hey, there the guys are getting ready behind me for this friday night before the long weekend. here's what's coming up on the show tonight ♪ welcome to the jungle, we got fun and games ♪ cat getting scratched this month. the stock down more than 10%, and the chartmaster see something in the charts that can spell even more trouble ahead. plus, how low can the ten-year yield go? rates hitting their lowest level in almost two years. mike khouw will tell you how to profit from one name that will keep going up as they keep falling down and later -- >> there is no place like home

there's no place like home >> well, dorothy, dan nathan doesn't think so, and he'll tell us how he's making money from the trouble on the home front. it's time to risk less and make more the action begins right now. ♪ all right, let's get right to it. it was a wild week for the markets. the s&p locking in its third week of losses in a row as wall street just can't seem to shake the escalating trade tensions. check out some of the stocks taking the brunt of the impact caterpillar, apple, u.s. steel, deere, micron, all down double digits in the past month, and the chartmaster says there is more pain ahead for one of these names. carter worth is at the plaza, plasma take it away >> caterpillar, the epicenter of all the trouble in many ways, and it's a prenlly cheap stock it's probably cheap now if you wanted to look at pe, but i don't think that's going to matter a bit several charts so, here is a decade worth of caterpillar. and one could say, so, what's the problem?

it went from $20 to about $122, where it is now, hitting a high of $175. here's the problem -- all of this, it's been underperforming the market basically for the past seven, eight years. so, if you underperform in a bull phase, what's likely to happen in a real bear phase, cyclical name and so forth so, let's zero in on this a little tighter now if you were to look at the past two years, '17 to '19, this is the christmas low, right? now, i'm going to put in a line here take a look. the christmas low -- in fact, that's a september low -- that's the christmas low. what we know is that this stock is, yes, slightly above its christmas low, but where is it relative to the market it's almost, frankly, making new relative lows. this is a problem. keep going here's the s&p, spy, here's the xli. similar. now let's put in cat, another way to look at it.

comparative lines versus relative lines here comes cat take a look. and what you've got is this. in fact, cat is almost down at its two-year low so, the chart itself of cat, where might it be headed we have this triple top. you can see it here. put it in green. i'll highlight it again with these circles. that's an issue. we also have a break in trend. let's do another chart same tops. here's the break in trend. so we've got this. we've got that we've got that, and we have the break in trend where might we go? to the low let's change the lines one more time were we to go here, close at $122, that's $112 and i think that's what's going to happen, $122 to $112, it's enough to warrant taking measures if you're long, getting out, and/or being short. >> all right, carter, thank you. mike khouw's with us tonight from san francisco mikey, what's the trade? >> yeah, so, you know it's an interesting situation in caterpillar. this was a favored short some time ago people may remember they were

talking about a commodity supercycle obviously, whether it was going to be good or bad depended a great deal on china, and it did manage to bounce back from some of those lows, and obviously, it's bounced back a little bit from those december lows and the bulls might make the case that right now the stock looks cheap. here's the thing about cyclical stocks -- you have to be very careful looking at multiples, because typically, forward-thinking investors recognize that there might be some hazards ahead so when you start seeing really cheap multiples, that actually can be as much a warning sign sometimes as much as things like high dividend yield. so i'm inclined to go along with carter here. i think the fundamentals are telling us that basically investors have significant skepticism about whether they can keep up the level of performance we've seen over the course of the last 18 months so i was looking out to july, the $120-$110 put spread, costing $2.75, pretty close to the quarter of the distance between the strikes we typically like to spend on trades like

this why we're looking at put spread is because in addition to the skepticism you see in the multiples, we're also seeing that in terms of implied volatility, which is a little bit above average here, so that's one of the reasons i think we're going to look to a spread also, that helps mitigate in any case the decay we're going to have between now and then, if we're looking for a trade that runs out a couple months. >> okay. so dan, what do you think? >> here's the thing, a couple things i don't disagree with the technicals and i don't disagree with the way mike's playing it, but i'll just tell you this. the last time we had a real growth scare from china was 2015 and '16 and caterpillar's earnings declined, eps, 25% for those two years consecutively. in 2016, they had $4.40 in earnings this year they're expected to have $12.38, up 10% year over year that seems very unlikely so, mike's trade lining up with carter's technicals, it all makes sense, except for one point -- this company's going to report their q-2 earnings on july 24, after july expiration so you may get this flush that carter's talking about i think you really want to be careful pressing that short into earnings

mike's trade gives you that leeway down to those lows, but if it does get back into those lows, into that print, i'm not sure you want to stay short throughout that. to me, you've really got to be cognizant of timing. that's why we have these expirations third friday of every month. but you know, you may get there before earnings. i'm not sure you want to be short into the print, if it is down there. >> and the interesting thing, caterpillar -- you think about where it peaked. it did peak in january of 2018, where most stocks at least attempted to get back to new highs in september-october this is an issue this is the epicenter. and i think there are greater risks still, despite people might think that it's cheap. it's not >> okay. mikey, i'll give you the last word on this then. >> yeah, i think dan makes a good point obviously you want to keep an eye on catalysts, such as earnings, and this name, and frankly, every other one we talk about trades, we're going to have quite a bit of time between now and that next one. their numbers, actually, when they have reported over the last four quarters have been pretty decent, but the stock hasn't responded well to them

so the real question is, if the stock does happen to drop between now and that report date, we're going to have an opportunity to adjust this trade and we'll probably want to before that earnings rolls around >> okay. so let's move on to the homebuilders now, the xhb. that's the etf that tracks the space, getting a boost today but still on track for its worst month since december dan says the group's about to see oven more shaky ground ahead. is that right? >> here's the thing, the group has traded well relative to the s&p 500 it's up 30% from those december lows, versus the s&p up 20%. but interestingly, it did not confirm the new high earlier in the month that the s&p made. and i'll tell you this, a lot of people are focused on rates. the 30-year fixed is at the lowest levels of 2019. i think the average over the last week was 4.06%, down from 4.66% a year ago that's actually big news, and that's something you would think would be very bullish for new home sales, but we just got some data yesterday saying that new home sales -- i mean, it was a bad number, and new home sales have recently completed was down 14%. that was really bad. the stock's --

>> mortgage apps even with rates being low were down, too >> so, my point is, i think that rates going down right now are for the wrong reasons. we know -- i know that you've been saying the ten-year treasury's going to 2% that is not exactly bullish about growth then when you look at what we've seen about credit card delinquencies, we're seeing them at levels we haven't seen since 2011 there's been data out about major appliance purchases getting slammed. so you put that all together and i say to myself over the next few months, i'm not so certain given the out performance the homebuilders have, is that this is a place i want to be, given the performance highs, and the hiccup about the downgrade in the u.s. -- we know we're seeing it outside of the u.s. -- xhbs going lower. so to me look at that chart that is the xhb, massive double top at that high from october, when it didn't break out, and then broke that up friend that had been in place since december i'll let carter speak to that later. to me, i'm giving this a few months to play out over the summer when the etf is trading at

$39.75, you could buy the september 40-35 put spread paying $1.25 for that, buying one of the september 40 puts for $1.75, selling one of the september 35 puts at 50 cents. that costs you $1.25 and breaks even at $38.75 that's down a little bit less than the price of the spread why is that? because that 40 put is in the money here and i like the risk-reward here. you're paying $1.25 to make possibly up to $3.75 if etf is back at $35 on september expiration >> so, interestingly -- and i'm sure there's reasons for this -- you've -- there's a high correlation between itb and xhb, but what's helped xhb relative to itb is non sort of builder names, i.e., specifically lowe's, home depot in this instance, lowe's and home depot are the ones struggling the most. we all saw what happened t lowe's this week and home depot was slumpish as well i think you have the added tailwind of the retail element --

>> you know why i didn't use the itb? options trade by appointment they're thinly traded -- >> there is divergence for the first time in a while. the thing that held this one up is now starting to hurt it. >> mike, do you have a thought on this trade? like it or no? >> yeah, no, i do like it. and a quick point i would make also in some of the higher end real estate markets, we have seen some evidence that prices are leveling off maybe even in the bay area, in some parts of the bay area they might be taking a little bit of a downturn. that's the first time in quite a while we've seen some of the homebuilders talk about how they're going to try to move away from those markets because we're seeing basically a big divergence between home prices and real incomes, and that's obviously been subsidized by low rates. but at a certain point, you start running out of the fuel required to sustain those markets. i'm with dan on this one i hate to have a sort of stacking all of these bearish bets together on one show, but the fact is, it does feel like we're a little topee here. >> all right, for everything "options action," check out

our websit optionsaction.cnbc.com and while you're there, check out our supercool newsletter what are you waiting for here's what's coming up on "options action" -- [ ringing leave me alone >> we traced the call. it's coming from inside the house. >> don't be scared, jill carter worth and mike khouw say there's one stock calling and you're going to want to pick up the phone. they'll break down the trade plus -- calling all "options action" fans reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air. when "options action" returns. ♪ ♪♪ ♪♪

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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 welcome back to "options action." the rate route rages on. the ten-year yield hits its lowest level since october 2017. the chartmaster's back, though, at the telestrator he says that move is good news for one stock. you're at the plasma to break it down, carter. >> well, low yields are good for a lot of things. of course, utilities making all-time highs, reits, but we're going to zero in on at&t well, you can see the numbers. dividend yields in descending order, right, or not as good to better, 1.85% for s.p.y., staples, all

defense, real estate, utilities, energy, then there's at&t. that's a big number. we're going to talk about their debtload maybe back at the desk and some other things. let's look at the chart first. so many ways to draw the lines certainly, we could draw them like this, effectively a head-and-shoulders bottom. a well-defined neckline with the prospects of a move above that line you could also draw them like this cup and handle, with the same well-defined line and the prospects of a breakout. you could also draw them like this, well-defined down trend. and the beauty of that is that if you do overshoot a down trend and then you check back to it and you hold and you bounce off it again, that's good stuff. the chart is the chart it looks quite good. i like it any way you cut it an old-line loser that is coming to life. >> so, mike, what's the trade then >> yeah, so, at&t. you know, we were actually talking before when multiples can be worrisome signs or high dividend yields, certainly you don't get much higher dividend yields than 6%-plus that you're seeing in at&t

why are those dividend yields so high carter alluded to one of those issues i mean, you've got a tremendous amount of debt on this balance sheet. they're obviously dealing with the time warner integration. i think these are challenges that people are concerned about. and obviously, their old business, the wireline business is in secular decline. we expect that to continue eventually, though, things like 5g are going to provide a tailwind the company does actually have significant free cash flow usually when you're looking at heavily indebted businesses, then you're concerned about if they also have significant negative cash flow they seem to be managing that all right. and in fact, the ceo during the at&t at pebble beach, he was referring to that specifically, saying you know, i think people are kind of missing the point. this is a company with significant free cash flow and ultimately, we are going it see 5g, i think, provide a little bit of a tailwind so, one of the other things that we can look at here is that when you have those high dividends and you are concerned about the debtload -- so let's say for whatever reason you really don't want to reach out and buy the stock, despite that high dividend because you are

concerned about that downside risk, that high dividend tends to make those calls cheap. so if you're going to look for price action in this stock, those calls are going to get quite cheap. we actually see that the july 32 calls, when i was looking at that earlier today were trading for about 95 cents. and consider those were already about 30 cents in the money, so that's really 65 cents of extrinsic premium to make a bullish bet in at&t because of that hig dividend in case the price should start moving up so i think there's actually a pretty inexpensive way to bet on that positive price action without taking a lot of downside risk by just simply going out and buying calls here. >> okay. >> so, i mean, just talk about the debt a little bit. if you think about it telcos are notorious for heavy debtloads. at&t is in the indebted company in the world but debt can pay off what we also know is that after apple, at&t generated more profits than any other company that's just it they seem to be managing the situation in a way, and the chart is bottoming >> yeah, so i think the way mike

is playing it off of carter's bottom call is a good way to do it you're not risking a whole heck of a lot, a few percent for about a month and a half, close to two months. you know, it's already in the money here that being said, the stock did just rally a little bit, you know and i think the story makes sense. everything these guys are saying about all that free cash flow generation, talking about this 5g, you know, move into -- that's going to be 2020, maybe 2021, but the purchase of time warner is really setting up for this all to come together, and at some point it's going to make a lot of sense to start thinking about what this company looks like when they have 5g, they have the content what is a new telco media company look like? but in the near term, that yield's kind of attractive the bottoming is kind of attractive and then the reach for yield, which investors really just started to pay attention to a few weeks ago. so to me, i think it makes sense. i like playing it this way i think at some point towards the latter half of this year, you're going to see some investors start thinking about what this company looks like in 2020-'21, the way we saw disney just explode once they were able to articulate putting all those

pieces together and what their future looks like. >> mikey, sometimes just being simple is the best way to go. >> simple mike >> yeah, that's right. i'm a simple guy i like a simple trade, but one thing i think people should also talk about -- you know, we talk about volatility a lot on an options show, obviously. when you add more leverage to a balance sheet, the equity becomes more volatile, all else equal, and that's one of the reasons that you want to use options here, too. because obviously, we're talking about the fact that there's a lot of debt. i do think it's well covered, so i don't think it's a huge concern. but to the degree that that creates leverage on the balance sheet and could propel the stock more violently than you might otherwise expect, that's why using just a simple call option might make some sense as well. >> okay. up next, energy stocks sinking into a bear market this week, down more than 20% from the highs and there could be more pain ahead. we've got those details. we're live from new york city's times square there are more "options action" right after this (indistinguishable muttering) that was awful.

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-i do. 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 take a look at our open trades back in march, dan predicted the xle would run out of energy. >> and i'm looking at the xle -- where did that get rejected? at $65 so, i think there's an

opportunity to get short the xle with defined risk. you can buy the xle june 63-56 put spread paying $2 buy one of th july 63 puts at $2.90, selling one at 90 cents. it costs you 2 bucks, breaks even. >> this is one of those what will dan do now moments? energy's in a bear market. >> and we've been doing this for ten years with you, what will dan do next? here is the thing, okay, i nailed the low in march. this etf rallied like 10%, but in the last month it's down 10%. it's actually in the money here pretty nicely. i mean, the chart's a disaster i'll let carter speak to it right here i think this is one of those views where i think we're going to see mid-50s i'm not sure we're going to see it in the next few weeks or so, so i think you want to take the small gain and probably roll it out to july, give yourself some more time. >> we had a particularly bad week, and it actually dropped and gapped it's only had three or four gaps in the past 12 months, and usually, that kind of jarring weakness is followed by further weakness so at a minimum, xle lower

>> mike, what do you think >> yeah, well, i mean, obviously, the key driver is going to be oil. oil got hammered this week these businesses also happen to be fairly leveraged, so that volatility we were talking about, just one block ago, also applies here the one thing i would say is that i agree with dan, rolling it out and the reason is that after this precipitous gap, you might actually get a brief pause, i think, before it continues lower. so, my inclination would be to give yourself a little bit more time. >> okay. all right. there you get with that one. all right, just about a month ago, mike said consumer staples might stumble. >> here is your double top and all of this greatness is, in fact, this, an alpha killer, meaning picks made here have cost you in the sense that you could have, one could have found other things to buy. that poor relative strength is the issue, and i don't see anything fixing that any time soon. >> i think you just keep the trade simple

i was looking out to june. the $56 strike put, just 75 cents for that >> okay, staples have been, you know -- >> they've held in. >> -- steady, right. >> they've held in, so they have that defensive element the same way utilities and reits, but they are stretched and in this case, there is a valuation issue, and the betting here is that they can't keep this up much longer. >> okay. michael? >> yeah, so you know, we've paid about 35 cents in decay. those 75-cent puts are worth about 40 cents at today's close, but of course, they expire in june, we need more time. so i think like dan with the energy trade, we want to extend this and roll out to a longer put of the same strike. >> last comment. >> i think it's important to remember, one of the biggest component in the xlp, procto and gamble, coca-cola. remember what you're paying 24 times earnings for, people just because this is defensive, i don't get it doesn't make sense to me. >> up next, your tweets and 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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all right, let's take some of your tweets now ryan asks -- "if i have a $190/$180 july put spread in apple, would you recommend rolling it down to $180/$170 or close it out?" >> it depends on the market call do you think it's going to $170 between here and july expiration if you do, roll this out and down a little bit. otherwise, if you think it's getting near a bottom, you want to take the profit. >> tough call. a lot to take into consideration when figuring that out we appreciate the question let's do the "final call." mikey, you're first. >> i think put spreads in cat will help us execute that bearish thesis that carter articulated. >> good stuff. good holiday weekend to you and your family. the chartmaster. >> well, one long, one short at&t on the long side for a nice bottoming out. caterpillar the other way, short. >> okay. same to you as well, long weekend. danny? >> do i get one, too >> you want one?

>> all right, i think the homebuilders, i think this is ready to turn. i like playing it, the put spreads. >> did you not one >> hey, happy memorial day and to all those who serve. >> okay, that does it for "options action. catch us back next friday, 5:30. don't go anywhere. why? you know why because "mad money" starts right now. >> cramer. the following program is a paid commercial presentation for total gym fitness. [music] everybody work out. feel the energy. build a better body. the best you can be. another body easy as 123. oh. ahh. better body as easy as 123 with total gym.