happy friday everybody it's tame for "options action. here is what we have on deck for the show >> announcer: coming up on the big show, carter werth. >> so, if i did google him what would i find >> you'd find he thinks the search giant could be breaking out then. >> all birds into final bounce mode. >> if you think the twitter bird lost enough altitude mike khouw has a safer way to take wing in the near term plus. >> my friends all call me x. >> but you can call it u.s. steel and can you call him dan nathan he tells you how to mark

the spot on x for the win. time to risk less and make more. "options action" starts now. >> and let's get right it to gearing up for the busiest week of earnings season with tech heavyweights like alf wet facebook and apple on deck to report results now up more than 33% and hitting a fresh all-time high. the chart master says there is a name in the space set to surge when it reports next we can. carter werth at the plasma break it down. carter. >> it's been a mixed bag netflix was poor after the results. amazon poor. apple is god this is one of the big supercap names left i would say this is one of the good ones rather than the poor ones one-year chart, several things i point out to get us going. puppeted to, right, you call this kind of thing up a handle people like that setup meaning you approach the high want do it you back away. but back away and make a shallower low and reproach it. there is a lot of tension in

that setup for ultimately exceeding the high but if i remove all that and go back for the regular chart what we also know exact same chart is we have now -- of course and you can see this we were in the well defined and we are now out it has -- here is the zoom we have brekeen out above that top. okay now hold that thought and let's bring it back in the really long-term chart and look at the all-time high where we might be headed but first the opportunity is the fact that google has underperformed the nasdaq 100 for four years think about that it's one of the biggest constituents in the nasdaq 100 and it's making relative lower lows like this for three years i think this is an at o an end google is likely to catch up, to break out. here are the last few charts to make the point here is the setup. mere are the lines and this all-time high, right,

which was in april, is 1296, 1297 we close at 1264 a 2.5% move would get threw. and that's probably what an earnings beat or a good outcome would do, which would get you a breakout above the tops in effect for basically the past two years. >> okay. so mike, chaes the trade here. >> i like google you know, i feel fairly constructive on the market here. but i will say it has had quit a run right here and even though it's reasonably priced at 20 times next year's total estimated earnings, it's trading at a valuation at about 27 times trailing, which is a little bit higher than some of the basically trough earnings we have seen even relatively recently to put in perspective look at where it traded at the end of last year at 20 times. so when you think about what the downside could provide, you think to yourself, okay, i'm constructive i'm bullish. but it's a $1,265 stock and

buying 100 of that is $125,000 or there base and there might be a bull he shall bet that would cost less and risk less money. looking at the january 13, 4 call spread. call the 1,300 call sfred for 3,800. tell sell the 14 hundreds for 9.10 basically spending $29 a share not inexpensive by options trading standards because you have each contract representing 100 shares 2,900 thars. but consider the alternative 126,000 worth of stock or 2,900 worth of options less than 3% of the current stock price to make a bullish bet you know going into earnings. you know, that seems like it makes sense. what were the chances stock lingers right here i don't think that's going to happen so if it rallies obviously it works out to be a good trade but even if falls you'll be better off doing that. >> do you think carter has the directs direction the trade right. >> undoubtedly contractor has it

right. this company last year -- last quarter put up a huge number and the stock gapped up 9% didn't keep that that was a broad market dynamic if they were to put up the fundamental quality that they did last quarter, the stock breaks out what i like most about mike's trade, he allows time to happen. let's just say the stock doesn't break out right here but the numbers are good enough sells off with the broad market for any sort of reason that's the level it's going back to the next time the market rallies or next time there is good news. and you are set up there to play for the breakout i like the technical setup i suspect the fundamentals will be good and i like the way mike play was with the 100 wide put spread to the upside. >> the fascinating thing about setups they are optically clear. you can see the well defined shops. sizes and shapes jp margen or nike did it they others, they trap you you think you get the breakout and sometimes it's earnings bate and guided up and it's not good enough and the stock backs away.

but it's a major inflection point. the way is act the last quarter suggests something big this quarter should be up. >> last quarter is interesting also simply because when you get a bad earnings result and the stock gaps down then but then the market forgets about it over the next 90 days and into earnings that's a dangerous setup that's the exact opposite what we have here. i think that's what dan is talking about. we were getting good results from the company we believe we are getting good results from the company even if we don't this is an options trade that's going to risk relatively little on dollarwise a spenlsive stock. >> does your outlook for the nasdaq 100 change at all with the good reaction of amazon and intel. >> here the interesting thing. in a pairs world i would be long google and short apple if you do kpafrt charts -- we do a lot of that -- this is an

ideal moment to fade one and double back and catch the other. >> dan would like that i think. >> i do like that. and i also -- let's talk maga for a quick second microsoft had good results has not broken out stuck in the mud. google might be stuck a bit. apple gotten ahead of itself amazon not making a new high any time soon. maga is a complex and i think apple is the most important next week. >> it's the heavyweight. of course it carries outsized impact you know, the point i would make and see apple has traditionally had massive cash flow and a chief valuation as a primary reason why you want to boy it. one of those remains true. only one of them valuation is not so remarkably cheap anymore. trading at 20 piems. that's fairly priced probably. but anything disappointing hurting this stock and hurt the market. >> all right well from big tech to heavy memgts. u.s. steel forging ahead to the earnings report next thursday but looking to are a way to stop the bleeding from the trade war.

this was a $45 stock back in march of last year before the trump tariff fallout and n cap shares but that feels like ians ago now it's barrel in the double indictments appears it gears up to test metal next week dan says the stock may have found a bottom. >> interesting you mentioned march of 2018. that's when trump put the 25% tariffs on steel imports 10% on aluminum. that was the multi-year hi in letter x, the u.s. steel that day. the stock sold off 75% since then we have a -- chart since the start of 2018. if you look at thisdown trend. it's been -- take a ruler and draw a line there. it's been bouncing off of ten a couple of times or handful of times in the last couple months. short interest at 33%. wall street analysts two buys eight holds and six sells. i look at this and say to myself they don't even have to say anything good. they just don't have say anything bad and this stock

probably rallies the other thing that got me thinking about this is mel you just mentioned cat tractor had a nice rally over the last week and a half triple m some of the industrials, fedex nop not a lot of good stuff going on in those places but investors starting to discount the worst is behind them i lack at letter kbchlt reports next move the implied move in the options market is 8% doesn't seem like a lot when you consider the stock is down 35% on the year. moved on average about 8% the last four quarters so to me i think it sets up as an interesting contrarian trade. looking at options market you want to give it a little time to play out if they say anything good the stock is going higher. i don't think to want to play with spreads just buy outright call looking at november expiration you got about three weeks right now, the 12 kaults ka calls when the stock was 11.70 offered about 58 cents breaking breaking even at 12.58. about 7.5% from the trading

level. inside the implied move. if you get it right this thing is going much higher i think the breakdown level from earlier in the year is $15 that would be my target i don't think you want to play in weeklies. that's binary. you get the direction wrong you get the trade wrng at least if the market breaks out decent enough news it looks like investors are looking for beta and you may find it in a name like this. >> you are looking at a name close to trough valuations here. i want to oint out this is a company with relatively speaking a lot of debt on the balance sheet. it has 2.7 billion worpgt of debt and total sbrnz about a billion. how does it translate into moves off earnings and why does it make sense to play options here? imprison simply, the more levered the balance sheet, the more volatility the equity is when you buy options you buy options on the equity. the equity is basically levered by more than two to one here what you're really doing is basically getting a lot of convexity. that's why you want to buy call options. it may seem like a 7.5% is a lot

to expect. for a stock like this it isn't. >> what an amazing thing talking about the stock that this was the largest company in the world at one point and here it is barely a mid-cap. $2 billion general motors was the largest exxonen. i ibm. nothing lasts forever. u.s. steel a piker not relevant but you can still make money very speculative it feels as though pennsylvania myren base it's asymmetrical. if you get some coined of thing you expect really give you 10% move, 12% move it doesn't at this point look as though you get that move to the downside. >> one last point. we have a five-year chart looking at the 2016 lows trading as low at $6 this is one of the reasons why you would want to define the risk to make a contrarian bet if you get this wrng and it's a all-out disaster the stock is a hat size that's not something making sense when you are trying to take a flayer on something

because there is no way to put your finger on say that's it this is it. >> and there is also like ak steel in the new core, glenn core in the uk they're -- the rate of change -- they're not making new lows. but they haven't come to life. and that might be the opportunity. >> okay. for everything "options action" check out the website. "options action".cnbc.com. while there check out the news letter in the meantime here is what's coming up. >> the bears chasing the byrd this this week as shares of twitter tanks on the earnings report but if you think the social stock it flop back. there is a safe way to play if. calling all "options action" fans, roach into your pocket abgrab your phone, and tweet us your question at "options ift'." is nice, we'll answer it on air. when "options action" returns. ♪ "options action" sponsored by think or swim by td

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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. ♪ welcome back to pgss action. the bears are out for the blue bird but twitter shares taking it on the chin this week falling almost 23% after a earnings whiff if you bet it could turn and take flight mike khouw lays out a way to play it with the call to action. >> this was a disastrous week for twitter. one of the most common questions that people who give advice on options gets, is i own the stock and now it's basically punched me in the nose, how can i make the money back obviously we can't unwind trades that have lost money but there are things you can do to recover a little bit without risking a whole lot more money if you are in twitter and you think to yourself, okay, what can i do now

i'm thinking about buy are more stock, the first thing i would say is don't buy more stock. likely to encount are resistance first thing is do not try to catch the falling knife. we give away to make get get more money this stock is likely to encounter some upside resistance if it recovers one of the reasons carter will be happy to elaborate on is you have ready and willing sellers if you get anywhere back close to where it was before they obviously had the big gap down the whole idea here is to try to boost the gains that you're getting if it has a modest recovery, maybe even some form of dead cat bounce let's look at what happened here one of the things you might do, if you look at a one-year chart. you say, take a look, you know back in 2008 this was obviously a weak period for the stock and market generally maybe i'm no the taking the risk by buying the stock only dealing with a couple of%. but i'd encourage to you take a longer look. looking at five-year chart

and we can see that other than the end of 2018 if we go back to these levels that's significant downside that's not a risk you're incline to take. what's the trade here? i was looking at december, the 32-35 one by two call spreads. buy fence the calls one for 32 sell two 35s against it. you put the trade tp if the stock bounces it doesn't have to get close to where it fell if it bounces you double the performance on the long stock position by $3 in this region right here you end up selling it out at 35 but the whole idea here is that if it gets back to this level -- and i don't think it will any time soon but if it did that's where you see the big levels of resistance the idea is if you get a bounce you have an opportunity to recover some of the losses you just took without committing more capital to buying the stock which i think would be a

dangerous exercise. >> dan, what do you think. >> well i'll let him speak to the 35, the level he sells the two calls makes sense. the breakdown level. the idea is that you spend 20 cents to possibly make another 2.80 if the stock is back at 35 that's how you get back in the money to the levels prior to earnings i like the trade structure i think it makes total sense i like the duration. december seems a reasonable amount of time but it would take a piece of fundamental news to change the story. i don't think that happens but you're not paying a lot to have the upside leverage it if happens. >> talk about getting punched in the space. we've had this recently. as you characterize sometimes it goes the wrong way what td. first loss, best loss one of the great add ajs in markets just take the medicine two, don't catch the falling knife. add ajs that are around for a reason and stock itself i just walk away take the loss and like the wounds and move on

in terms of upside, after you have a gap like that on 100 million shares, you have left so many people stranded above, that even if it were to have some upside there -- what's the definition of interest in sellers? this makes it a burden stock and there is no reason -- let's end with this now below the ipo price. i mean, this is a mess. >> yeah, talk about burden stocks, one of the things the strategy looks a little bit like if you sell a covered call against stock. this is similar in some respects to that when do you do you the trades like that when you think there is limited upside appear collect preem up here the premium you look to collect a dead cat bounce but there is a situation with elevated volatility because of what happened. and there is strong resistance above the current stock price. selling some upside makes sense which is why we look at one buy two. >> had it on buy list recently. >> technical or fundamental. >> i've had- i don't do

fundamentals as you oknow. i've had- in sell off was down to a level of support where you would get a pop-like reaction on a earnings in fact the exact opposite, right. punched in the face. just start. >> last word, dan. >> i think it's going lower to be frank i think they blame the disappointing earnings on some bugs the way -- i hate the excuses. i think the platform has spent it's just -- you know, i won be trying to buy the falling knife. >> all ♪ ♪♪

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