leigh, there we're live in times square the band is back together tonight. here's what's coming up. >> it's been a wild few months for the market as wall street hopes for a year-end rally, dan nathan says there's one group that could be left in the dust plus -- athleisure stocks are soaring. but michael khouw says one name looks a little stretched he'll give us the trade. and later -- investors are

piling into health care stocks. >> doctor -- >> doctor? >> and the chart master said there's a key group that could see a bigger breakout. it's time to risk less and make more the action begins now. >> and we start with the health care rally heating up in november the sector rallying nearly 7% for its best month in more than three years. it is the best performing sector of 2018. up about 15% and the chart master said there's one group in the space that could see a bigger breakout. let's go straight over to carter with a checkup on the health care charts. >> so we know in principle, defensive assets are acting well relative to the market it's health care and other staples and in the case for health care it's a big catch-up trade. they have lagged so much over the proceeding three years so let's look at a few charts and then get around to a trade here i want to talk about biotech at the end. so the etf for health care, you

have the one-year chart. and xlv like the market of course sold off in october everything sold off in october but what we know is it was an alpha generator. it is actually going straight up in the same time frame meaning, relative to its peer group, the market. the health care is doing very well defensive characteristics kicking in in a bad october, the worst in ten years pull it back further this is the part that's interesting. while we are making new highs and all-time highs what you see here is that of course this was just a massive period of underperformance for health care what we do know is that we finally got above this trend line so best performer on the year, all in the context of something lagging in the equity market since 2015 a few more charts. now, it's beta within health

care health care is very defensive, like managed care stocks, unh. pharma names that are considered defensive. biotech is not it's cyclicality, or at least risk, if you will. many profitless. but look at the health care sector and the ibb over the past year-plus. what we know is that either this is a trap or it's a catch-up trade. i'm going to make the bet that it's a catch-up trade. so this divergence i think is an opportunity. you can see very clearly the percentage change. let's move it back a little further. here is a five-year comparative chart. again, the same set-up what we know is that biotech overshoots we know that it undershoots and the bet is that having undershot again that it can play catch-up with the overall sector. so a few charts on ibb and we're done no an notations or drawings by

me next chart, look at this over and over, it's literally held the 100 level i mean, precisely reliably, consistently week after week after week draw the lines another way we found this well defined level. we ricochetted nicely off that i think we'll continue -- it's a beta trade within health care. ibb on the long side here and now. >> so mike, how are you trading biotech? >> i think one of the reasons it keeps bouncing off the 100 level, one of the rationales in the space in general is the valuations of the underlying businesses, amgen, gilead, celgene. they're selling at relatively cheap multiples. i feel like that serves as a little bit of a back stop. this is a basket of stocks the options aren't overly expensive. especially given how volatile this has been and how stocks have been recently i'm looking at january and

looking at the 108 and 33 cent strike calls that seems strange, right? but only because sometimes you get the strike adjustments this is just a standard contract like any other that happens to be the nearest out of the money strike those are going to cost you $4 so you're risking approximately 4% of the underlying price here to make a bullish bet. look, one of the things that can happen here is that you have some time until january expiration if it does run we'll have some opportunities to either roll this or potentially spread it so there are things to do here. i think that's a simple way we can make a bullish bet here. >> they have to make a lot of cash on the balance sheets still. >> so it's interesting the trade that mike is choosing, he's going into the period where we may have some volatility for the next couple of weeks and after that we may see a slowdown, between christmas and new year's what i think mike is trying do here if you see the strike go into the money here, you sell it out of the money, turn it into the vertical spread and then kind of lower your break even

level or premium at risk i like the idea of spending about 2.5% of the underlying or what have we got, like 3% or so. because if you think about it, if you're wrong on this, it's going right back to 100. so you're basically -- your upside downside you're risking four in the long term but you'll be back at 102 if things go south in the next couple of weeks. >> sure. i think that's the importance, you know where you stand if it will be wrong. like there's so much authority at that level. that it would be very hard for it to really punch through to the downside. >> this call -- this call isn't going to be worthless in that instance this is slightly on the money as of today's closing prices, but that's basically the idea. with 100 being a $9 drop from the current closing price, obviously you get an opportunity to risk a little bit less here this isn't going to dekay right away. >> let's move on to the banks. the etf rally at 4% and it's a

case of the good, the bad, the ugly jpmorgan and chase are both up more than 2% and morgan stanley and citi looking a little bad and then all-out ugly like goldman sachs down 15% dan said there's one name on this list that's about to go from bad to worse. what are you looking at? >> so i think the really scary thing about that graphic right there is the ugly is really down right ugly we are not throwing ge in there yet. if you look at the acceleration of the downside of some of the, you know, these household names that we all know, people own and you definitely own them in your mutual funds, in your 401(k)s, the acceleration at the time of the year in the names is kind of making me a little bit nervous here for the financial stocks. they caught a bit this week with the news out of the fed. we know there's another fed meeting on december 19th and to me, i think you have a situation where some of the initial enthusiasm could wear off over the next couple of weeks especially if there's nothing big on the trade front

i think the bank stocks close near the lows of the year. the underperformance has been down right horrendous. pick on the losers not pressing like a goldman sachs or a deutsche bank but if we had any more headlines out of names like those, you will see the bad move into the ugly category. citibank i want to focus on here people are focused on the valuations and the buy back but the thing acts down right horrible down about 20% look at that chart right there i think 60 bucks where -- it bounced off, it seems like an important level. it goes through that in early 2019 you'll have a stock probably in the low 50s. that's my guess. we have a five year chart. i want to look at this you know, what's important to me, look at how it's come back to that prior breakout level from 2017. this was a group that was supposed to benefit from fiscal stimulus, deregulation, a global synchronized recovery they're not doing it they're telling you something

how about how -- i think how the economy is going to be in 2019 listen, a simple trade look to the december expiration. the next fed meetingi think yo focus on the citigroup focus on the moves back to 60 over the next three weeks for the stock who's trading today at $64.75 you can buy the put spread for a dollar you can make up to 3, between 63 and 60 $1 is your max ristucck. you're risking to make a move that the stock is going back in the next three weeks to the level it was trading three weeks ago. >> normally when you look at financials, one of the metrics we think about, if it's under the way that citigroup would be right now, that's typically the place to buy but in the price action of the stock it's a real warning sign that maybe the book value isn't what you think it is i think financials have been trading this way

whenever we hear concerns about, you know, potentially the end of this credit cycle that's the thing you have to look at. this is not just a dollar bill that's sitting there you can pick up. the value of the thing is what's potentially at risk. that's what the price action is telling us right now i do think this is the structure to put on and i can understand why you would do that. >> right i mean, look, we know it's not as big as tech, but it's the lifeblood of the system. and almost without exception american express being one, the group doesn't act well it's asset managers, broker dealers, insurance stocks. and we're just cross back below 3% this is not a place to be. it never has has been. it had six weeks of alpha after the presidential election and it's been an underperformer for the last two years even though it was embraced by the street. it's the right one to go after.

>> i think people are being lazy about this a lot of commentators and analysts and even investors. they are looking at ge, looking at goldman sachs they're looking at deutsche bank and saying this is it -- idiosyncratic to the names and things start to snowball a little bit i just think there's definitely potential for that in 2019. >> for everything "options action" check out our website and sign up for the newsletter what are you waiting for here's what's coming up. investors are loving the athleisure stocks this year, but michael khouw says there's one name that's looking a little worn out he'll give us the trade. plus, calling all "options action" fans reach into your pocket grab your phone and tweet us your question @options action. if it's nice, we'll answer it on air. when "options action" returns.

see that's funny, i thought you traded options. i'm not really a wall street guy. what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade

(indistthat was awful.tering) why are you so good at this? had a coach in high school. really helped me up my game. i had a coach. math. ooh. so, why don't traders have coaches? who says they don't? coach mcadoo! you know, at td ameritrade, we offer free access to coaches and a full education curriculum- just to help you improve your skills. boom! mad skills. education to take your trading to the next level. only with td ameritrade. welcome back to "options action." retail ending november with another loss the third straight month in the red. after seeing a huge rally earlier in the year. dom chu is in the newsroom with more. >> well, there are two fairly distinct chapters in the consumer story through the course of 2018, melissa. in a little over the first half of this year, the strength of the consumer and rising consumer

sentiment has really played out in many parts of that retail landscape. you have to look at the year to date chart of the spdr retail etf and equally waited fund that de-emphasizes the amazon.com companies. through the latter part of the summer it was a nice, gradual rise in the last three months a topping out that got embroiled in the market turmoil in october. a notable lagging part of the retail has been on the luxury side of things tiffany is a recent example after shares tanked on the heels of the earnings report earlier this week. the shares topped out late summer just like michael kors did. check out coach and kate spade, tapestry, those shares tapped out as well. the story has been mixed with athletic apparel where under armour is trending higher, albeit off the press levels. nike and lululemon have seen the

optimism fade as markets have pulled back some we are still talking about nike up around 20% year to date under armour up 65% year to date and lulu up around 69 to 70% year to date now a key will be lulu's earnings report on wednesday after the closing bell options markets are already looking for possible fireworks with pricing implying an 11% move up or down on the heels of the report melissa, it may be one of the big tea leaves in determining the next leg for that athleisure trade. back over to you guys. >> dom, thanks and dom mentioned lululemon does report next week. that stock is up around 70% this year so how should you play it? let's kick it over to the yoga expert, michael khouw, for the call of action. >> i don't think they'll see me in yoga studios too often, but i'm interested maybe in fading that whole play general here a little bit we're looking at a one by two put spread of lulu going into

earnings first of all, as dom just discussed, options are expensive. it's actually implying a slightly over 11% move that's higher than it usually is and the other thing i'm looking at here, this is a name i'm willing to get long. at a lower price although it might have to be a considerably lower price given the rally that the stock has had since the beginning of the year. and finally, i have a proprietary metric called the holly index or indicator i look at my credit card statements if i see a store on there that i'm basically i'm assuming that's still in favor and if i don't, for the first quarter in years i didn't have any lululemon charges on the american express bill, i get concerned. let's look at lululemon here it's up substantially on the year, down a little bit from the highs. let's think about how much this stock typically moves on the earnings when it makes a move to the downside that's fairly

pronounced about 11.5% on average the worst one was during the credit crisis. that was a decline of about 30% and the second worst was 23% let's keep the levels in mind as we take a look at the trade. i'm looking at a one-week trade here the december 7th weekly, 130, 115, one by two put spread i'm buying one of the 130 puts spending $6.50 selling two of the $1.15 puts and i'm taking in $3.30. net-net. i'm spending $3.20 a share if it declines down to $1.15 i'll see the most profits. so the profits will trail off as the stock declines and my downside break even is right around $103.20 that would represent a -- approximately 20% decline from where it was trading at the end of business today. so this is way that you can take advantage of the elevated options premiums make a bearish bet that will

profit on say at 11.5% decline if we see that not risk a great deal in terms of premium if we don't >> what do you think of this trade? >> so interestingly for the one by two, mike just said worse case you get long here that's not the point of the trade. the point of the trade by selling two of the downside puts is reduce your premium at risk so whey like about it is -- what i like about it is he's doing it at a one-week trade. 103 level where you're long, you have losses, it's very slim especially over the course of the one week but to me what's really interesting and carter can speak it to, that 103 level would be filling in the gap from june it's had a couple of big earning gaps over the last year. >> i think that's the most important part about this chart. you have a triple, basically the 50 to 165. and in that ascent over the past year, you have had three quarterly beats. it is very hard, you can look at statistics on this you typically get two or three it's very hard to get a fourth

beat because obviously analysts move their numbers up. at some point even if it's a good quarter it's not good enough to beat the newly revised or continually revised price targets. so the risk is to the downside after a great ascent, after a big sell-off, 28% from the peak on october 1st now it's kicked back to the continuing trend line. >> much more downside risk what's the downside level that you would look for >> well, you can fill all three of the gaps if you want to get excited and dan referred to that but i mean, you know, we have seen what can happen to certain retail, tiffany being an example this week. you can have a 10 or 15% drop post bad quarterly numbers >> what carter is saying is valuable intelligence too. if you're saying i want to make this bearish bet but i'm uncomfortable with the stock at 103, you can consider selling only one of those. that would obviously eliminate the possibility of losing any

money at all or getting long at stock at all if the stock did decline that much. but again those types of declines have been very, very rare 30%, 20% that's about the most we have seen to the downside so far in earnings doesn't mean it couldn't be worse but that's the worst we have seen. caterpillar up a whopping 30%. is it nothing more than a dead cat bounce do you have a question for the traders, yes, you do if it's nice, we'll read it on air. much more "options action" after this what do you look for when you trade? i want free access to research. yep, td ameritrade's got that. free access to every platform. yeah, that too. i don't want any trade minimums. yeah, i totally agree, they don't have any of those. i want to know what i'm paying upfront. yes, absolutely. do you just say yes to everything? hm. well i say no to kale. mm. yeah, they say if you blanch it it's better, but that seems like a lot of work. no hidden fees. no platform fees. no trade minimums. and yes, it's all at one low price.

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so lionel, what does 24/5 mean to you?rade well, it means i can trade after the market closes. it's true. so all... evening long. ooh, so close.

yes, but also all... night through its entirety. come on, all... the time from sunset to sunrise. right. but you can trade... from, from... from darkness to light. ♪ you're not gonna say it are you? welcome back to "options action." time to look back at some of our open trades. mike and carter said that shares of caterpillar were headed for a breakdown. >> my hunch is that after this ricochet, cat fails. could they bounce another day or two, sure. but this is a point at which i would take the money and run. >> the december 130, 135 call spread and at the time i was looking at this you could collect about $1.65 which is one-third of the distance between the strikes. >> since the time of the trade,

it's rallied and sold off and then rallied again what are doing >> if you haven't taken this trade off yet, i think you stick with this. i think there could be further weakness i'd rather be long the 135, 130 put spread than short it that's effectively what you're in. >> carter? >> that's right. the initial sell-off is the primary thing. also dan said that cloud stock adobe was looking a little gray. >> look at it sitting here on 235, down about 15%. it is in correction territory. this is an expensive stock just like nvidia, trading ten times the sales and about 30 times its expected earnings. i see some kind of gap down to 200. you could buy the december 235, 200 put spread paying $8 for that buying one of the 235 puts, selling one of the puts at $2. >> well, the stock initially tanked around 13% in the days following the trade but has since rallied back what do you do, dan? >> it's not only rallied back,

but $10 above the level. $240 when we detailed on november 17th. it went quickly down to $207 that put spread was worth 22, 23 bucks. originally paid $8 for it. when you have a move that quickly basically you're striking to the downside you have to take it. but the trade was initially targeting earnings which will come in a couple of weeks. it's worth $3.50 originally cost $8 a little further and this thing is going to be worthless even before you get to the event. up next, final call. i don't know what's going on. i've done all sorts of research, read earnings reports, looked at chart patterns. i've even built my own historic trading model. and you're still not sure if you want to make the trade? exactly. sounds like a case of analysis paralysis. is there a cure? td ameritrade's trade desk. they can help gut check your strategies and answer all your toughest questions. sounds perfect. see, your stress level was here and i got you down to here, i've done my job. call for a strategy gut check with td ameritrade.

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i'm not really a, i thought wall street guy.ns. what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade time for the final call. carter >> ibb, buy on the long side for catch-up trade with the health care sector. >> michael >> i think you should just buy calls at ibb in january. you don't have to wait for expiration you can roll or spread the

trades when you put them up. >> nathan? >> you can do all those things, mike but the bank stocks, i don't see any reason to own them i think you keep selling rallies here and citibank is the one that makes sense individually. >> looks like our time has expired. catch us back here next friday, 5:30 don't go anywhere. "mad money" with jim cramer starts right now - [voiceover] the following is a paid presentation introducing the new dermawand pro, brought to you by ictv brands. introducing the new dermawand pro, 50% more powerful than regular dermawand for even more exciting results. also, dermawand pro is thinner, lighter and with soft grips, easier to hold and use. and anytime during this show you can call to upgrade to the new dermawand pro. now here's lisa. - hi i'm lisa varga, i'm 40 years old. i've never had cosmetic surgery and i'm not afraid of high definition cameras.

bring them in closer guys.