market site in times square. look who stuck around. b.k. the guys are getting ready for the show in the meantime, here is what is coming up. >> you're killing me smalls. >> small cap stocks burned investors the last few months. but mike khouw and carter wirth they are due for a bounce. they give us the trade plus. >> i'm in love i'm in love and i don't care who knows it >> options traders long the banks this week. and one name in particular they see soaring in the new year. we'll tell what you that is. and later. >> i've got the deal of a

lifetime for you do you have a minute >> the recent selloff has stocks trading at a major discount. and there is one dow stock carter says is a major buying opportunity right now. he'll break it down. it's time to risk less and make more the action begins now. let's get right to it because it has been the ultimate battle between bulls and bears as the major indices close out a wild week. the s&p down wall street clawing their way out of bear market territory up around 3%. even the russell 2000 which has gotten hit hard in the selloff eeking out gains and the chart master says the small caps could be setting up for a big are bounce he is at the plasma. hey carter >> we know there is beta in small caps relative to large caps we no he they've sold off more than the s&p and we know that if you believe in the january effect, that favors small cap stocks in the month of january so let's talk about the three

drawdowns are down of the past decade you can see them here, very clear. a big circle around this, down 31% in 2011. down 27 in '15 and '16 and peak to drove in of course thee 20 would you rather play these to a catch-up trade to the overall market that's the bet i make. this is a little bit complicated. it's a relative chart. you are not looking at the russell. you are looking at the russell 2000's relative performance to the s&p on top here the important thing if you have a moving average on this over the past 15 years 150-day moving ample every time we have come down and gotten in low what's happened is that small caps have outperformed we are at that critical juncture yet again. you can see it what has happened here is this is this, is this, is this. and i'm making the bet that that

is going to happen again that we are going to have a double bottom on this and we're going to have a major multi-point bottom on the percentage above or below. and in fact let's look at the statistics when you've been in this exact circumstance. so when the ratio at 7% or more below the 150-day moving average, relative performance. keep that in mind. russell outperforming the s&p upon a relative basis, 150 basis points, 200 basis points, 500 basis points the stats back it up the charts back it up. if you believe in the january effect i want the way to play it and then specifically if you really want to talk about this, it is small cap value. which would be iwn as in nancy versus iwo which is growth. >> all right very convincing carter mike khouw is in reno, nevada today how are you trading small caps >> yeah, so i don't think i need to tell anybody watching that with all of the volatility we've been experiencing lately options premiums have gotten elevated in

the indices and in single stocks as well. you know, something else is of course whenever you're in a situation like this where you see prices moving around as sharply as they have been tough to know whether you are catching a falling knife whether there might be a drawback. what i'm looking to do here is mitigate the high cost of options, looking to get near-term upside exposure to the degree that i can but i don' want to necessarily buy the iwn right here i was looking at the february 115 with 140 risk remember reversal for 1.25. you sell the downside strike is 10% where iwn traded at the end of the day today give or take. and then long that 140 strike call i actually get immediate exposure closer to where iwn current trades to the upside but don't have it put to me unless it falls by 10%. a quick point i want to make about a trade like this.

these puts as elevated as they are actually are going to decay at a rate not dissimilar to the calls even though you collect less -- that's an important point between now and february expiration, 49 days away, that's the reason we sell the downside put if you wonder why you are looking to collect maybe 1.10 against a 2.35 call option. >> bk what do you think. >> directly i like this trade a lot. let's think about what's going on in the world. we know we see slowing growth. we know we're seeing china slowing. we know we see europe slow where is the growth? here in the u.s. the small caps generally are insulated from the international scene i don't know about the dollar but in the small cap area they will do well if we rebound in the economic growth here. so or at least a surprise in economic growth i like it directionally. >> interesting also you like financials and of course the weighting in the small cap index is much bigger in the russell 2000 than it is in the s&p so if indeed that's something you think is going to work just classic cni loans.

>> and you don't think financials will work yet you think the overall trade will work. >> because i don't think there is as much trouble in the small regional bank level than what they used to money center banks capital square - where it's not as good as they appear. >> are you concerned about the heavier weighting in the russell to financials? >> well, you know, the upside to financials is a little bit more limited than maybe it has been in previous financials downturns. we have a situation right now where you need to see really good cni growth. obviously we would like to see a steeper yield curve. all of those would be beneficial as rates rise. that could obviously impact the former as it flattens, that impacts the latter that said, a lot of damage is priced into the space. i really think it's probably the other names in the russell that are going to provide fuel though for a bounce if you look at how poorly it has performed since the peaks earlier this year, one question

you have to ask yourself is that everybody wants to buy things when they're on the highs. here we are trading at a huge discount essentially to where we were just earlier this year. and i think that's really the play here. one final point i would make about the options trade, as it goes higher you're going to have an opportunity to do two things. one is to buy the putback at a cheaper price if it rallies. secondly sell higher strike calls against it to help finance a trade. try to be nimble with this the market is moving around a lot we want to take advantage of that if we can. >> speaking of the financials those stocks have been coming back to life this week along with the broader markets the xlf financials etf up around 3% for the only positive week of the month. a big caps, bank of america, morgan stanley, citigroup all getting in on the action despite the move the sector in bear market down 20% from the highs but the rally did spark a wave of call buying in the options market specifically in bank of america, bank of america trading over 1 million call contract

wednesday alone making it the single most active stock put going in perspective, the second most active stock was apple. which saw only around 400,000 calls trade that day and shares up around 10% from the low on monday and it looks like traders are expecting the rally to last at least through the end of next week, so should you buy the banks here and specifically should you buy b of a? >> that was my final trade on the show before this b of a yes. what i like about bank of america particularly is it's cheapest on a price to book value ratio. trading something around a 0.7 or 76% of book value i'm not suggesting that banks should be trading much above book value but you're getting a discount here and unless you think that there is a huge recession come in the next three months or six months, then that book value is probably pretty solid so you not only have fundamental support, i've got a sector that's just been destroyed this year and now i've got options players coming in trying to play for a bounce to me that's where i want to be.

>> how did you interpret the action, mike >> yeah, you know i think this is pretty interesting. you know, he is referring to book value and i think that is what's financials is that financials of course you can get a significant amount of volatility because the balance sheets are so enormous. if you actually think that we're getting to a level where there is a back stop to valuation, that same effect can create a lot of momentum to the upside. i'm not surprised. we actually saw this a lot during the credit crisis as well right about the time that people thought maybe the worst is over and we can actually start looking at the stocks as a call option, buying calls on them essentially was a way to get more leverage. we saw that a lot in the citi bank in the credit and a lot in bank of america now. and i think part of the reason for that is when people make these kinds of plays very often

they are looking not at the most favored in space like maybe jp morgan but maybe one less favored. bank of america fits in that category nicely. >> the big of course -- the 800 pound gorilla in the room. the 10-year note hit a new intermediate low 2.71%. none of that ultimately is god -- is good for financials. >> however two things about that one the 2-10 spread steepened a bit. secondarily worried about cni loans and loan growth. what do banks do when they can't make the big fat margins they make loans. late cycle i'm not suggesting long-term play but it wouldn't surprise me to see the loan growth increase and slightly steeper yield curve. >> at the end of the day if you believe equities have bounce potential more than the slight bounce that's occurred this is a beta trade financials go up more than the market or down in principle. >> mike, you mentioned the higher quality name of jp morgan that's usually a go-to at this point with the bounce we have seen this we can where would you reach? bank of america or jp morgan. >> i still think you probably want to look at something like

bank of america. i mean, where most of the damage gets done is in the names that are less favored and that's why if you are getting sort of a v shaped bottom and a significant rebound that's the place you probably want to go to get most of the action if we call it that. this is the name of the show "options action," after all. that's the other reason i think we see people making the plays making relatively short-dated outright call options, this is relatively cheap stock and the options cheap her if you look for convexity this is the place. >> check out the website option action at cnbc.com. check out the newsletter. it's b.k.'s favorite thing to read over the weekend. here is what you are waiting for up next. >> i'm going to disney world. >> disney shares held up amid the market chaos and the chart master says it could be the ultimate value play in the new year. we've got the trade.

plus, calling all "options action" fans, reach into your pocket grab your phone and tweet us your question at "options action." if it's nice we'll answer it on air when "options action" returns. "options action" is sponsored by think or swim by td ameritrade 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

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. ♪ welcome back to "options action." stocks on sale as the recent selloff put every dow stock in

correction territory or worse. if you are looking for a bargain the chart master says there is one name in the group that could be about to break out. carter back at the plasma to break it down. >> disney. it's a family program and it's a family stock let's talk about it. disney, since 1990 on the top what you obviously see is this very sideways stuck in a range behavior now, the important thing is as it's been doing this it's actually been of course underperforming the market this is the past three years because we know the market is up disney's sideways action represents poor performance relative but of late that started to change which we see at the end that's the basic impetus for this call. a couple ways to draw the lines, again, here is the same chart. instead of a range i did as a wedge or triangle. what we start today is break out of that. but then on a relative basis, notice that when we were coming down we stopped right at this line

and that we started to move back up that's encouraging which is to say we found in level of support on the relative chart and it is acting perfectly right there. another way to draw the lines on the relative chart is it an uptrend. the same thing let's keep going so now the chart itself is a little bit tighter since '04 look how we triangle eight you can call it ascending wedge. what it is, after an incredible advance it represents consolidation as you work into the apex my hunch is that we are butting out here in a big way. and i think disney is one you want to own both offensively if the market goes higher and defensively if the market struggles. this holds up well as a testament to that look at this this is disney over the past month or two, down with the market

but what has it done it has basically been outperforming. that's alpha that's what you want in a tape like this. i like disney long buy it >> mike, what's the trade. >> so disney is a really interesting case here because this was a stock historically traded at a significant premium in terms of valuation to the market that's no longer true. 15 times forward earnings right now. we haven't seen persistent periods where it traded multiples low are than this other than 2011 where we had the market drawdown to credit crisis prior to that not back until the early 1980s. while the sop companies you could justify the cheapness saying the future has been set in stone and they're not having much of a future that isn't the case for walt disney it is not apple iphone sales in the future their business is consistent i like the stock outright. the second thing is that options are expensive right now. since the credit crisis we've

only seen two instances where they are more expensive than they are right now after the earnings disappointment in 2015 and then the big market swoon in 2011 we want to look at strategies where we can sell premium to help finance what we buy i was looking at 100, 110, 120 call spread risk reversal one march pch semg the 100 puts. buying the 110 calls and selling the 120s they are announcing earnings in february that's baked in as much as the volatility in the market here what's happening over time even though we lay out a bunch of premium is that the wing options are decaying at about the rate the options we buy it's going to give us participation essentially up 10% or so from where the stock is currently trading and give us a little bit of insulation against the 10% downdraft but that isn't the reason i tell you to sell

the downside put i'm trying to collect premium. i don't think there is a lot of downside potential for disney given how cheaply it trades. >> high praise from the chart master and mike. >> i agree with them you look at what's happened the last several years and why disney traded between 90 and $120 most of the businesses were disrupted. now you have to say is the worst behind them? have they change the business enough and can they start to accelerate think about espn that got disrupted. the abc tv studios disrupted by under bundling, the movie studios disrupted by netflix all of those things happened the last several years but now disney is accelerating and i think the worst behind them i like this trade, particularly at these levels. $100 seems like a critical level. >> they have to have a couple of big movies in the theaters, things that are epic sort of names. mary poppins and lion king and wreck it ralph. >> this is all good stuff.

>> you are so up on the latest disney i had no idea. another expert you look at anything other than charts retail stocks back in fashion as the xrt rallied 6% should you trust the bounce the traders weigh in plus a question for one of the traders send to us tweet to at "options action," if it's good we read it later in the show. live at the market site in new york city's sometimes square >> announcer: "options action" sponsored by think or swim by td ameritrade 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.

what do you look for 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. td ameritrade. ♪

welcome back to "options action." time to look back at one of our open trades. just two weeks ago carter and mike said nike could get kicked down on earnings. >> neckline is here. a break of the neckline. would give you a costco-type selloff. earnings coming up i'm a seller. >> i think the way to do this is simply look at a relatively near dated put spread i was looking to january the 72.5/65 put spread spending 3.05 for the 72.5 puts opinion sell it the 62 for 80 cents. >> nike share slightly higher than the since of the time of

the trade, how do you manage this. >> this is important you have to follow us on twitter. we sent a tweet about this before earnings. why? because there was a huge downside move. the stock traded down to $67 we suggested rolling the trade. the stock got a pop but traded poorly there after again and i found that interesting i think i'm deferring to carter if you happen to still have the trade on. >> right it's been a wild ride basically where we started if we have the time or own the security on the short side stick with it. nike is not going to new highs any time soon. >> but it was an earnings report that they published. >> yeah. i'm not sure i want to necessarily be short nike in this a decent earnings report a great trade. i think the liston on this i if you are in the money and starting to make money, before the event happens and before the options expiration why not take the profits? i mean it worked out but in terms of do i want to be short nike here? i probably don't i mean $70 was a big level.

>> how about two mark short nike at long disney one is trading at 25 times do you like that as a pair. >> i don't lie like fair trades for knows liking pair trades. >> do you mention that because you like the pair tried. >> i do like that pair trade i thought of it now sounds great. >> mike, thoughts on the pair trade? >> well i think we have actually done it already, right so we had the put spread on. and yes we've got a bullish trade in disney. yes, i'm fully onboard with that. >> all right how about retail in general? we saw a pretty good bounce. >> yes. >> the past week. >> they've had a good bounce in my view we get another bounce, part of the market bounce we are looking at but you look at amazon, the disrupter, they told you it's going to be pretty good. consumer pretty good holiday season so i think as part of the market rally, you can get into the retailers. >> all right up next we take your tweets. and we've also got the final call stay tuned >> announcer: "options action"

sponsored by think or swim 24 hours a day, five days a week. that's amazing. it's a pretty big deal. so i can trade all night long? ♪ ♪ all night long... is that lionel richie? let's reopen the market. mr. richie, would you ring the 24/5 bell? sure can, jim. ♪ trade 24/5, with td ameritrade. ♪

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. ♪

time to take tweets. our first you ask what do you think of selling coverage calls or naked puts, or on apple on the 140-strike. >> i like it because the options premiums are elevated and the upside is muted and the downside muted as well, good trade in this situation >> next question is, could 2019 be the year to bet on beaten down commodities, especially in the dollar weakens carter >> i think that's a darn good bet. in fact commodities as aggregate start to exhibit certain relative strength characteristics suggesting it's maybe a safe haven play as crazy as that sounds gsg is the vehicle shall, the i share for commodity it's liquid. >> call spread risk reversal on disneyland following cart thor i like it. >> carter. >> if you want to play equities in general iwn small cap over

large. >> bk. >> carter mentioned the dollar which i liked long for 2018 and 2019, you might see the shift helping out the commodities lower dollar. >> that does it for us on "options action. see you back here next friday. meantime, ""mad money"" starts now. - [narrator] the following is a paid program for luminess silk, sponsored by luminess air. watch this revolutionary touchless makeup that appears to erase flaws like magic. it'll transform the way you look in minutes. - see this here? gone! - see these blemishes over here? all gone. - you can see all the sun damage that i have in here. you can see it just disappear. you see that? gone. - [narrator] people are leaving ordinary foundation for this miracle breakthrough, because it seemingly wipes away years in seconds.