. hi, everybody, happy friday, ""options action"" fans. tyler mathieson in for mellissa lee. here is what we have coming up carterror with worth explains w sector should get your heart racing right now then -- karen fineman has a way to possibly use big ups and downs in one airline i'm in your advantage.

and well, not his house per se more like his housing stock him mike drops the mic with one play it's time to rick less and make more ""options action"" starts now. let's get to it. healthcare having a bit of a hangover up 6%. the second worst performance of the year biogen, pfizer, cigna weighing on the space, down double digits the sector has been caught in the crosshairs of late as the 2020 election draws closer our truck master carter worth has a prognosis. she on the plasma. >> we're not really at the plasma not yet. are you going to go there? >> i'm waiting for per mention. >> permission granted. you are banished from the desk >> thank you >> so, you know, this has obvious been a dud, in many

ways, it was a year of risd hig market, reit staples, winning, healthcare is that other area that's both defensive but is offensive. at this point it's a head you win, tails you win, let's talk about it so since data is available back in 1989, this is a chart showing healthcare's weight as a percentage of the s&p. and it has been higher, as high as 16.5. obviously, it's been lower right now we're at 13.5% the average is about 12 and my thinking here is that not necessarily dependent on this, but that there is surprise potential in healthcare. let's look at a few charts so this is well, just to show you, this is how important healthcare is

the second as waiting in the s&p. what's remark sabl it's second biggest, yes, it has been the second worst in terms of performance and we'll look at that a bit here's a cart going back to 1989 this is the relative performance to the s&p so the top is the sector, itself the bottom is relative performance so we have this circumstance, obviously, where the sector has continued to advance over the past three years. but it's relative performance to the market has been very, very poor now, at this point, though, i'm thinking we've got the following circumstance we are down to the relative trend line and i'm going to make the bet that we just as we have in prior instances have bounced, have bounced, have bounced, in this is the point at which this relative performance came to an end and healthcare came to a light. in terms of the absolute chart, itself what you will see here a couple line, this is the compare chart over one year.

this is the opportunity. again on a one-year basis, actually flat versus the market up ten now let's draw some lines on the sector, itself this is the xlf. here is a five-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 acentreing wedge or an acentreing triangle. it's all very precise. these levels are not random and ultimately, a lot of tension here, i'm going to make the pet that we are going to break out again an offensive/defensive area of the market that will perhaps serve its market in any environment market from here. >> what's the trade you had put on here? >> we take a look at the healthcare sector. i think it's interesting if we compare this sector to a lot of others and obviously we're very close to if not happy all time highs on the market a lot of that is coming, obviously, from some increased valuations

we seen higher multiples we're not seeing that in healthcare healthcare multiples is looking at the healthcare sector index which this etf is actually based on actually hit the zenith 2015 and it has been going down i don't have all why is that? overall healthcare has been seeing earnings growth we haven't soon core someoneing prices in growth here. we don't see very high prices for options in xlv we are talking applied volatility for january about 15%. >> that puts that basically. look at where the vix closed vix closed today at about 14 and change so this is a really fair value trade. to be able to buy optionality. i was looking out to january you can buy the 92 call. 3% in this range 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.

that's how long we have to make this bet the short answer is it's reasonable to assume it can move 3% and considerably in either direction and in either case that makes this a reasonable what i to basically limit your risk and play to the upside here. >> karen, do you have a thought here >> it's interesting to me the relative strength of it. so if one didn't want to make a market bet, then you would look like you would say along the market, short devoid of healthcare iagainst it for outperformance >> no, i would think at this point it's been such a relative outperformer j & j has been struggle, obviously the managed care stocks others have been fine. the totality of it, it looks like it's had its three-year under performance. at this point it's coming to an end. that's my thinking i'd rather be amiss on the market is that what you are saying? i didn't get that at all oh, i agree with you

>> do you have a final thought >> no. >> you have been validated so you are cool. >> so j & skw was an idiosyncratic issue. obvious, they had bad news and the managed care space, i think we understand. we've got an election year fast approaching. this is sort of in the crosshairs you could safely say. but it's priced as such. that's the important thing this is an outperforming sector. >> i can't think of one tesecto maybe technology it's got drugs in it, hospital stocks in it it's got the long-term care. managed care >> tech is speculative biotech is the most speculative of a all it's got the most defensive and speculative. it's something for everybody. >> it's something. let's move on to boeing taking a leg lower 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 did not stop shares of american airlines from taking off today and as that stock gets ready to report, its profits next week, karen feinerman says it hasn't quite reached altitude yet. so what's the trade here >> i'm long on stock it's an options overlay, looking at that time calendar, jans 29 call, short of the expiration, these are the weeklys that expire next friday which is after earnings those are pretty pumped up to be if we look at the volatility chart, thankfully, that mike provided we can see the near term relative is compared to the longer i want to take advantage of that and sell these shorted-dated calls that are more pumped up to be long to 29 calls. so they've released earnings that are fought grit and the stock kind of goes sideways to down that's fine. those go away. the weeklys go away to zero.

i'm left with a 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 one, we may still have value, more than we paid possibly for the long-dated one even if the stock is -- >> it's a way if you own the stock a way to amplify your profit, right? >> exactly, not putting up money, you don't own it because are you worried about airline, i think it's a cheap way to leg into it. >> i use calendar spreads all the time 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 take a look at the last eight quarters, you might say that's reasonable. that's what we've averaged part of that is last quarter we had a really big move. and if you are thinking what the catalyst could be, consider this, we've had result, first guidance then results from dell that we've had results from united all of the news that might be

impactful as far as boeing is concerned, that is 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 markets or do we think a lot is baked in? i think that's why it makes a great deal of sense to collect the premiums which i think is mabel rate issed at least as much as it should be >> carter, you want to dip in here >> sure. independent of all the news, we know this is all news related. you have a circumstance that this is perhaps the best performing stock along with caterpillar. off the 2016 low for the past three years, it's been wideing time. fuse not withstanding. the ultimate is biding time is the setup, the rest before the next major upleg in the stock. >> so, american airlines, you are long the stock you like these long-dated calls? >> long with stock i've also long delta as well

you know, they had somewhat disappointing earnings i like this space. i want to have a little more invested without owning the stock. >> there is delta's chart. it's up for the year and up today. everything "options action". check out our website "options action."cnbc.com while are you there, check out our super cool newsletter. here's what's up next. >> it's been a sturdy week for the home builders. but our mike ko 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 out "options action" fan, reach if your pocket, not in your phone and tweet us your questions at "options action. if it's nice, we'll answer it on air when "options action" returns. ♪ >> announcer: "options action" is sponsored by --

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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. ♪ and welcome back to "options action". where is that? that is chi, a beautiful -- i love chicago i have to say, a windy city a lot of options are traded right there in chicago i'm not sure which street that is >> whacker, i don't know >> we are back here at nasdaq, another nice place, new york city thanks for being with us it was a hot week for the home builders that tracks the group up nearly 4% closing out its best weekly performance since june this is names like lennar, home

depot, d.r. horton i like to call dr. horton. mike ko says one name in this space could get nailed on reports earnings next week mike >> well, named that's a little bit harsh. i'm in the sure nailed is the way i would put it we will look at pull pullte home it may hit a pause this is a way you can express a neutral to bearish view. it's had a terrific run. this is a situation where are you looking to collect premium and this is a situation where going into earnings we will see elevated options premia. we are trying to collect that. another nice thing about spreads like this, out of the money credit spreads they tend to have a better than 50-50 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 so we can see here what has happened with pulte. my bet is we had a really strong run coming in here and we hit the pause button itself on eais. we have 30-year mortgage rates around 3.5%. that's obviously a positive. what i'm going to do here, i'm going to sell an upside call spread, specifically the call spread i was looking at with the november 3940 call spread. today i was looking at that you could sell that and claekt credit of 35 cents that's cliff% between the distance and the strikes why the probability of profit will be better than 50-50 on trade like this one? three things can happen. one is it could go higher. >> that obviously is not the bet i'm making but the other two things that could happen it could go

basically sideways or lower and of the three things that could happen, two will be good for this trade basic ally if it stays below 39.35 by november expiration, this will be a profitable trade. the most i'm risking is the 65 cents. if the stock surpriseds to the upside, it's not likely that will go exactly to a dollar. so that might be rengt at least in the short term more risk than is based this is elevated options premiums you are looking for ways to collect money. calendar spreads is one way. selling credit intredz lispreadi is another >> i'm going ask you a question for viewers tuning in here for the first time describe what you mean when you say call spread. in other words there, it was graphic. it was clear you are teleselling one, buying another, is that the fundamental definition of it >> yeah, generally speaking about spreads more often than

not is buying one option and selling another. >> on the statement stock in the same -- >> this is a vertical spread but it wouldn't have to be actually the trade karen was talking about a calendar spread is a call. in her case it was an october weekly call versus the january call on american airlines so that is another form of call spread we call those calendars, in this case they go up and down, we call those vertical. >> he laid out his case for this >> if you look at the growth the group has recovered back to its well defined former top in each etf, which was january of 2019 these stock has blown through those highs. it's one of the most extended. i think you got downside plus or minus which is about 7%. it's the kind of thing where this is steep uncorrected and acommit trickal. can it eek out a point or two in the risk is it has a swift cap

>> even though i bullish the space, that chart is scary. >> you said that to me earlier. >> the stock is up close to 50% for the year that's a little scary. mike's trade a bearish to neutral to bearish on it it also is capped, which is super important. you know the most that you can possibly lose, right, a buck i think your scenario where even if the stock goes up, that spread doesn't immediately go to a dollar why would you pay a dollar for something that would be worth a dollar on its last day you wouldn't so you won't lose that buck if it goes. >> that's right. if we were using weekly options and have an opportunity to address that next friday, then, of course, it's either in the money, out of the money, somewhere in between actually this one expires on the third friday of november so there is time if it goes higher i'm not suggesting the home builders are completely broken it's not like these stocks are immensely expensist.

they're no they have had a good run. it's a cyclical industry and it shouldn't. so, you know, i think it makes some sense if you are ever going to bet that something might fade its rally. >> some trends have correction look at utilities. look at reits. they're sensitive, they're they've done well. that's the nature of an uptrend. you have these setbacks, which are in a way healthy, allow it to reassert itself and no higher this is the point a setback or a pause is likely. >> you said offline like this group, home builder or confidence was very fair in x months make the case for why you like the group as a group. >> so many things actually so rates are, you know, at all time lows. so almost everyone that buys a home, they need financing. rates are very low and people are employed, this is important. those two things are really important. the home builder's space we do see. it does have some tariff

repercussions because they do import a lot of things, materials, so that's one thing that weighs on it. but that macro-environment is so good and the space, i mean, that never recovered even remotely close to where it was in financial crisis >> they are a better managed business now than they were before the credit crisis, by far. up next, one of our traders is spying big gains in the market and we'll go deep under cover with that trade. plus, it is friday you know what that mean, tweet us your burning questions, only burning ones at "options action" and you might just get your answer on air. don't change that dial because we got more "options action" coming up. ♪ ♪♪ ♪♪

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♪ ♪ ♪ ♪ ♪ and welcome back to "options action". it's time to take a look back at one of our open trades two weeks ago, pike told us he spied, that's your hint, some gains ahead for the market >> despite the volatility we saw this week, options premium dos 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 295 call $2.77 is what you would spend to buy those. >> the spy up 2.5% since that calm >> that is a good enough move for mike to escape this trade in the green by the skin of his teeth so what's your next move >> if you put this trade on earlier this week, the call was 4.5 dollars. some may have carried it all the way to expiration. it expired today it's in the money, that means you will own the stock i'd rather own calls than spy here so i think it would be wise tore unload that. >> get out unload that. >> you can buy longer-dated calls, they're still inexpensive. >> close it off. up next, your tweets and our or their final call. we'll be right back. this piece is talking to me. yeah? so what do you see? i see an unbelievable opportunity. 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 ptions 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". we got a few seconds before the

final call take your tweets first viewer asks, how would you trade apple into earnings carter >> i'd be 240 calls month end, they close at 236. i think there is pop potential. >> the next rid him, what was it, what was that street we saw in chicago it was "options action," michigan avenue. we think i believe it is eric for that. that is very nice. we appreciate that let's get to the final call. there it is, "options action" view of michigan avenue in the great mid-way. all right, carter, final call. >> like healthcare here, i use xlv. >> karen, next. >> american airline, expresses bets for one or more, down 29 okay weekly expirations call spreads. >> mike you get the last one. >> yeah, i like selling credit spreads into pulte homes and

calls on xlt. >> it's been an interesting week that does it for us here on "options action" you can catch us back next friday at 5:30 meantime, do not no anywhere you know who is right around the corner "mad money" starts 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.