happy friday, everybody. it's time for "options action. here is what we have on the show tonight. >> on the big show tonight -- >> banking. >> banking, yes. >> that entire sector kicks off earnings season next week, but dan nathan says there is only one name you need to concentrate on plus -- >> have you tried staples? >> staples >> hmm, maybe you shouldn't. carter worth explains why you might want to be wary of consumer basic necessities finally. mike khouw's plan to netflix and chill. no, literally. he lays out a way to keep your

cool going into earnings binge next we can. it's time to risk less and make more "options action" starts now. >> let's get right to it a slough of big bank earnings on deck goldman sachs, wells fargo, report on tuesday followed by results from bank and america and morgan stanley later in the week financials up more than 17% this year underperforming the broader market one trader is betting on a bounce for one name in a report. let's get into the money right now and dan what are you looking at. >> regular viewers of the network probably know i'm not constructive on bank stocks here i do not like the way the investment banks act i don't like the way some of the money centers act but i like the way jpmorgan acted if you have to buy a bank buy jpmorgan on dips but here is the two-year chart on jpmorgan this has been routinely rejected

dating back to early 2018. and it's having obviously some trouble there. that being said it's the only major bank on the planet making a new high since the financial crisis and it's obviously best of breed. when you think about what's going on this week, we had a chance where maybe we see the yield curve steepen a little bit. maybe we see some of the economic data changing a little bit. or maybe at least sentiment as it relates to trade deal maybe the brexit situation got better if all that stuff interests you and you think about jpmorgan and the guidance they give when they report october 15th after the opening and they say, maybe they have the opportunity to give better guidance than what downbeat investors are thinking, then this is a name you may want to set up to own with defined risk over the next couple of months this is implied volatility and i think that, yeah, focus on earnings, you know, the implied move about $3.60 you know, that's about a little more than the stock has moved the last four quarters not an earnings trade.

i would look out to december expiration if you want long exposure you want to define your risk, you look at that 120 level that is the level, the big technical level. i'll let carter speak to it. you'll want to own long exposure in jpmorgan. buy the december 120 calls when it was trading at $117 that's about 2% of the stock price for a break-even up about 4.5%, 5% from current levels to me, i like the risk/reward but you have to be set or have the mind-set this is going to lead financials higher go with the market if we get a breakout and you'll have a meaningful move from that 120 level. defining your stock. >> i like the trade. a couple of reasons why, take a look back a year where jpmorgan started at the beginning of december 2018 and what followed. we saw about a 20-point decline from probably around 112, 113

down to the low 90s. you are looking at a near 20% decline in the course of less than a month here we have a situation where the stock is essentially at the same place it was at the beginning of last december 2018. obviously, some good news today. this is not a hugely expensive stock. one could argue that it is, but relative to itself, it isn't terribly you're risking less than 3% of the current stock price to make a bullish bet. here's the thing we've observed. and that's options prices have been very fair whether it's to the up side or down side, options have not been massively overpriced i've been more active in my day-to-day trading lately using long options than i have been in a long time. we like to do credit spreads and things like that where you're collecting premium when we can this is where the options are cheap enough if you'll make a directional bet, keep it simple. >>. >> it's an important technical level as dan said.

it's been repeated it broke out slightly two months ago and made an all-time high and then really reverse pivoted and collapsed. it's not quite the technical -- we just looked at apple. that's a different circumstance, by my work the issue is this. if rates do go higher, this is not one of the most rate sensitive banks. yes, it will go high ter that happens but there are other banks more sensitive to a spike in rates it's a choice of picking best in class, which is obviously partly what you're doing or you double back and say i want to go after that one for a catch up. either technique is reasonable >> obviously, rates kind of finding a little near-term bottom they get 155 or something. ten-year treasure yield and now we're 20 bips higher that caused this group to catch a bit of a bid we know banks are the life blood of the economy if all this is coming together, i'm not saying it's all coming together but this is the one you want to own and define your risk trading between 105 and 120.

that's a big range that's why you want to define your risk. big banks to surging stap staples, the xlp etf defensive stocks continue to play offense but heading into the end of the year, the chart master says there are signs the consumer trade is starting to crumble carter, head over to the plasma and show us. >> there's a lot going on. we know this is the ultimate safety trade along with utilities and utilities accomplish something that's only happened three times up ten weeks in a row and they got murdered this week staples are equally extended and the bet is these two are about to give way. so the sector overall, not that big in the s&p at 8% 33 stocks. just to go through the sort of particulars at $2.2 trillion the top five really dominate names -- household names you see them here. 16% for proctor. that's the big one 11, 10, 9 and 5 adds up to 36% it's 33 stocks

one-third is in just a handful of names let's look at the actual etf so this is the xlp it captures the entire sector. and here is on the bottom, relative performance to the s&p 500. and what jumps out to me is the following. that we've been in a perfect up trend and, yet, if i draw lines here, when we made the new high here, we did not make a relative high and so you have something of a double top that's a negative circumstance i think you're getting that divergence to suggest this is going to break trend and ultimately give back a lot of ground here it is in its entirety and very precise which is so often the case notice we're compressing, not quite getting the bounce that often gives way to that it has a bit of a stall. let's look at a few other iterations and then go from there. now this is going back to 2014,

and this is that circumstance over the past 12 months. again, steep, uncorrected. a few other ways to look at it so think about how orderly this has been that's the exact same chart. look at the advance/decline. up 22 and then give back 14. up leg 16, we give back 7. up 13, give back 17. up 19, give back 14. up 30, well, it's like paint by color. if you follow the schem atic, th next direction is that making a bid that its run is at an end mike, given what carter said, what's the trade >> options are relatively fairly priced here. some of the constituents of xlp as an etf, proctor & gamble, are not fairly priced. a stock trading 30 times earnings with no revenue growth whatsoever there are better places to be long equities in the market than

stocks like that the thing i'd point out is because staples are typically not that volatile, because they tend to move in an orderly fashion, rather than just buying at the money puts we can use a put spread here. cut back on the cost a little bit. i was specifically looking at the put spread spend $1.80 for the 61 strike puts and sell the 56s against it for 55 cents net/net, $125 for a $5 wide spread look at the level here on that short put. the 56 strike. the last time xlp was close to that level was the tail end of may. we're looking at a period going back almost half a year. this is going to expire in three months time. what we're talking about is not just which direction we think it's going to go and mitigate the cost but also how much magnitude do we really think we can possibly get within the amount of time we have between now and the expiration of the trade. that would represent a near 10% decline, 7 to 10 is probably as

much as we could expect in the amount of time we're giving you for this one >> i think you put this all together nicely. every few months you get a pullback of that magnitude in the space and every time that we get just a little higher like we are now from the prior high before that other pullback, the whole group gets more expensive. we're seeing the price appreciate the fact that mike has a $5 wide put spread that gives him three months, that's a little in the money and costs a little more than a buck, that's a great risk/reward. i don't really see any of the names specifically like proctor that make up a good bit of this etf. just having some idiosyncratic move to the up side and dragging this whole group up. i like the technical setup and the put spread >> when you go through this chart of the xlp, it reminds me of what you highlighted on the utilities. >> the same behavioral element money clustering into a very defensive thing because of a high fear of headlines like good

or bad that might be coming. i'd also point out proctor is the big weight at 16%. if you look at some of the others, clorox, church & dwight, colgate, they've all started to roll if proctor rolls, the sector rolls. >> okay. to the big story of the day. president trump says the u.s. struck a substantial phase one trade deal with china. a tariff increase will not go into effect on tuesday huawei will be dealt with separately, and the deal is not yet written, just agreed upon in principle. we're getting new information out of the white house at this hour eamon javers just asked president trump about the trade agreement moments ago. >> the farmers, it's going to be $50 billion worth of purchase. the most they've ever done was 16 the farmers in iowa, nebraska and these other great states that i love and, obviously, like me a lot, too, they're going to have to buy more land fast and bigger tractors.

>> what's interesting is eamon asked, what was the most important thing out of this agreement, the phase one, and trump highlighted the ag purchases which was never a centerpiece of the trade negotiation. >> to be frank, he put the tariffs in place and took in the tens of billions of dollars and then they took him in. it was at the farmers behest they had to turn around and give the money back to the farmers in aid. they've given out $28 billion in aid. is it today? they were buying the stuff before they put the tariffs. listen, at the end of theday, it's not bad news, but this was all kind of self-inflicted and we really need to get that ip stuff to make it all worthwhile. that's the most important thing. >> we've got much more ahead in "options action. here's what's coming up next >> streaming wars kicking into high gear as netflix prepares to report earnings next week. mike khouw is laying out a way to make money if the stock goes up or down. we've seen stranger things before

calling all "options actions" fans. grab your phone and tweet us your question @optionsaction if it's nice, we'll answer it on air when "options action" returns. ♪ ♪ ♪ ♪ ♪

what do you look for when i want free access to research. yep, td ameritrade's got that. free access to every platform. mhm, 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. now offering zero commissions on online trades. we charge you less so you have more to invest. ♪ welcome back to "options action." netflix is up 5% since monday but the streaming giant is far from out of the woods. last quarter was a disaster for netflix as investors started to sweat over whether the company

would keep up with competition but if you think netflix could flip the script when it reports next week, mike khouw has a way to play it on the cheap. stage left at the plasma with his call on action mike >> now we're going to talk about why we would buy a calendar put spread one of the things i would do is maybe just omit the put part because when you buy a calendar spread, what you're essentially betting is the move is not going to be that big right now the options market is implying a move of about 10% or a little more by the end of the week after they report earnings. that's considerably higher than about the 5.6% or so they had averaged in the seven quarters leading up to the last one it is all because of that last one where they fell out of bed by more than 10% on disappointing results. the thing is that a lot of things about netflix true then remain true now. they do have more competition, although it does seem like they'll be getting along and they can co-exist with the disneys of the world and apple tvs of the world they continue to see significant cash burn.

still, i'm kind of thinking this is a situation where maybe on this result we'll not get the disappointment we did before we can see the distress the stock has had since its peak this area right here represents basically an opportunity, i think, maybe this could basically be the washout over here is what we're looking at this is where we saw that last earnings result. i don't think we'll see something quite this big that time how do you put this trade on very simply, i was looking out at the october/january 280 put spread this doesn't have to be puts if you traded the 290 call spread it would work out the same way you're selling the nearer dated option the 280 puts expiring in october for 12 clnt $50. buying the january 20th. $9 a contract. and the idea here is that if the stock basically does one of these things, this put is going to expire worthless. i'm still going to own that one.

that won't decline by as much. of course, i'm limiting my risk to the amount of premium i'm spending even though this looks like an outright bearish trade, what it really is, is a trade that's betting the move is going to be less than 10%. when you see these very high implied moves and think some of the bad news may be baked into the cake, this is the way to make the move. >> the stock kind of found a bottom recently. i think a lot of the fundamental headwinds have become really well known a lot of their competitors have had good competitive announcements and prior to that, just all netflix all the time. so at the end of the day, the likelihood of them seeing the subdecline they saw that caused that 10% drop and the subsequent decline for two months is not likely and mike's trade isolating a less than expected move makes some sense here. that being said, if they guide down and miss north american subs, that stock is going down to the december lows it's just that simple. >> carter what do you --

>> of all the sort of marquee supercap names so prominent, this is the worst performing one. you are talking about dropping from 35% from its july peak, $380 to $250 and this little bounce in a way, it removes some of the potential for further bounce so i'm inclined to bet against it and bet that because you had that earnings gap and drop last time, you get a second one >> yeah, this is one of the marquee names that's had such a big draw down because unlike some of the others, from a valuation perspective, it certainly was basically ahead of the race highest on price to earnings it's the one where a lot of other marquee names didn't have negative cash flow this one does. it seems to continue to pile up. and there are some questions also about the business model that we're talking about here. the content costs are high and whether or not you slap the same valuations on that type of business you do on the other portions of their business still

remains in considerable question there's a lot of bad news baked in the cake. we're limiting our risk and the options market is baking in a 10% move this would be a scratch anyway >> up next, nike sprinting out to new all-time highs. one of our traders says the sportswear giant may be about to trip up. we'll tell you why "options actions" back right after this ♪ ♪♪ ♪♪ ♪♪ but when i started seeing things, i didn't know what was happening...

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♪ welcome back time to look back at one of our open trades. back in september, nike said nike may be running toward a spell on the bench following its earnings report. we thought we'd roll the instant replay and take a very special look back. >> on "options action," it's how we just do it. risk less so you can make more and that's what mike did with his bearish trade on nike. mike thought nike shares would get tripped up heading into earnings >> the stock is basically right there. we're just under those all-time highs. we're going into earnings. three things can happen. it can either break out to new highs. it can sit right here and struggle to make it anywhere or go a little lower. >> hmm, mike thought, let's do

it i'll put on a short-dated put calendar spread. here's how it works. >> let's play ball here. >> mike sold the september 27 weekly 87.50 foot for $10.10 then bought the october weekly 87.50 put for for a 75 cent difference mike would own those longer dated put options at a very low price. >> hey >> but nike earnings were indeed an event the company beating expectations and the stock jumping more than 5% in after-hours trading on the news topping its previous all-time high of $90. with the first leg of the trade expiring in the green, what's mike's next play >> this trade actually was a double on wednesday after

earnings and so some of you may have already taken it off the put that we still own is worth slightly more than we put the spread on for initially. i kind of feel like it's peaked out here so i'm inclined to put on a vertical put >> so, did mike end up bouncing out of nike? let's find onike >> it was interesting. when we took that initial look back on a friday, the following monday you could have sold just that outright put at a profit. we sent out a tweet at that time if you don't follow us on twitter, you should. take the profits then because it definitely looked like nike had sort of -- that was it it was kind of off to the races. i didn't want to initiate a new bearish bet there. >> this is the same setup that is apple and perspectively jpmorgan a stock at well-defined tops the more you coil at those highs the more tension to exceed those highs. nike broke out, and the way is

higher >> what do you think h jpmorgan is simple it breaks out. it holds the breakout, establishes that new range the fact that nike has not broken 90 to the down side since that breakout tells you that's where your stop is to the down side if you're long that from here on out and you should feel comfortable with that level but not comfortable below it >> that's especially true given how the market has behaved not all rosy like it was today, for sure up next, final thoughts from the options pits ♪ ♪ ♪ ♪

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what do you look for when i want free access to research. yep, td ameritrade's got that. free access to every platform. mhm, 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. now offering zero commissions on online trades. we charge you less so you have more to invest. ♪ time for the final call. carter braxton worth >> consumer staples sector has come a long way. use xlp to hedge or to go short. >> mike khouw? >> xlk the stocks and etf, too expensive. i want to be short those but the options are not too expensive so

i'm using put spreads. >> on jpmorgan, it did not close particularly well. you may have a better opportunity to buy calls on that if you want to be constructive on the banks, stick with jpmorgan see us back here next friday at 5:30 p.m. eastern don't go anywhere. "mad money" with jim cramer starts right now - [narrator] the following is a paid advertisement for the hoover smartwash. when your throw rugs need cleaning, you toss them in the washing machine, easy. if only you could do the same for your carpet. instead, here's what carpet cleaning looks like for many of us hauling around heavy, bulky rental machines. they're a hassle. and do you really want to bring someone else's dirt into your home? and then there's all the mixing, soaking, waiting forever for your carpet to dry. no wonder we sometimes give up and call in a pro, but that's a whole other level of pain. they're all over your house. you're left with a damp carpet and it costs a fortune.