i'm mellissa lee, this time it's time for "options action" on deck >> yes straight ahead, but the question is, should you be, too? carter worth looks at the bumps in the road. then. >> captain we have to make a stop until we can make a change to the caterpillar unit. >> the same way of caterpillar stock. a way to stay afloat even when the alarm is still on. plus, if you want to keep searching pop in the market, mike has a plan to raid without

drowning when the wave actually breaks "options action" starts now. >> let's get right to it it's been a rocky road the group transfers out following 3% take a look at some of this week's worst performers, delta, ryder, norfolk southern. american airlines. our chart master says this could be the beginning of a bigger branch out ahead >> just that imagine a recovery in the market transports are down 3% it says a lot about a lot of things a one decade chart doesn't tell you much, most everything is up over the past decade relative performance from the transports to the s&p, we are basically, we've undone the entire thing we are back to where we were in '09. >> that is the issue >> that is the problem it's this persistent and chronic slide.

even as the index, itself, has had advanced all right, take a look at one or two things another what i to look at it more immediate rather than a ratio chart is a comparative chart. so over the past five years, you see the two colors, the two lines. s&p here of course, transports. so even as the s&p has managed to make incremental new highs. not impressives a doesed by dan and others what we know is the transports have continued to do that we got this divergence that is the issue. okay take a look. now, here is the index you can draw the line so many ways basically at a minimum, it show what is a waste of time, adjusted for risk, beto, it's been worse the waste of time now. is this random of course, it's not random stops to the penny stops to the penny stops to the penny lines matter, levels matter.

nothing good about this. here's the iyt, which is the etf, vacillating around, ultimately i think what's going to hasn't is we are going to reach the lows and a break here would yet further sink this thing into bad to worse to bad to worse and on and on. >> all right so, mike, in the charts, what's your trade >> yeah, i'm going to actually refer back i have a question about those charts, which we'll get to in a second looking at iyt, obviously some of what is happening in the price action we already know some of the besh constituents obviously haven't been doing very well. we talked about federal express on this show before. we talked about earnings it looked like the classic value type of trade. that's a big constituent other constituents include the airline, one of which will be reporting next week. delta, they've gave guidance this week. we already know whether it won't

be all that fantastic. i argue, what's not going to be that bad what's interesting to me is despite the volatility in the market and despite considerable volatility in iyt, option aren't that elevated. right now the december volatility of iyt is about 20% we're see anything average move over the last 40 trading days, a move of 1.2% >> that would correspond to about 23-and-a-half. so it looks fairly cheap to me the other thing i would point out is like many situation, indices, there is some floor here i think the way to play this, looking out to december, i was looking at that time 175, 165 clip spread, sell the 165, you guessed it for 280 that's a net debit of $2.40. that's a quart over a distance between the strikes. this brings me to my question also, that also looks like a

little channel here to me so one of the reasons i was looking at this, rather than selling and up call spread, there does seem took risk for me, that is obviously a question for carter. >> and a very real concern for someone making the case that something is wrong, the one i just made. so this is why options, of course, are the way to play it the thing that bothers me, not to mention the names that we said, remember, the two biggest names by weight are railroads. three of the top five are railroads. they have outperformed the industrials and transports for years and years. they are all starting to roll. >> dan, what do you think of the trade? >> didn't i have choice words for this the transports, like the worst one in the world >> i think i said that a couple fights ago mike brings up a point, though, it's hard to res those things, which is why i like his put

spread it's $10 wide. he se paying a quarter of the width of the spread. if you start seeing some of those names in there you see the rails. you see the airlines roll around i think that dill that chart -- delta chart breaking that uptrend from the december low, that was a decisive trend. there are a lot of bad charts. you will see a lower loop. does it bounce off the mid-term? maybe. does it look like it will break some time soon yeah. >> does that hold true anymore >> sure. okay oh, i mean, i had to ask >> it seems tike too simple to be true. the concept is very real right? if it's moving around on a truck or a rail or a boat or a plane, it speaks to the level of business activity and output in the country. and while that's maybe a little passe, there is something about a major index, the one that has more prices than anything else

not confirming the other that's what we got >> mike, lyft word >> no, i mean, i'm kind of where that look. we take a look at the results out of fed-ex and others they speak to whether we are thinking of the new economy or the old. the new economy is embedded in the transport even if some of the other areas of the industrials are not. well, from the transports to the industrials, take a look at caterpillar seeing a boost it's the second worst performer in the week. they weigh on investor, dan is betting today's move higher is nothing but a dead cat bounce. >> yeah. so a little cat scratch fever i got over here. listen, this rally today was instigated by the prospects of some sort of china trade deal. this is one of the worst looking charts also, you know this stock is down 5% on the year, down 30% from its 2018 highs. it had been in a series of lower

highs here if it can't rally on a day like today, i don't know whether it will rally i want to focus on two starts, in 2018, from that high, you see that, it just gets rejected there all the time it's obviously got a little support at 112 it's a double bottom dating back to late last year. but let's go to the six-year chart, just to kind of show what's going on here why the 112 level is such an important support level. >> that it was high back in 2014 the net stocks saw a peak to decline. i look at this name and say there is expectations for i don't know 2% earnings growth next year. 1% sales decline now, if we got a trade deal and the global economy re-accelerated, who you would that change? of course. i don't see it i think when they report on october 23rd, the options market is implying about a 6.5% move between now and then

i think you will see weak guidance especially if we don't have a trade deal or a substantive one. i would use a put calendar if wethe earnings event, a longr put premium will capture that trade. today when the stock was trading at 120-and-a-half you could buy the october 18th two, fridays from now, october 25th, three fridays from now 115 put calendar are you selling one of the october 18th, 115 puts at $1.15. and you are buying one of the october 25th 115 puts for $2.35 it costs you $1.20 that your max risk what you want the stock to move between 115 between now and then >> that short dated one is worthless. then you on that okay 25th, 115 put for that earnings -- october 25th, 115 put for that earnings

event here i like the risk reward i don't know about my entry point. vip no idea where the stock will be in a week ore two weeks or three weeks. i like this trade if looking to the prospect we are not going to have a substantive trade deal any time soon. >> mike, the thought of the structure of this trade? >> first of all, i really like the structure. there is somethingwe should look at. >> that is a short calendar. he is only looking at a one-week calendar maybe the way to think is how does caterpillar move typically before the move and after ther they announce earnings in the week leading into earnings over the past ten years into earnings is 3.5% that week. the average move coming out about 5.5% so using that shorter data put to help finance the purchase of the one that cap cures earnings makes a great deal of sense. quickly talking about it being a cheap stock. that's tip chi a case for cyclical stocks.

they will always look cheapest trading at their highs and look most expensive trading at their lows they will be coming off the best earnings and they will be coming off their worse as you reverse and come up. so it's very easy to get cornered into what we call value traps when you look at a stock the way i did federal express or mentioned. you see a 10 pe and think this must be cheap. that's not necessarily the case. the market might be something else i'm agreeing with dan here, that's exactly what's going on. >> you heard fundamentally why cheap is a dangerous word. he's trading a 10 at times this is trading at six times or four times earnings. there is no safety net in that notion technically it's busted. it's been trading straight down on a relative passive. it's highly suitable, tied to a lot of the problems that are in the news what is the thesis for being wrong? i don't know, maybe it's

hopeless did they say? >> i love carter's rhetorical finishes >> i love it >> for everything "options action," check out our letter. what are you waiting for here's what's coming up next . stocks staging a big comeback to end the week with the dow surging triple digits if you are betting this rally has legs mike ko has a play to weigh it for less plus, calling our "options action"s fan, reach if your pocket not your phone and tweet us your question at "options action." if it's nice, we'll answer it on air. when options actions returns turn on my tv and boom, it's got all my favorite shows right there. i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in.

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♪ ♪ well come back to stops in action if you are betting the rally has legs, mike ko is laying out how to play it with his call to action mike. >> reporter: yeah, so for the call to action we're just simply going to use calls in this particular case. why would we do that given what we saw this week in the first reason is the reason we would ever look to trade options >> that is to define our risk, define it to the premium we're spending the second thing is despite the volatility we saw this week, options premiums to me remain relatively low the final reason is this could be a head fake

while it might be tempting to believe the bounce we saw off yesterday's lows in the morning, which which point i actually had covered some of my hedges tant, it did feel like it was going to catch a bounce you can actually spend less than 1% of the current price of sdy to buy a call option specifically, i was looking at the 295 calls. 2.77 is would you would spend to buy those. the upside brief open that trade is 1.4% than where spy closed today. consider this, they will expire in two weeks some things could happen between now and then the markets need to rise or fall it doesn't need the rise too much for to you see profits. it also doesn't need to fall that you decided to buy halls rather than stocks i think the options market right now is giving us an opportunity, whether you want to play on the

long side, or the short side to do so by buying options and using simple structures to do it and being quick on your feet. >> questions or comments from mike >> i will let you talk about the trade. i actually think it's a really simple what i to do this i think with an etf that covers an index as broad as the s&p 500. you see options pick up like it did this week, it's not that meaningful, especially when you think about the fact that it's come in a bit. meaning of all terms, but the index has rallied. you know, he doesn't need a whole heck of a lot to break even and spread those long calls. to me, it's a great what i to do it especially since they are dollar cheap. i think they are relatively cheap considering the youp side vol. >> you talk about opinions aside, i'm read you some statistics for those who want to go with history. q4, to get this right, mean and median performance, 1928 to

2018 the mean performance is plus 2.5. the median 4.4 now, up 72% of the time, if you have the market up that's all years if the market is up at the end of q3, the numbers go up even further. so statistically, it's a very ro best period of equities, that's not a judgment for me, that's not charting that's just data, it is what it is. >> can they trade a couple weeks until the end of october if you look at the last two highs in july. what they are, they came literally the 26th or 77 e 27th of the month, the earnings month is similar to october. you may have an opportunity to ride this into earnings. this is a trade you want to exit mike's timing makes sense here, too. >>ic moo final word >> one of the things i would point out is that with all of these trades, we have the show once a week. we get to talk once every friday

about these things you take a look at how much the market is moving around, bear in mind these things could be quite profitable one minute literally, 15 minutes later you are looking at a different picture so my recommendation here is be prepared to roll this is a short data trade, it may require shorter data adjustments. if you see a move through 300, you shouldn't be sitting on this thing waiting for it to go up another 100 handles on the s&p what you should be doing is taking your profits or rolling up and out coming up, next week, to give investors another chip whiplash as trade talks go back off. one of the traders watch them vermont closely. plus, its friday, you nope what that means, you might get an answer on air. we are live at the nasdaq overlooking time's square, "options action" back right after this 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. ♪

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 a couple of our open trade, just last week dan said there could be a ship wreck on the horizon >> obviously, you see the

uptrend from december low, we haven't made a new high. what's most important is the guidance we got from micron last night should have set alarm bells off. a lot of investors thought we were closer to the cycle you can look at expiration by the spread paying $3 for that. >> well the semis finished the weak higher. as trade talks loom next week, dan, how are you managing this trade? >> listen, this will be a volatile group, closed at 120 and a quarter right here so the stock is up 1.4% week over we're this trade is down maybe 25% in premium terms. so really what you ought to do when you manage a trade like this, is you are risking what you are willing to lose. you got to be kale you don't let something like this away from you. you want to have a premium stop. i paid $3 for this y i am willing to pay a dollar-and-a-half.

the closer to probability of success is very low. that's how you manage a trade like this that said this thing has been very volatile over the last year, it's had some significant declines, so i think you want to kind of trade it and stick with it. keep a premium stock >> maybe it's the darling of sort of emotion, semis will break up, here we go again so, okay, maybe one day, for now, the burden of proof remains on the bull. the bear points to the fact that this thing is not breaking out >> all right meantime, mike said it mate be curtains for costco's big run higher >> how do you like this? 36 times trailing 12-month earnings, that is a history of that valuation over the course of the last ten years so this is essentially right now a peak valuation over the course of the last decade. i was just looking at the october 4th weekly, november 280

put spread >> costco swung around on the back of its earnings report, ended up 2% higher on the week as the first leg of this trade expires, meek what do you do >> well, for those of you who got into this trade him some of you haven't. some of you may have exited. as of this morning, that trade we spent less than $4 was $9 it was more than a clean double this morning now those shorted dated options rolled off the stock finished higher so that other put is left essentially what we paid for the trade to begin with. that's not a bad spot to be. i think what you will do next week is actually roll into another calendar year. you can sell the regular 280 puts against these and continue to finance premium this is a stock that will pay off if it drips from 2912 down to that 280 little i would be surprised if we see the follow through on the market that we had finished this one

with i think we are in good position if are you still in it. >> how do the charts look, carter >> costco has been the best in class. the issue is is it full? who is the environmental buyer i think it's all of those things it's number, it's rich it looks a bit stalled why stay >> all right up next your tweets and the final call 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

♪♪ ♪♪ ♪♪ welcome back to "options action". time to take some of your tweets some of you ask, would you rather, apple calls or apple puts >> i think you have to pair that with this earnings cycle the company will report in a few weeks and gow with it. the after money call is 1% >> time for the final call mike ko with san francisco >> you know i think there could be a reward if the market goes

higher the risk by spider calls >> carter worth. >> transports, dommy, short iyt. >> dan >> cat i like the put calendar and earnings >> that does it for us here on "options action" see you back here at 5:30 eastern. meantime, "mad money" starts right no - [announcer] the following is a paid advertisement for plexaderm skincare. (upbeat music) - many of us have seen before and afters on social media of people getting rid of eye bags in minutes. well today, we're talking about plexaderm, and it works in minutes to reduce some of the key signs of aging. if you have wrinkles, crow's feet, or under eye bags, get ready to be surprised. if you have smile or forehead lines or saggy skin on your neck, you're gonna be stunned at the results that are captured on camera with plexaderm. lifestyle consultant, annette figaro, and hollywood aficionado, scott defoulko are here