friday "options action" fans i'm tyler mathisen in tonight for melissa lee. we have a big show on deck here is what's coming up. >> announcer: on the big show tonight. >> health care. >> carter worth explains why the sector previously left for dead should get your heart racing right now. then. >> you don't like flying huh. >> karen finerman has a way to use big ups and downs in one airline name to your advantage and. >> when i say who is out you all know what time it is

who is out. >> khouw's house, not his house per se more like his housing stock. mike drops the mic with one play it's time to risk less and make more "options action" starts now. and let's get right to it, health care having a bit of a hangover this year up just 6% and the second worst performing sector of the year behind energy. names like biogen. centene. the space down double digits in the cross hairs of late as the 2020 presidential election draws closer but our chart master carter worth has a positive prognosis at the space and he is at the plasma he is not yet at the plasma. >> not yet. >> are you going there. >> i'm waiting for permission. >> you have my permission. banished from the desk. >> thank you this has obviously been a dud. what's interesting is it was a year of risk off in highly

defensive areas of the market, specifically utilities, reits, staples winning. health care is the other area that's defensive but offensive in which i think at this point it's a hedge you win, tails you win. let's talk about it. so since data is available back in 1989, this is a chart showing health care's weight as a percentage of s&p it's been higher, 16.5 and obviously it's been lower right now at 13.5% the average is about 12% and my thinking here is that not necessarily depend on this but that there is surprise potential in health care let's look at a few charts so this is -- well just to show you this is how important health care is. with the exception of tech, the sector is the second biggest sector in terms of weighting in the s&p. what's remarkable is that it's second biggest and yes it's been

the second worst in terms of performance. and we'll look at that in a bit. here is the all data chart going back to 1989 and this is the relative performance to the s&p. the top is the sector, the bottom is relative performance we have this circumstance obviously where the sector has continued to advance over the past three years but the relative performance to the market has been very, very poor. now, at this point, though, i'm thinking we have the following circumstance we're down to the relative trend line and i'm going to make the bet that we just -- just as we have in prior instances have bounced, bounced, bounced, that this is the point at which this relative performance comes to an end and health care is actually able to come to life in terms of the ability chart itself, what you see here a couple of lines, this is the

chart over one year. and this is the opportunity. on a one-year basis actually flat versus the market up ten. now let's draw lines on the sector itself. this is the xlf. here is the 5-year chart and i think the way to draw the lines is as follows. here comes the setup take a look. and what you've got here is you can call it an ascending wedge or triangle. but it's all very precise. the levels are not random. and ultimately a lot of tension here i'm making the bet we are going to break out again an offensive/defensive area of the market that perhaps will serve its purpose in any market environment from here >> the charts are very interesting, mike. what's the trade you put on here. >> yeah, so look at the health care sector, it's interesting. because if we compare the sector to a lot of others and obviously we are very close to if not at the all-time highs in the market, a lot of that is coming

obviously from some increased valuations we have seen higher multiples. we're not seeing that in health care actually health care multiples is looking at the health care sector index what the etf is based on actually hit the zenith in 2015 and essentially going down ever since. why is that because the health care sector has seen earnings growth but not corresponding increase in prices here. we also don't see very high prices for options in xlv. we are talking about implied volatility for january options of 15% that puts that basically -- look where the vix closed closed today at about 14 and change this is a fair value trade to be able to buy optionality. i was just looking out to january. you could buy the 92 calls for

$2.60, round about 3%. consider this. what do you think the chances are that overall this sector could move 3% or more between now and the third friday in january in that's how long we have to make this bet. i think the short answer is it's very reasonable to assume it could move 3% and probably considerably more in either direction. in either case that makes this a reasonable way to basically limit the risk and play to the upside here. >> karen, you have a thought here. >> i mean it's interesting to me the idea of the relative strength if one didn't want to make a market bet it would look like you would say long the market, short equal weight of health care against for outperformance. no? >> no, i see -- i'm thinking at this point it's such a relatively underperformer. it's been dragged down by big name j&j struggling and the managed care stocks. others fine. but the totality of it looks as though it's had the three-year underperformance at this point that is coming to an end that's my thinking i'd rather be long. >> that's what i'm saying.

>> i didn't get that at all. i agree. i agree. >> i agree with you. >> i agree with. >> mike tie it off -- do you have a final thought. >> no, no that's it. >> you've been validated you've been validated you're cool. >> yeah. >> i mean we have -- j&j was idiosyncratic issue we saw they had the bad news and the recall that's a bit of a headache the managed care space i think we understand. we have the election year fast approaching. this is in the cross hairs we could safely say but it's priced as such. i think that's the important thing. this is an outperforming sector >> i can't think of another sector maybe technology is one before we move to the next thing that's as sprawly as this. it includes everything we have drugs in it. it's got the hospital stocks in it i want got the long-term care. >> think about this. >> managed care. >> tech is speculative biotech to it most speculative of all it's the most defensive speculative something for everybody. >> really something. let's move to the stock story of the day. that would be boeing taking a leg lower today. and shaving a big chunk off the dow.

the faa saying boeing withheld quote concerning pilot messages about the safety of the 737 max jet but that didn't stop shares of american airlines from taking off today. and as that stock gets ready to report its profits next week karen finerman says it hasn't quite reached cruising altitude yet. what's the trade here. >> i'm long the stock. but here is the option overlay which is a calendar. looking at the jan 29 -- long the jan 29 call short with the october 25th expiration these are the weeklies that expired next friday after earnings and those look pumped up to me if we look at the volatility chart thank you that mike provided we can see how expensive the nearer term volatility is relative to longer i want to take advantage of that and be selling the shorter dated calls to be pumped up to be long the 29 calls they release earnings that are not great and the stock goes sideways to down that's fine. those go away, the weeklies go away to zero and i'm left with

the longer dated call for a stock that i want to own and we have some time. we have time to see how the market does. and i think that the collapse of the near dated ones -- we may still have value, more than we paid possibly for the long-dated one even if the stock -- >> if you own the stock it's a way to amplify profit. >> exactly, not putting up a ton of money and if you don't own it and don't want to buy it i think it's a cheap way to leg into it. >> mike. >> i use calendar spreads all the time i like these kinds of trades it's interesting we were talking about this before the show actually today american is implying a move of a little over 5% if you look at the last eight quarters you might say that's reasonable that's what we averaged part of that actually is because last quarter we had a big move and if you think about what the catalyst could be consider this, we have results -- first guidance and then results from delta. we had results from united all of the news that might be impactful as far as boeing is concerned, that's well-known already.

there is no surprise really likely to come from that area. and that's really the issue with calendar spreads are you expecting that -- some news could come out that would blindside the market or do we think it's baked in and a lot it baked in that's why it makes a great deal of sense to collect the premium for the weekly which is maybe elevated at least as much as it should be. >> carter you want to dip the oar in here. >> independent of all the news and this is news related you have a circumstance this was perhaps the best performing stock along with caterpillar basically a four fold increase of 100 to 400 off the 2016 low the past three years it's been biding times news notwithstanding i think ultimately the biding time is the setup. the rest before the next major up leg in the stock. >> so american airlines you're long the stock, you like the long dated calls.

>> right long the stock also long delta as well. you know they had had somewhat disappointing earnings but i like the space and i want a little bit more invested in it without owning the stock. >> all right there is delta's chart and it was well up for the year and up to today everything "options action" check out the website "options action".cnbc.com and check out the supercool newsletter here is what's coming up next. >> announcer: it's been a sturdy week for the home builders but our mike khouw says one name in the space could get nailed when it reports earnings next week we'll tell you what it is and how to trade it. 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 ♪

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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. ♪ and welcome back to "options action." where is that, that's chicago. a beautiful -- i love chicago, i got to say windy city a lot of options trade there in chicago. i'm not sure which street that is anybody know. >> lasalle, wacker. >> man, chicago is nice this time of year back here at new york city it was a hot week for the home builders with the xhb etf that tracks the group up 4% closing out the best weekly performance since june

names like lennar, d.r. horton which i want to call dr. horten and pulte group at fresh 52-week highs. but mike khouw says one name in the space could get nailed when it reports earnings next week. mike. >> well, nailed. that's a little bit harsh. i'm not sure nailed is the way i put it we'll look at selling a call spread in pulte homes which is reporting. when you sell a call spread it's not a bet that it's going to crater it's really more of the stock may hit a pause kind of a thing. so why we sell a call spread this is a way you can express a neutral to bearish view. obviously it's had a terrific run. this is also a situation where you look to collect premium. and this is a situation where going into earnings sometimes we see elevated options premiums

and trying to collect that a nice thing like these out of the money credit spreads they tend to have a better than 50% probability of profit. and the reason for that as we are about to demonstrate is that you can have three things happen to a stock we can see here what happened with pulte my bet is we have had a strong run coming in here and that maybe we just hit the pause button on earnings and you know i'm going to also admit that it's not a terrible environment for the home builders here we have 30-year mortgage rates around 3.5% that's a positive. but what you look to do here is bet it's hitting the pause button and i sell the upside call spread specifically the call spread i was looking at was the november 39-40 call spread today you can sell that and collect a credit of 35 cents 35% of the distance between the strikes. now i'm just demonstrating quickly why the probability of profit is better than 50/50 on trades like this why? because three things could happen after earnings. one is it could go higher that's not the bet i'm making but the other two things it could go sideways or lower

and of the three things that could happen two good for the trade. basically, if it stays below 39.35 by november expiration this is a profitable trade the most i'm risking is the 65 cents. but actually if the stock does surprise to the upside and runs through 40 it's not likely it goes to a dollar that might be representing at least in the short-term more risk than is actually faced. these are the kinds of situations with elevated options premiums you are looking for ways to collect money. calendar spreads like the one karen talked about is one way. selling credit spreads is another. >> as you walk back to the desk i'm asking you a question here for viewers who may be turning in for the first time describe what you mean when you say a call spread. in other words there it was graphic. it was clear you're selling one and you're buying another is that the fundamental definition of it >> yeah, generally when we talk about spreads more often than not what we're talking about is buying one option and selling another.

>> on the same stock in the same -- >> this is a vertical spread but wouldn't have to be. the trade karen talked about is a calendar spread is a call spread in her case it was an october weekly call versus the january call on american airlines. so that is also another form of a call spread. typically when we spread it out in different expirations we call those calendars. in this case going up and down in the same expiration we call it vertical. >> carter what about this. >> looking at the group or the itb or xhb, the group recovered back to the well defined former top in each etf in january of 2018 this stock has blown through the highs. it's one of the most extended. i think you have downside to 35 plus or minus about 7% it's the kind of thing where this is steep, uncorrected and asymmetrical could it eek out a point or two? sure but you trade off the risk

it would have a swift downrun. >> even though bullish the space, the chart is. >> you said that earlier. >> the stock is up close to 50% for the year that's a little scary. obviously mike's trade is a bearish to bent on it. it also is capped which is superimportant you know the most you could possibly lose, right is a buck and i think your scenario where even the stock goes up that spread doesn't immediately go to a dollar why would you pay a dollar for something that could only be worth a dollar on the last day you won't lose that buck. >> if we used weekly options and only had the opportunity to address that next friday, then of course it's either in the money, out of the money somewhere in between but this one expires on the third friday of november so there is a time to address this in the event the stock moves sharply higher like i said i'm not suggesting the fundamentals for home builders are completely broken the stocks aren't immensely expensive. but they have had a good run,

don't typically trade at the same multiple for the rest of the mechanic for good reason. it's cyclical and shouldn't. it makes sense if you ever bet that something might fade the rally this is something to do that. >> look at utility and reits also rate sensitive done well. even staples but pulled back of late that's the nature of the uptrend you have the setbacks which are healthy allow it to reassert and go higher these the circumstances where a dip is likely. >> karen you said offline you like the group homemade builder confidence was good earlier this week make the case why you like the group as a group. >> there are so many things actually rates are you know at all-time lows. almost everyone buying a home they need some financing and people are employed. the home builder space we do see -- it does have some tariff repercussions because they do import a lot of things we use. >> a lot of materials. >> materials right.

that's one thing that weighs on it but the macroenvironment is so good. and the space -- i mean, never recovered even remotely close to where it was in financial crisis. >> and they're better managed business now than before the credit crisis by far. >> all right why don't we move on from here up next one of our traders is spying big gains in the market and we'll go deep undercover with that trade. it's friday and you know what that means tweet us the burning questions only burning ones at "options action" and you might get your answer on air. don't change that dial because we've got more "options action" coming up. ♪ ♪♪ ♪♪

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♪ quug ♪ ♪ ♪ ♪ and welcome back to "options action." it's time to look back at one of our open trades. two weeks ago mike told us he spied -- that's the hint gains ahead for the market >> despite the volatility that we saw this week, options premiums to me remain relatively low. you can actually spend less than 1% of the current price of spy to buy a call option,

specifically i was looking at the 2.95 calls 2.70 is what you would spend to buy those. >> well the spy up just about 2.5% since that call and that is a good enough move for mike to escape the trade in the green by the skin of his teeth. what's your next move. >> i mean if you put this trade on earlier this week the call worth about $4.50. and some may have taken profits then if you carried to expiration today that means you own the stock that isn't something i want to do i'd rather own calls than spy here i think it would be wiser to unload that. >> unload. >> and get out. >> you can buy longer dated calls they're inexpensive. >> up next your tweets and our or their final call. we'll be right back. >> announcer: "options action" sponsored by think or swim by td ameritrade tunity. i see best-in-class platforms and education. i see award-winning service,

and a trade desk full of experts, available to answer your toughest questions. and i see it with zero commissions on online trades. i like what you're seeing. it's beautiful, isn't it? yeah. td ameritrade now offers zero commissions on online trades. ♪

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 welcome back to "options action" a few seconds before the final call tweets

how would you trade apple into earnings. >> i'd be long into earnings buy the 240 calls month end. they close at 236. there is pop potential. >> the next tweet, the riddle what was that street we saw in chicago? it was "options action," michigan avenue. we thank eric for that, that's nice we appreciate that all right let's get the final call there it is "options action" view of michigan avenue. in the great midway. carter final call. >> i like health care here and i use xlv to express that view on the long side. >> karen next. >> american airlines expressing bet for -- more jan 29 october weekly call spread. >> and mike the last word. >> i like selling credit spreads into pulte homes into earnings and i like calls on xlv. >> a very busy and interesting week, that does it for us here on "options action."

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