hey, live at the nasdaq market site, the guys getting ready behind me. while they're doing that, here's what's coming up on the show. ♪ it's a good time for the great taste of mcdonald's ♪ >> but it may not be a good time to buy the stock, because mcdonald's shares are pennies away from doing something bad. we'll explain. plus -- >> can you hear me now? >> we can. but investors in verizon certainly don't like what they're hearing. but now might be a buying opportunity. and we'll explain why. . and -- something in the charts that says one sector is a creaming buy. and here's hint.

♪ we're gonna turn it on ♪ we're gonna bring in the power ♪ >> we'll tell you how to profit. the action begins right now. ♪ so let's get right to t. as we head into the heart of earnings season, what names present the biggest buying opportunities. lets get in the money right now. dan, we have a preview from some sectors from the earnings we've had so far. >> we had intel a few weeks ago, better than expected. the stock rally. honeywell last week was important, as it relates to industrials. and the swath of financials we got today. overall, i think there is a lot of stuff cancelling each other out, for all intents and purposes. i don't expect a huge move into or out of just based on earnings here and i also expect the things working, the stuff like amazon and stuff, will probably continue to work. i'm not expecting a shoe to drop in those names, just yet. that's a 2017 thing. >> we have seen short interest in names like amazon creeping

up. at some point, you always wonder whether valuation is going to matter. and good i object dada, but at some point they start to matter. i think earnings are going to basically tell you whether that kind of data is flowing to the bottom line. >> one of the things about earnings is it's your -- you're taking a lot of chances. we know stocks have violent moves. if it's a disappointment, you get murdered and a beat you get rewarded. a lot of very astute professional people actually wait for the earnings to pass. and then they go after it. meaning if it's good, okay, we can chase it. even if it's missed. because you take a huge risk, and we're doing some of that. on the show, from time to time. and that's how you get paid. you also get murdered. i think this is going to be more misses than beats coming up. >> so you're looking at ge specifically. why do that if the down side is that you can get murdered? >> here's a great example. this is something that i think

mike and i make to people, investors all of the time when we talk about uses options. when you're long premium, directional into events, you have to get a lot of things right. timing right, magnitude of the move right. and most possible, you have to get the direction right. if you don't do that properly, then you get murdered like carter is talking about. but here's the thing. every so often, sometimes you arrive in a situation where you don't think the options market is maybe pricing the situation clearly, and it looks like a really good risk/reward. that's why i want to look at ge. but first a step back to honeywell last week when they surprised the market and guided lower than they had geuided in july. the stock down 7.5% on october 7th. i'm looking at ge, they report on friday morning, before the opening. and the options market is implying a 2% move in either direction. that's nothing. and you know, one of the things interesting to me about ge is the stock is also down on the year, down 12% from its 52-week highs. the honeywell news is in the stock for all intents and

purposes. that chart is not giving me -- carter, i'll get to it. a whole heck of a lot. needs to hold around 29. here's the thing. i think there's probably a lot of bad news in the stock. if they don't guide down, i think the stock probably goes up a buck here. and i'm looking out october 21st, next friday, expiration, 29 strike calls offered at 30 cents. that's basically 1% of the stock price. when i listed off those three things, all of the things i have to get right, it makes it a lot easier if you're only risking 1%. if they're able to come in line, guide up a little bit, i think the stock is at 30, three times what i'm risking. >> here's the way to think about it. if this stock moves less than 30%, you might have been better off trading the stock -- 30 cents, i'm saying f. it moves more than 30 cents, that's indicative of why you want to trade options in a case like this. you're risking very little. what are the chances this thing is going to be trading within 29, 30, and 28.70, one week from today after we have the earnings

data point? i think the chances are actually pretty low. >> i think they're two burdens proof on bull in this case. one, 13 weeks ago, coming up, the quarterly results, good or bad, they're actually big beat, stock gap down. comes in twos or threes. the second is the relative performance. meaning post labor day, the market rallied back to a high. trailing down, trailing down. it just seems heavy. >> listen, to use your expression, you use it all of the time in print. it's kind of a choose your own adventure. here's the thing. if they are to guide down, this stock is going down to 27 bucks. quickly. >> and honeywell -- >> and then you're -- i'm just telling you, it's going to be down. 6, 7, 8%. of. >> the reason that would be the case, the thing trading almost 20 times next 12 months estimated earnings. not exactly cheap for a company that hasn't been growing at all. so if you have a situation like that, and it is a little disappointing, it doesn't justify it 30 -- >> 3.2% dividend yield. >> which is well-covered. >> right. and they buy back a whole heck of a lot of stock here.

listen, i think honeywell showed us, there is gap risk, and you want to be contrarian, you're risking into an event. >> does this mean you're optimistic about industrials in general, or just -- >> no, not at all. i just don't think it's a good press on the short side. if you were coming in as an options trader and said i could use 30 cents to buy the put or the call, i would rather buy the call than press short. moving on, the other big story this week was a selloff in bonds. the u.s. ten year yield at its highest level since june. that is creating an opportunity in one group of rate-sensitive stocks. so carter. >> reits, utilities. we're going to look at utilities. and in principle, almost there is no precedent. if the market is in trouble, even as bad as these have been, they're likely to -- offer alpha and outperformance. so i'm going to make the bet the utility is a bit oversold here, overdone and going alongside. all right. long-term chart. this is back since all data

begins in late '89. now, how do we draw the lines? let's see. first thing i see is this. yes, you have well-defined tops. and you have that breakout. it's a little bit -- we're checking back to the point at which the line comes into play. you can also draw it this way. we have ascending a nice line, put them together. we've -- back into the point at which i think you're going to get some support. let's keep going. okay. now, these by definition can't outperform during a bull market. this is the absolute low in '09. bull market starts all the way to here. we know they underperform, all the way, of course, because they're bonds. what's important is they broke above their down trend. their relative down trend. i've lost my charts. okay. well, that happens. here is the long-term story. utilities having underperformed are now outperforming and breaking above a long-term down trend and finally rates, which have -- we're going to get a little help. thank you. rates which have now backed up,

let's -- let's go back to this chart. thank you very much. so that's important. but now take a look at this. this is the part that i think is interesting. if you take your low over the last two years, and you -- those who get into replacement levels, these are the exact numbers. 63.46 points, pull back 31.64. exactly a 50% replacement and bounced to the penny off the line. i think that bounce continues. we know that, of course, the bonds have moved up in terms of yield, and utilities move down. but really, are rates moving that much higher? this is the long-term pick you are of rates. and i think ultimately, it's this, and we're going to go to new lows. i want to be buying utilities as a defensive thing here. >> all right. so mike -- >> i think we need to make an important distinction here. utilities are a yield trade, but not a fixed income trade. okay. bonds are a fixed income trade. so when rates go up, that doesn't necessarily mean that utilities are going to go down. take a look at the last tightening cycle we had, started in june of 2004 to 2006.

i think we have a chart. take a look at how utilities did. up 36% over that time frame. now if you think it's because stocks were rising, take a look. yes, stocks were rising. we have another chart that shows the s&p. but the s&p was only up about 14.5% over the same time frame. what was interesting there is that even the short-term rates were rising, significantly. long-term rates did not rise. in fact, in september of '05, yield curve actually inverted. it is absolutely possible for yield trades to rise, even as short-term rates are also rising. and kind of like what dan was talking about right now. options are actually relatively cheap. i think the very simple thing to do here is buy the january and 48 call, spend $1.55, look for opportunities to spread. this is one of those situations where if you get a little mommy, you want to start to monetize it. >> do you like this trade? >> i do. some may remember last month i tried this using december expiration, similar entry around 48 bucks here. these guys have a better run here. i like it. and i actually think because i

think the fed is going to raise in december. but i think they're going to be -- i think they're going to be sitting on their hands for a while. and i think -- i'm not sure pressing a trade, thinking that the ten-year treasury is going to make a new low is a great trade. >> that's a longer-term thing. this selloff in utilities already priced in some sort of 25 base point bump. >> the other thing also to pay attention to is that valuations like in many other places are not cheap here. in fact, utilities -- the top five names like the southern companies, the next eras, all these. these are actually trading at valuations that look a lot like the tail end of the last rate hike. not the beginning of it. so evaluations are not cheap. but if you're going to play it directionally, options actually are relatively inexpensive and you can make your bets that way. >> got a question? send us a tweet to "options action"s and check out our website, "options action"s.cnbc.com and while there, check out our super cool newsletter. it is a must-read. in the meantime, here's what else is come up next. ♪

♪ i'm lovin' it >> why investors aren't loving mcdonald's. if you're worried about earnings next week, relax. we've got a way to buy protection. plus -- ♪ microsoft shares surging today, but these guys want weren't the only ones celebrating. how high it could go when "options action"s returns. [pony neighing] what? hey gary. oh. what's with th returns.e? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade.

hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart. well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade. welcome back to "fast money" -- i mean, "options action." i'm dominic chu. a number of notable large cap stocks are weighing things down. so we took a look at s&p 500 stocks in search for those near their 52-week lows.

turns out around 30 are within 5% of those marks. and some are big familiar brand names. so you've got like coffee companies, starbucks, just a percent away from its lows that hit back in early february. the stock has been trending lower, but analysts still think they have 23% upside from creme levels, according to data from fact set. another big name, nike. the athletic apparel giant just after the brexit vote in june. analysts price targets getting lower but they still think there is an average 22% up side. and then the embattled epipen make e mylan, just hit a 52-week low last week. analysts say there is still 47% upside. one that's not on the list but still has been hovering near its lows of 2016, and that's mcdonald's. analysts still think there is 13% up side from here. melissa, are there some traders who think these big brand names have gotten low enough to become compelling value plays.

back to you at the nasdaq. >> thanks,dom. and get your shows right. have a good weekend. so what's a good way to protect yourself from more losses as we head into earnings season? we have our "call to action." what are you looking at? >> i want to look at mcdonald's but first talk about using a collar. this is a strategy you use against a stock you are long, that you're looking for protection. you don't want to sell the stock, but you don't want to also just be long premium against that stock. if you do that too frequently, that's just going to whittle away at your performance. so let's go to the playbook, let's talk about what a collar is. it's essentially against a long stock position, selling out of the money call and using the proceeds to buy an out of the money put. creating what we would call a collar. why do you want to do that? well, you're cautious, near-term. you don't want to sell your stock. in the case of mcdonald's, for instance, going to pay a 94-cent dividend on november 29th, e next week. 2.5% in either direction. the stock has been kind of gappy.

the other reason is that you just don't want to buy puts all of the time, like i said. you want to finance the protections. you're selling out of the money call, essentially overwriting your stock and using proceeds rather for yield but to use that to buy puts and give yourself protection to the down side. the last point i would make, you're willing to sacrifice some of the up side by selling that call, because your gains in the stock are going to be capped there to get that down side protection. is you're leaning a little bit more to the down side here. i just want to look at mcdonald's. the stock, as dom just said, banging around here, near its 2016 lows, doesn't act well. carter always says you want to sell weakness here. look at the air pocket, the big gap the stock had last year when they introduced the all-day breakfast. that was a big thing. the stock moved. almost 30% from that. and here is over a longer-term situation. the stock spent years consolidating. here was that gap, kept on going to above 130. now we're at 115, all i see is an air pocket, if i own that

stock, for a whole host of reasons. i may be worried in earnings next week that 55% of the sales come from overseas. we know that competition is red-hot for mcdonald's and we know they're going to come up against the anniversary of the all-day breakfast. what's the date trade for mcdonald's? if you look out to january expiration, you can sell. the january 120 call at 1.45, use the proceeds to buy the january 105 put for 1.30, resulting in a 15-cent credit. you can make money in the stock up to 1.20, plus the 15-kept credit and then you have losses in the stock down to 1.05, but protected below that. i want to go back to this chart. i'm thinking about the air pocket, one reason why you may be looking for some down side disaster protection that doesn't cost you anything. that's the point of the collar here. i'm not trying to get taken out of the position. if the stock is above 1.20, i can cover that call and not be taken out of the position.

>> dan knows it. it was associated with earnings. exactly a year ago. it was october 22 nd, and they beat big. consensus was 1.28. it came in 1.40 when the all-day breakfast started to have traction. while not all gaps are filled, the risk is this one will be filled. and the stock acts poorly, it's a a held and shoulders top if you want to draw lines differently. >> last year a revenue decline of 2.5%, 7.5%, probably 3.5% this year. next year, 6.5%. they are losing the burger battle. they really have to -- other than all-breakfast, have to pull another rabbit out of a hat. i like collars in general. we saw a lot of trading this week in pfg. this is a really good strategy if you want to hold on to your stock. in mcdonald's case, i don't know why you would want to. >> and restaurants in general, panera is heavy, buffalo wild wings. if you look at the s&p 500, restaurants sub industry group,

big topping out formation. >> in terms of extrapolating this strategy in this view towards other consumer stocks, as carter mentioned, what would you look at? >> yeah, so here's the thing. you don't want to do this strategy too much in stocks like amazon and facebook. one of the things, i'll just say, i think the fundamentals have changed in mcdonald's. investors were caught offsides. they had new management, they had a restructuring and dramatically changed. it was like a -- dramatically changed their menu. it was the perfect storm. what has the stock been doing since july? lower highs and lows. if you own it for your kids, this is a strategy that around a potentially volatile event makes sense. >> they have been trying to put out the more upscale burgers and not getting a tremendous amount of traction. we'll find out. that's the story you're waiting for and if you're hanging on to your stock, what you're waiting to find out. microsoft surging 1% today as the company gets ready to report earnings next week. we will explain.

[pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade.

hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart. well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade.

welcome back to "options action"s. time for "total recall" where we look back at some of our open trades. two weeks ago, dan said shares of microsoft were about to rally. take a listen. >> so listen, here's the trade. very simply. you look out to october expiration, the company is going to report a day before that, okay? the october 57.5 calls when the stock is trading at 57.5 today, are offered at $1.45. >> the stock is flat since then, but the company does report earnings next week. dan, what do you do? >> this is a great exactly what we were talking about before. i don't think you want to be long one week option into this event. they are now worth $1.25, worth $1.45 a few weeks ago. i think you want to roll this view out if you remain bullish and want to play for the breakout. because otherwise it's a very binary event. if the stock just goes down, a couple cents from here, it's a total wipeout. i think if you're still bullish, you roll it out. >> there is a gap below so that's a risk. what you have to say, this stock

has held up remarkably well. in a dodgey tape here. especially over the last three weeks. i would say you're respective on the long side. now to verizon. poised to break out? >> so we've had something of a -- a pullback to a level where rebound potential is high. we have a -- down to a trend line. maybe a 10% correction. i think this is a good time to take advantage. >> you could buy the november 52.5 calls and spend just over $1 for that. >> stock is down about 3% since then. so carter? >> got murdered on this one, obviously the right kickup. what is important, we just talked about utilities. if you look at the correlation, verizon and xlu, it runs 85, 90%. i think we want to stake with this one. >> the nice thing, we only spend about $1 to get the call. only worth 30 cents now. we have e coming up. this stock actually moves about 5%. that would take us right back into the money if this thing rallies. and i'm not going to sell the call at 30 cents on a $50 stock at this point. we knew how much we were

risking. letting it ride at this point. >> these are the only guys that didn't say anything about the iphone 7 uptick. i think this is going to be a very important quarter for at&t and verizon. it may get investors focused on fundamentals again. especially when we know verizon is out there buying $5 billion yahoo! $5 billion aol. >> maybe less. >> fundamentals may be something to keep an eye on. >> up next, "final call" from the options pits. [pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade.

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hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart. well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade. ♪ happy birthday at our friends "halftime report" kicking off the two-week show in style. some of the biggest names with david tepper, carl icahn on monday. after that, nelson peltz, jamie dimon, and bob kraft, all starting monday at noon eastern

time. so you won't want to miss it. happy five-year anniversary, guys. let's get some tweets. this one from a millennial. how come dan is so casual for "fast money" and on fleak for "options action"? hash tag pinky up. >> pretty simple. they have the professor here and my -- so, you know. >> you haven't gone -- a pocket square yet. saving it. next from bryce. any ideas on options strategies? >> this is one of the most aggressive stocks. 2 1/2 times the market, a great performer. be the long side. >> yeah, but the options are pricey so probably want to do an upside calendar spread. >> all right. time for "the final call". carter, what do you say? >> i like utilities. it's a contrarian and defensive play. >> michael coe. >> happy birthday to my dad, 79 today. >> happy birthday, dr. coe.

>> if you have a conviction in either direction, the calls or puts attract. >> looks like our time has expired. i'm melissa lee. see you back here next friday for more "options action." don't go meantime, don't go anywhere. "mad money" with jim cramer starts right now. my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain but to educate and teach you. so call me at 1-800-743-cnbc or tweet me @jimcramer. my wife is going to hate me next week. in fact, she'll hate me for the next three weeks because we'll be in the thick of earnings season, and the work is so overwhelming during this period that i don't feel like doing