990 bucks every time i went and there's a huge increase in the amount of money available. the mall looked full to me as well. valuations are things i keep coming back to. folks, if you're going to look at equities, have you to concern yourself with valuations at some point right now. all of these names are looking at or above the historical averages. to me that makes it more reasonable to begin. >> you are factoring in where gas prices are, dan, aren't you? >> i kind of have a different sort of view on this. i think in the near term because of the oil decline and because of the price at the pump dropped

so dramatically around holiday season, i think there's too much emphasis on how much the consumer now has in their pockets. i think as we get into the new year, i think a lot of the 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 and credit issues and stuff like that. i'm not convinced this is a 2015 boom the way it has been in late 2014. >> all right. up next, 15,000%, how much altria has returned since 1980 and we'll tell you why our resident chart master tells you it may be time to quit the stock. more when we come back.

welcome back. how does this sound? you make a product for a penny, sell it for a dollar and sell it to addicts. that's what warren buffett said about cigarettes, and that might explain in part why altria's stock formerly known as philip morris is up 15,000% since 1980. carter, you say the stock is too high now. why? >> let's have fun, long-term charts, of course, are what they are, very long term and they are not the here and now and here and now is also stretched. starting with the lock term, s&p

up 1,700%, procter & gamble double that up 14,000, cole gate doubled that 8,000 and philip morris has doubled that 15,000, so one. 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 pe 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. a 30% dividend yield annually and buying at a pe and now, of course, the reciprocal. the pe and yields. here's the yield, 4%, and you can say that's pretty good. on a relative basis it's quite poor compared to treasuries. it's the lowest ever, so take a look at trend. we close at 50, 60, like to measure trend, and when you're too far above you check back, you check barks you check back,

we're playing for a check back to 45, and the 45 level is where the 150 moving average comes into play and it will 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 and back to 45. >> mikey? >> i'm sorry. >> yeah. i am a seller. >> yeah, you're a seller. >> and right now interestingly although the stock is so expensive, usually options get cheaper. they are not in this case. a little bit above the average and here you want to use the spread and very specifically looking at the march 45-49 put spread, those are favorable odds, spend $1.20 for the 49 and sell 45 for the bets against it and make a bearish bet and the thing could drop back about 10%. i've been trading this thing since it was single listed and remember this being put out of business. let's face it, no more smokers

coming up. >> dan, you agree. want to fade what's been one of the more resilient of stocks? >> listen, really try to hard to find reasons other than the secular trend against smoking, why to pick a stop right here and fade it. to me the way mike is doing it with a put spread makes a whole heck of a lot of sense. not looking too long date or too large of a pullback. i like the pullback and the range he's looking for, risk-reward of the spread. >> carter, last word to you. all good things come to an end. >> yeah, right. i just wonder, you know, if it hasn't to this point, what makes you think it will now. >> interestingly the day-to-day relative strength is quite poor. stocks not keeping up with the market. it might just be the foreshadowing of weakness up. >> next, the final call from the options pit. >> @optionsaction, realtime all the time. catcher move we make as it

happenings. don't miss any of the action. follow us on twitter n now @optionsaction.

all right. welcome back. let's take tweet for you. carter writes @optionsaction, long the coca-cola 43.50 january calls. stick with it even with the job cuts? mike? >> the job cuts aren't necessarily going to hurt this stock and the other thing is these options are incredibly cheap, probably only 40 cents, so if you're still making a bullish bet on coke, still probably the best way to do it. >> final call, final word from the options pit. dan, start us off. >> best wishes to a huge fan of the show and a friend, don from baltimore took a spill today. watching the show from the hospital right now. get better, don. >> yeah, certainly wish that to you as well. mike? >> calls are still cheap so if you're going to continue to make bullish bets, that's the way to do it. >> wbw? >> yield star, we always think people are overpaying for florries. >> looks like our time has

expire. i'm scott wapner. for more options action go to our website optionsaction.cnbc.com. have a great weekend. stay tuned for "mad money." it begins right after this. >> announcer: the following is a paid presentation for the nutribullet brought to you by nutribullet llc. special tv offer. stay tuned to find out how you can get the nutribullet superfood nutrition extractor free! that's right. get the complete nutribullet system free! details just ahead. >> my muscle aches, my back aches really started to decrease significantly in one week. >> first night that i actually used the nutribullet, i actually slept really well. that was exciting. that was phenomenal. >> the bad cholesterol which was 290 went down to 190. >> before you turn to drugs,