we are live at the nasdaq market site on this expiration friday we'll take a break from politics and talk about, get this, the markets. the guys are getting ready behind me while they are doing that, here's what's coming up on the show >> go with the perfect storm. >> let's not get too dramatic but if you're worried about stocks, we'll tell you where to hide out plus, deere shares are getting crushed and could spell trouble for another industrial giant we'll explain.

lowe's and home depot, something in the chart suggests more pain. >> let's get to it while the s&p has fallen 1% in the last month the so-called safety sectors, rallying, telecom and utilities up 4%, even consumer staples managing to eke out gains. if volatility picks up, is this where you want to be dan? >> it's interesting, we used to talk about interest rates and thought we were in a rate increase cycle here. fed fund futures pricing less than a 35% chance of hike in december that's why you've seen these rate proxy names kind of come back to life a little bit. telecom is interesting, we know there's fat dividend yields there and utilities like you mentioned there, staples are acting pretty well if you're looking for safety trades and volatility will pick back up, valuation may become a concern for some of these sectors that have had big runs it makes sense to look at ones regionally priced with decent yield. >> what could you do in view of

the safety trade move we've seen >> one of the things interesting about the safety stocks, the valuations are very different in this space you can take a look at names like staples and utilities and valuations are maybe a little higher than they are in the telecom sector if you're looking for yield, that latter one is where you're likely to find it. >> i mean, there's no great valuation anywhere in the market utilities are at or near close to historic highs and it's the reason the xlk -- there's no etf, they love at&t. >> only three stocks, right? >> two. >> coke and pepsi, the question is can they continue to generate the cash flow and buy things to do that. no chairman wants on their watch i caught the dividend -- so they keep desperately trying. as operating businesses i mean -- >> to that point, one of the things you should look out for if you're looking at stocks,

when you see very high dividends and very high yields, that often can be a warning sign. it's base beiically telling you might be unsustainable. >> i'm looking at at&t, i bought close to 36 a month ago prior to the earnings and it's important to think about why we're buying stocks in a market that was at all time highs, it was near 52-week lows, i was thinking of something fundamental and thinking about the yield also. to me i think this stock sets up pretty well if you believe the fundamental story. that gap you see there a few weeks ago, the stock was up 5% after the q2 earnings, they beat on sales and net ads and other thing, wall street journal reporting yesterday that their time warner acquisition bid for $85 billion bid and i like this fundamentally, that is at advanced stages. if we get nor clarity, i think the stock will rally i bought more today but there's an opportunity near term to sell against my stock and do a buy

right and add additional yield this is a stock that has an annual yield of 5.2% today when the stock was trading at 37.5, let's say you were to buy 100 shares of stock, look out to october expiration and sell one, 100 shares, one of the october 39 calls at 38 cents, you have a buy rate. your max gain is up to $39 in the stock of 1.50. if it is 39 or lower, you take in the 38 cents. that is a 1% additional dividend yield. or just yield in general if you annualize that, that would be a 6% yield on top of the 5.2. it's important to remember that this is long stock, short call and stock will pay a 49 cent dividend in october. to me i'm eyeing a move back towards the 40 range and if i get to october, the stock moves up to 39, then i'll roll that to a higher -- it sets up well, a super yield trade in a name i

think is beaten up. >> in yield trades typically in high dividend paying stocks, you're not expecting the stock to rocket higher, which is why you may look to sell upside calls, often times you'll find the premium you collect for you what you sell seems low and implied volt tilt, price of options is up a little bit which makes it more attractive, it's not likely to rocket higher for the reasons we've articulated. i think that makes sense. >> right, price action, what obviously we know, this is a stock that had a 52-week low, 52-week highs in the newspapers for past 100 year. gapped up, that appeals to dan and buying the check back. it's good technique. the question is the upside of a 1.50 and downside is 1.50. do you get the next -- >> listen, my brother, this is an options show, i got the call premium and then have the dividend that's -- >> he's collecting between the

dividend and call. >> sort of in the middle of those very well defined. >> i want to make this point, this is sleepy friday, not much going on in the markets. this is the starter drug trade for equity traders here. you own something, you're not going to sell it you look out and sell calls against it and take in a premium. if you feel like it's going to rocket through, you cover that call and leave that position intact to me this trade gives optionalty on long equity earnings. >> now to deere seeing the worst sell-off after disappointing earnings before today they were trading in lock step for most of the year carter, you say deere's pain could double down to the triple counterpart. >> we know deere and cat are correlated but it's not these two as it is all industrial stocks >> break them down. >> inferences are based on evidence but it is also a presumption. let's do this rapid fire

i'll go through fairly big industrial con glom rat type names, it's clear it's an up trend. let's go to the next stock inger sol rand, 21 billion, clear up trend and here is a breaking trend i'll give you nice red arrows to get your mind aroundit next one, here we've got illinois tool works, 48 billion, big up trend, here's the trend line and breaking trend. there's a pattern going on now we have a big deal, 80 billion, biggest railroad in the world, here's your trend line and break in trend flavor of the day, deere, up trend, here's our line ready. break in trend all gapping. so inference, here's caterpillar, here's its trend and it's the only guy holding up either they are sort of miracle

or going the same way. i'll bet they are going the same way. i'm a seller. >> caterpillar is an interesting case because of course this thing is trading not far off its all time peak valuations and rallied strongly and had a great year so far. but it's earning 40% lower revenues now than it did at its peak in 2012 60% lower eps. if something sets up for weakness, companies with a little leverage and cyclical and trading close to peak valuations when maybe the fundamentals don't justify it, those are 9d ones that set up for a potential pull back. i'm inclined to go along with carter and buy a put spread, the october 100 p put spread you can spend 4.25, sell for 60 cents and $3.65 for the put spread which could be worth as much as $15 if it went to the maximum value of the spread. contrarily, i'm only laying out

a relatively small amount of premium and giving time to play out and there are plenty of things that could make it play out sfwl the trade itself, i like the structure and the fact it's in the money and giving yourself -- stock has been range bound for a month or so. this helps you stay in the game a little bit when you start to see a kmpelt tore, with a gap, that was a nasty breakdown, it could be telling a story about these multinational industrials that maybe things are not as good as -- >> cat is more multinational than deere, has -- actually much more focused on construction and mining than deere is which has considerably more ag and forestry businesses and more volatile and vulnerable. >> how closely do you pay attention to what's going on with commodities >> it's all related. specifically to caterpillar more son than deere nothing to do with the key commodities like copper -- >> iron ore and aluminum deere broke today but every one of the other stocks on the earnings broke

cat has come right back to its all time high and it's somehow defying what's going on generally speaking in industrials, whether it's big industrials like ge or the transports can kalt go it along? probably not. >> the amount you're risking is a fraction of the gains you've had so far a very small fraction of the gains. why would you not even think of hedging. >> we have much more options action still ahead here's what's coming up in the rest of the show. >> they are selling. >> stocks just post two back to back weeks of losses. >> get back in there and watch it sell, sell. >> don't be so dramatic. we have a way to protect your portfolio. calling all options action fans, reach in your pocket and grab your phone and tweet us your question at options action if it's nice, we'll answer it on air. when options actions return. >> logicalg 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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hthis bad boy is a mobile trading desk so that i can take my trading platform wherever i go. you know that thinkorswim seamlessly syncs across all your devices, right? oh, so my custom studies will go with me? anywhere you want to go! the market's hot! sync your platform on any device with thinkorswim. only at td ameritrade welcome back, i'm dominic chu, we've been talking about the lack of volatility in the marketplace for months now over the last couple of weeks thinks got dicier. yesterday was a loss of 1% or more and third all year. we came close last week on the heels of all of that north korea tension. to put it in perspective, last year there were 24 times the dow

had a 1% or greater drop and 2015, there were 34 such instances. for the most part this is still the buy the dips and shake it off kind of market there are fears we could see a mean reversion towards more volatility take place. in fairness, stocks aren't even close to being in panic mode there was a time when the geopolitical and macro level shocks seen in markets would lead to much more than a 2% pullback but there are traders who look at the recent price action and of course bets being made by hedge fund managers on more stock market volatility ahead. michelle, they are perhaps getting a little more cautious than they have been lately it's something to keep an eye on back over to you. >> it certainly is, dom, thank you. >> if you're worried about more volatility, how can you protect yourself mike is at the plasma with the call to action. >> although we had a slight bump up in volatility, we haven't

seen that much yet if you are interested potentially and want protection, you might want to buy a put. if you're anticipating more volatility, are these 1% moves we've been seeing recently a sign or harbinger of things to come options prices are low they are higher than they were but still in fact quite low. we can see obviously the dow, we were talking about dow stocks earlier, quite a rally this is a pretty small little move to the downside i still think if you're interested in buying protection in your portfolio, you have the opportunity to do that i'm looking out to december, you can spend $4 to buy those, that's less than 2% of the price of the diamond etf inexpensive way to give yourself a hedge to the end of the year, gives you a little bit of leverage in the event we see sharper moves to the downside. >> what do you think >> let him go on the charts first, i want -- >> you go on the charts. >> you broke that up trend from the -- >> sure, and here's the --

nothing has happened i mean, think about it okay, so we had an all time high, a week or so ago, it was tuesday, s&p was what, 24.90, that number sticking in my head, we're down 2.6%. it's like nothing has happened and the feeling is though the market died. this is just a salvation of what could happen and all depending upon a few big stocks. the top five stocks in the s&p are the same value as the bottom 250. that's going to determine what happens. >> not every constituent of the dow jones industrial average has rolled over yet. we were just talking about one of the big ones, caterpillar, only 30 stocks in the index and one is trading up there. so things that could make this trade work out, obviously a pull back in a name like caterpillar could help general volatility in the market listen, when things start to turn over, you see correlation rise and that's when products

like the diamonds and qs are going to behave much more sharply than they have typically in upward moving markets. >> what i like about this, why i wanted you to go to the charts first, if you have these dow winners that have appreciated a good deal, 2.10, your strike price is the level it broke out may/june that's what you want protection for. we've been lulled into sleep how many times have we had a 1% droudown twice? it can happen once i like the idea. if you're long the 2.10 and gets near 2.10, then look to sell that by selling a lower strike put and take that off the table. the likelihood of it going below 200 is not particularly great and that's one way you trade -- >> consider if implied volatility like the vix was around 20, you would expect the move on average each day to be at about 1%, right we've had two instances so far this year. we're talking about it's happening every 2%

how about if it started happening 20% -- >> what do you think about russell? a bigger drawdown -- >> like the s&p, that's 2.6, the s&p equal weighted is down 3.3 that speaks to a few big names there's this, remember a week or so the dow had eight or nine days in a row it was up. it is a lower beta index than the s&p and lower pe when the dow was starting to outperform the broader market s&p to that rate making new relative highs, that's a defensive kind of thing. but a lot of them had no ground giving back, boeing hasn't cracked and mcdonald's we talked about caterpillar. a lot of those still quite steep. that's vulnerable. >> coming up next, home depot sinking 5% in the last week and something in the charts suggests more pain in the way we'll break it down when "options action" returns i'm here at the td ameritrade trader offices.

steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. see options data like never before. with thinkorswim only at td ameritrade.

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...prices from over 200 booking... ...sites ...to save you up to 30%... ...on the hotel you want. trust this bird's words. tripadvisor. the latest reviews. the lowest prices. what?pony neighing] 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. welcome back home depot shares fell 5% this week, that's great news for cal and carter.

>> on options actions it's how we build sturdy profits, risk less to make more. that's exactly what they did with the bearish bet on home depot. carter saw cracks in the home improvement retailer heading into earnings. >> so i think the next move is down and want to bet against home depot having rallied steeply going into earnings. >> just shorting the stock that could lead to mass destruction. so to make a bearish bet, mike sold the september 155 call for $3.45. now to keep all of that money, mike made shares of home depot to stay below $155 he won't see losses until home depot rises above the price by more than the $3.40 he took in or above $158.40 by september

expiration however, above that level, mike will be vulnerable to infinite losses to limit his risk, mike then bought the september 160 call for $1.40 and created his bear call spread. >> you know what i'm getting at? >> not even close, tim >> now between the $3.40 he collected by selling that lower strike call and the 1.40 he spent buying the higher strike call, mike still pockets $2. that $2 is the most he can make on the trade but to keep all of it, mike needs home depot shares to stay below $157 by september expiration above $157 losses do kick in but they are limited to the difference between the strike of the call that he sold and the strike of the call that he bought minus that credit. >> little clearer now? >> less than ever, tim >> we'll make it real simple for you. mike can now do something even the handiest of men can't do

not exactly. but he can make money whether home depot goes down, stays flat or even goes slightly higher and since the time of the trade, home depot shares have fallen 5% now "options action" fans all over the world want to know just one thing, what will they do now? >> what do you do with that trade now mike >> we've made essentially all of the money you can make on this trade. i'll defer to carter and you think we have more downside? >> there's the tactical. you paid for an earnings miss, we happened to be short. this is structural, as low as $17 on the crisis loi and high of $160 we've given back little. still operating business and it's a hardware store. after all, if things get in trouble, home depot won't be immune to that.

>> take your profits and i can roll out out to the 1.40 put spread and playing with -- >> you went into the event and new option prices were elg elevated and sold premium and got it right do you want to roll it out >> i want to buy premium because i think premiums are underprigsed they tend to go up -- often go up more than they should if you can identify a direction, now we've got a trend. first you're just trying to make a directional bet. once it starts to roll over, you can press bets and we're doing it again with house money. >> up next, your tweets and the final call hey gary, what'd you got here? this bad boy is a mobile trading desk so that i can take my trading platform wherever i go. you know that thinkorswim seamlessly syncs across all your devices, right? oh, so my custom studies will go with me? anywhere you want to go!

the market's hot! sync your platform on any device with thinkorswim. only at td ameritrade

steve, other than making me move stuff, i'm here at the td ameritrade trader offices. what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place and lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim. see options data like never before. with thinkorswim only at td ameritrade. time to take some tweets first question from james, is it dr. spok logical redundant, isn't it, to see baba hit 200 by september expiration

love the show. >> i think it's entirely i will logical it would be. if you looked out to the options in september and 200 calls, it's about a 2% chance of that occurrence if you said september 18, i would say that's much higher. >> the second question for mike, i own a small amount of tesla shares, what's the best way to protect them from downside risk? mike, i've got to think protecting tesla shares must be very expensive. >> it is exceptionally expensive, cars are expensive but so are the options at least you get a federal tax credit to offset that you need to sell options against it put spread callers are probably the least expensive way to make that bet >> time for the final call carter >> caterpillar has been perfect, perfection does exist but doesn't last sell. >> sell your caterpillar. >> with the october 115 put spread you can make that bearish bet at the low risk. >> final trade. >> at&t, the stock call, i like

the stock and liked it lower, i think it will go higher but the idea of selling calls against it to add yield makes a lot of sense. >> that does it for us on "options action" don't go anywhere because "mad money" is up next on cnbc. don't move >> announcer: the following program is a paid advertisement for the hd mirrorcam, brought to you by inventel products, llc. yep, they're out there, driving recklessly, causing accidents, and driving up your insurance rates! this is a show about car accidents... ...classic cars... ...and the hd mirrorcam, the personal security camera for your car. this is... "accidents caught on camera" with the hd mirrorcam. today, we're going to hear from people who have been in accidents and used the