new york city's time square, i'm melissa lee on a brutal day new york city's time square, i'm melissa lee on a brutal day for stocks. our guys getting ready to give their best news. here's what's coming up. >> great selection, great prices. >> and yet, walmart's lagged in both the dow and retail stocks. but could the world's biggest retailer be the world's catchup trade? plus, there is something funny about apple joining the dow. >> funny how? >> relax, joe. all we're saying is that apple shares may not do what you think. we'll explain why. and want proof tech is in a bubble? >> i want the truth! >> we've got a shocking chart that settles the question once and for all. the action starts right now. growing jobs, sinking stocks, and on the back of this

morning's impressive jobs report, treasury yields surge. the s&p had its worst day in two months. the question now, are rising rates killing this rally. gets find out. dan, you are a bear. so do you -- enjoy the action. >> i'm skeptical. my view very simply here is the fed is walking a tight wire here. and, you know, they have a real opportunity to mess things up pretty badly here. and so to me, you know, i think they're almost damned if they do, damned if they don't. if they raise rates too quickly and kill the rally, the market is in trouble. if they do it too much, too quickly. and, you know, i just mentioned this. when you think about what we just saw in treasury the last couple weeks, the high-yielding sectors like reits, and utilities, they have been slade. and you know, what the iyr and xlu down 3% today, and investors are repositions for a higher rate environment. i think there is some risk to bond-proxy sectors out there. >> for the investor here now,

classically, if you feel there is trouble ahead, you rotate into defensive assets, health care, staples, utilities. and you can't do that this time, because they're already bid up and starting to come apart. it's a little bit of a checkmate. >> mike, what do you do in this market where you see selling across asset classes. throw gold in there too. >> well, the gold selloff makes perfect sense, because, of course, if you are assuming that rates are going to rise and that the dollar is going to strengthen, gold is a proxy for the basket of all other currencies. you see it in dollar terms, at least. it's going to weaken. one of the things we haven't talked about that much. if you start to see interest rate volatility, volatility in equities and other assets, bound to follow. there is no chance the fed is going to get the first say on this. the market is going to anticipate what the fed is going to do. they're going to front-run that and we're starting to see it right now. >> looking at longer-term, carter, when you look at rising interest rate environment, what historically is the relationship between that and equities?

>> sure. very long term. of course, there is an inverse relationship. if rates are very, very high, it makes equities less attractive. you can get a risk-free return from the government. but the here and now, it's not quite -- these are very low rates. artificially, though. so moving up a little bit, is it really that bad, the market didn't like it today. the question is, normalization of rates is probably a good thing over time. >> all right. so dan, you're taking a look at the home-building sector. >> and the xhp. listen, we have a date, march 18th, we know the fed has their next meeting here and the whole market is focused on whether they take out one word. whether they remain patient. patient. if it's in that statement, you know, then that would be a very do havish thing. maybe rates go higher sooner or later. i don't think going in and shorting the iyr or xlu or even treasures, the tlt makes sense. they're short-term oversold here. but one sector, despite pretty decent news is the home builders of late. and the only reason i say this, maybe a little counterintuitive

here, but when you think about it, if rates go up and mortgage rates go up quickly, you could see a pause in home building activity and some of the related names. there is a lot of retail. so today when the etf was 35.5, this was a good trade. it sets up pretty well. because it's not off a heck of a lot from the recent highs here. you could buy the april 35, 32 put spread for 65 cents. one of the april 35 puts for 80 cents, sell one of the 32s at 15 your max gain is 235. i like that risk-reward relationship. we have a chart. look at that thing. it ran 35% from the october lows. it's coming back here and i think if you have a breakdown below that breakout point, that's that upper line, i think you get to move back to 32. that is a 200-day moving average and this looks like a good risk/reward setup if you believe the fed is hawkish. >> mike, there is an argument to be made that goes like this. with rising rates that will finally get people off their did you haves and into the housing market buying homes.

so it could actually be decent. >> if rates rise, i think there is a problem. right now the price of homes is sort of -- if you exclude the housing bubble itself, the price of homes in the united states is right near the upper edge, essentially, of the approximate cost to rent. so essentially, what's going on, if you get any kind of material increase in rates, the affordability of homes is going to be significantly challenged. so i think that it is going to get people off their sofas but maybe not quickly enough they can go find the house they can afford. so from that perspective, i think there's an issue. xhb also includes a lot of things like home depot and mattresses. i don't think that's going to be a big deal. but i also think autos, anything rate-sensitive where people are borrowing money to buy it, is going to be hurt if we see rates tick up and could move up sharply and quickly. >> carter, we started 2015 and you said home builders was your trade. >> so far, so good. up 8%. but that was highly debated. people said that's absurd. and then a little bit of trouble today with this rate move. but we still like it.

and i think the facts are in the pudding. so far you've got an area that's really outperforming, even with today's down draft. and again, xhb dominated by whirlpool and home depot. >> but those stocks are really extended and starting to get really expensive. home depot and whirlpool. >> but you chose xhb -- >> because i like -- >> and options don't trade in the itb. mike made a great point. february auto sales data was really, really bad. and if you want to extrapolate anything to the housing market, that could be another nail in the coffin. more americans are working, apparently, and retail stocks are beating the market this year. why is the world's biggest retailer, walmart, such a laggard. explain what's going on. >> that's right. in many ways, of course, this is its own thing. is it a department store, is it a grocery store? it's a lot of things. come together. but i've got some charts and we can look at them and let's try to figure it out together. so the one thing we know is walmart has been a massive underperformer compared to the equity market generally. s&p and compared to other retailers.

i want to go through some charts and again try to deduce. this is a two-year chart. the performance is nothing short of a disaster. walmart being up 14, almost a third as much as the general retail component of the s&p. now, take a look at a five-year chart. here again, talking about a third. 55 versus 145. real laggard. that's the opportunity. because walmart did just break out earlier this year, and take a look at this chart. and then take a look how drawing the lines. back to the original. and then back to the lines. the breakout that occurred is very, very important. and as a rule of thumb, if and as you do break out from well-defined level, if you fall back to the pivot point from which you broke out, the probabilities of a rebound are pretty high. we like the actual stock itself here. but then we also like this. let's just talk about how this stock does if and as we're entering a bad period for equities. this is a very defensive asset and everybody knows it. if you look at the last two bear markets, of course, this is the s&p and this is walmart, and when the s&p drops on 50% from

the peak at 2000, walmart, while it did drop, was an outperformer. and in the most recent bear, 2007, 2009, you're talking about s&p down almost 60 and walmart outperforming on a relative basis. down, absolute. but saving you money. so we think that there's breakout potential here after having bounced to go again absolute. but also a good place to hide if and as things do get much worse for the market. >> mike co, do you agree with carter's take? >> well, you know, there's a couple interesting things going on here. walmart is not incredibly cheap, you know, compared to its own historical valuations and about 16 and a half times earnings. and top line growth, 2%, maybe less, that's even lower than our overall relatively anemic gdp growth. when i look at walmart's growth prospect, not that good. the stock is concentrated, the walton family owning half the company outright and they're not going to be selling any. what's interesting, as i look at this stock, despite those things that suggest it's stable, it's a

stock that has moved more than five bucks over a period of two months or less, eight times in the last year. it can move around a decent amount, 5% or more. so as i look at this, i can say, okay, i'm willing to go along with the trade. but i'm also willing to concede that the stock could move 5, $10 against me. i'm going to take advantage the options relatively cheap. and i'll look out to june and by the 82.5 calls, a closing offer today. that represents less than 3% of the stock price. and i think there's a very good chance that whether the market is going to strengthen or weaken here, it's going to move significantly more than that amount by june expiration. >> all right. we don't look at trades in a vacuum. look at target, up more than 30% so far this year. there seems to be a growing, positive sentiment when it comes to brian cornell and the changes he's exacting at target. will that be a headwind to this thesis that walmart can bounce? >> it could be. that's a great point. target was so out of favor for so long and walmart was that preferred thing. that being said, walmart was in

the massive two-year base that carter showed here. all things being equal, i think that walmart had that massive breakout and then target had their breakout. target put up better numbers. they have less currency exposure. i think that was a problem in walmart's last report. i think this is an okay trade. i think if we were having this conversation a week or two from now and the stock was back at 80 at the breakout level, i think all of us would be pounding the table and saying that is that pifrt point that carter mentioned and that's where you want to take the shot. you may be early. but like mike said, you have until june here to have this thesis play out. >> carter, i put the question to you. how does a target chart look? >> that's the problem with walmart or the opportunity. target is up and to the right quite extended. and the bet here is that walmart has lagged by so much, it is a relative safe trade but absolute possible winner. >> all right. got a question out there, send us a tweet at options action for everything options action, check out our website, optionsaction.cnbc.com. and while there, sign up for our newsletter to put some calls.

here's what's coming up next. talk about weird. >> machine inside of a robot built in the form of a woman. >> well, not that weird. but something strange could happen to apple after it joins the dow. we'll tell you what it is. plus -- >> i just want to smash your face in. >> what do records prices and divorce have in common? one chart will explain when "options action" returns. ♪

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little piece of news you may have missed today. little piece of news you may have missed today. apple is going to join the dow. on a terrible day for the market, that helped the tech giant stay in the green. is it actually a good reason to buy the stock? dan, break it down. >> well, you know, listen, i don't think it's a good reason to buy the stock. i think there was a lot of excitement this morning. i think the sentiment towards a stock in general is very positive and i think people are more inclined to go in and buy when they see a big headline like that than they are to sell. the stock, obviously, got hit towards the end of the day. closed up small here. obviously, monday, the main event, is this watch launch here. we already have a lot of news about it. so to me, i think it does set up for the potential of a sell the new situation. i want to make one point. i know we're going to talk about this. i think while the world is generally positive on apple, the stock up, gained more than $120 billion in market cap this year, there is a potential bear story.

over the next few months, you could make the argument that all the catalysts are known and there is a potential to disappointment. so here's the one thing we could get in april. we are going to get probably some first weekend sales from the watch, at some point in april. and then could disappoint. the critics could not like it. that's one big thing. obviously, people are expecting greater cash return, okay? they could disappoint there. they bought back a lot of stock over the last few years here. and the last one is that this is one of the huge multinationals when they just reported that didn't show a huge adverse impact from the strong dollar. and so maybe we start to see that come into their q2 results when they also report in april. so if you line those things up, there is a bear case to be made here. and no one is making it. and so to me, if you have that, you could have a perfect storm in the next few months. >> what do you think? >> the thing is, though, here is obviously an important name. and it's trading in market multiples. so in a sort of fixed world, if you had to choose this equity versus equities in general, this equity is likely to serve you well. relative to being in the s&p, for instance.

so despite being in or out of the dow, despite the stock split, results, cheap or expensive, i would rather be in apple than the s&p 500. >> >> the bull case, to play dlifl's advocate, expectations for the watch are so low that it will surprise to the up side. but there will in fact be capital return that will be at least in line with what analysts are expecting. so either a buyback or a dividend increase. and we will get first weekend sales of the watch. and they will be decent. >> you know, i think the watch actually could be a big surprise to the up side. i mean, if anybody is going to sell an electronic digital watch and do so successfully, i think maybe the only company around that would be able to pull that off is apple. so if there's -- anybody is going to sell one of these wearables as successful, they're probably going to be the one to succeed and show everybody else how it's done and playing catchup as they always are. the other thing i would point out, with 5% free cash flow yield, there is a lot to support the stock here, even if they disappoint in terms of returning cash. at the bottom of that stock,

that's what you're looking at. there's $178 billion there right now on a market cap with $780 billion bucks. and by the end of the year, you're going to add another $30 billion. so, you know, when you have that kind of thing supporting it, and valuations are relatively light compared to the rest of the market, it's hard to figure out why this is the place you would sell. >> so the fact that there is disagreement on this desk that both cases, bull and bear, can be made, sets up for wanting protection, dan. so what's your trade? >> so to me when the stock goes 127.50 today, there is a trade at that sets up and i think it makes sense. when you get the fear of having monster gains that a lot of people have over a short period of time, we know there are catalysts and stocks when they disappoint with high expectation, they can go down a lot. so here was a trade that looked interesting to me. it's an options trade, okay? and so year-long, let's say 100 shares of stocks, you could look out to may and sell one of the may 140 calls at about $2.40 and you could use the proceeds to buy one of the may 115 calls for about $2.40.

and what you've done there is you have created a collar. you would have gains between 127.50 up to 140, be called away above that, but you would also have protection below 115. and you would do this trade if you think that there is the potential for a massive move to the down side over the next few months, because of all these catalysts don't pan out. but you really want to participate in some further up side. >> mike, how do you -- how does one decide whether or not to do -- trade like dan is putting forth or a stock replacement strategy at this point? >> well, you know, one of the reasons you might think of a strategy like this, because options premiums in apple actually are a little bit high when you consider that it's not a levered business. you know, if i take a look at the situation like this, the question you want to ask yourself, is that a level where i would want to buy the stock or sell it? because if you're buying a put, that's what you're doing, saying that's a level where i want to sell it if the stock declines. i think this thing gets down into those levels and probably a lot of people who would reach out and buy it. i do like the idea of selling calls because of the elevated premium. so for people who hold the

stock, you can do one half of the trade, look at selling some up side calls to essentially collect a little yield. i think the down side, though, here is probably pretty muted for apple. >> carter, how do the charts set up for apple these days? >> as it's said, what's not to like? it's not too hot like xhb and hasn't rolled over so the benefit of the dow is with the bull. the burden of proof is with the bear. >> your exact complacency is the exact reason you should be considering other strategies here. that's it. >> all right. coming up next, the nasdaq soap opera in one chart. you've got to see it. that's when "options action" returns. hey mom, you want to live by the lake, right?

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with the nasdaq hitting 5 k with the nasdaq hitting 5 k earlier this week, everyone is talking about bubbles. but carter has the chart that tells the real story. >> that's tongue and cheek. this is from advisers, a classic kind of thing. down here, you know, 1996, i think i better go to the store and buy me an internet. people have no idea what's going on. and my neighbors are making money but i'm still not involved. i can't stand this.

what do i do. and all of a sudden i'm all in, baby. just, of course, before the crisis hits. and then here, people say i better double down and then here hide statements from my spouse. and then here, of course, you're back in on margin. and this is where the divorce occurs. and ironically, of course, we're back to the tops. and this is where people start to feel good again. but you know what's interesting as we talk about apple and nasdaq and the milestones, we're nowhere near the peak in terms of real money, meaning adjusted for inflation. look at this chart. this is the s&p. just last week, we got back to the 2000 peak adjusted for inflation. even though we're 30% higher, we're not really 30% higher. we're same price, 14 years later. and the nasdaq, despite all the talk of 5,000, is still some 30%, 25, anyway, below its all-time peak in real terms, real dollars, adjusted by cpi. >> so what is the -- dan, in your view, what is the extrapolation? if i wanted to make a bullish case, there is more room to run.

>> i think it's easy to make a bullish case when you think about more profitable. and the earnings. and actually think about the cash on the balance sheet of those companies. i think that would be the take-away here. and we don't nearly have the mania. we lived through that. there was an all-out mania. carter's chart displays that. and all things being equal, 5,000 was not a big event. >> mike, your take. >> cisco one of the biggest names in the nasdaq and tech bubble, still one of the big names today. but valuation wise, well less than a tenth of the price it was back then when you take a look at what earned per share. i think carter is right. the market is actually cheap compared to where it was back then. >> so carter, are you saying that the nasdaq has more room to run based on that? >> well, in the sense that it's gotten all this attention, this 5,000 miles, so apple going to the dow, tech. it's nowhere near as excessive, of course, as the prior peak. and, you know, the tongue in cheek stuff sort of suggests that, to some extent. so we would say, obviously, it's

nothing like that peak, even though we're back there but not really. >> all right. coming up next, get out your phone. we are taking your tweets. heroes charge! ♪ (explosion) ♪ (explosion) ♪

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♪ ♪ let's take a tweet. bench us 300 said cities should rally after march 11th, i'm selling the june 55 puts. mike, what do you think? >> one of the things i think is that banks have big balance sheets and that makes them fairly levered and at ease. it's a place where if i'm going oh to trade options, i usually like to do it on the long side. you're buying calls on calls if you use that to make a bullish bet and volatility is relatively low here. that would probably be the way i would favor making a bullish bet in the name. >> what do you think about citi after the 11th when banks find out how much they can return if they are allowed to return capital? >> oh, you know, look, the situation here is, we saw what

happened to goldman sachs. their situation where people were looking at the possibility of returning capital on some negative disappointments there. you know, my view of it is, the banks have strengthened their balance sheets, u.s. banks are very strong. not as cheap as they were, however. still, favor using calls to make bullish bets in that space, especially with the market having had as long a run as it has. >> can we talk about bank of america? this is a tremendous stock in the past couple days and today in particular on a down day. >> in general, if you look at the kre regional bank index, because it's interest rates. net interest margin in the spread business. so in principle, it's not random they did well today. very well. and i would expect more of that. >> and that's the trade next week. if we get a continuation of today's weakness and the banks go down to certain levels, bank of america an obvious level 1550, $15, that sorts of thing, i think you buy in front of the march 18th fed meeting. time for the final call. mike co. >> your bullish bets in financials, calls are the way to play it.

>> carter. >> walmart gets them. >> dan. >> i would consider protection. >> looks like our time has expired. i'm melissa lee. thanks for watching. for more "options action" check out our website. i'll see you back here monday for "fast." ouncer: the following is a paid presentation for p90x3 brought to you by beachbody. [ bell tolls ] [ clock ticking ] [ dramatic music plays ] >> announcer: do you wonder what it would be like to be in amazing shape? [ pulsing ] do you look in the mirror and wish you had a six-pack? don't you want a body that can perform like this and look like this at least once in your life? [ air rushing ] well, now, you can get that body... faster than ever before. you don't need a gym membership or fancy equipment, and you don't need a lot of time. you start by doing what these