hello, everybody and welcome to "options action." i'm brian sullivan in for meliissa lee we have another show on tap tonight. what is it here is what's coming up. >> the dog of dogs >> sit, stay, good viewer. boy, do we have a treat for you. the dog of the dogs of the dow woof then -- yes if you think investors are starting to bite off more than the market can chew with the high-flying stock we have an insurance policy. an options antacid of sorts.

>> plus. >> love gold. >> goldman sachs. >> and we'll explain why you shall too right now. time to risk less and make more "options action." >> risk less make more has a nice ring to it. let's get right to it. as we know now the record rally rolls on the dow hitting another all-time high today while a tremendous year for the index, a number of names sat out the rally. let's look at three. walgreen's, pfizer and 3m the only three components down in year but carter says one of the names is his dogs of the dow pick for you for next year at the plasma to tell us which it might be. >> dogs of the dow, put together in 1950s it's a dividend strategy, the thinking is a blue chip stock that's the worst performer in the index by definition will have a high yield and that you get a little catch-up trade

here in fact is the index of dogs of the dow relative to the dow back to 2001 a lot of -- well, efficacy, blows away the dow itself. in any event, let's take a look at walgreen's. here is the spread there is the dog walgreen's, down 14% versus the market, the dow up 22. my thinking is that walgreen's is going to do something in terms of catching up here is the beginning of the year what we know is they were both sort of doing well and then all things went sour for walgreen's. boots. look at the following charts no judgments or annotations by me one way to draw the lines. nice setup another way to draw the lines, a textbook rounding bottom you could call it a head and shoulders bottom of sorts. meaning any way you cut it and it's the dip back that should give you the pop setting up quite well this is the dog of the dow pick

for me. >> carter, see you back here what's the trade if any here on walgreen's. >> here is the thing if you look at a dogs of the dow strategy carter referenced one of the things you are arguably looking to capture, a dividend, a high-dividend paying stock of course to get that you must own the stock. the trade we're looking at here is maybe the most fundamental one in all of options trading and it involves owning the stock first. you would actually be buying wba here at about $58.5. and to enhance the yield further you would look out to january and sell the sixty call for $1.20. looking at what's going on, in the trade you have upside in the near term if the stock goes up a bit from here. you collect $1.20 in premium from selling the call.

2% of the current stock price which you'd collect in premium over the course of one month if the stock rallies through the strike your gains will be capped but capped at nearly 4.8% based on where the stock closed. that isn't a bad rate of return for a single month why would you be willing to sell that upside? one of the things the reason the stock performed badly, people just aren't that excited about it you know you'll notice the average analyst rating on this stock is pretty much close to right where in thing is trading right now. what creates support for it is the valuation question it's trading around 11.5 times earnings, that's close to the bottom in terms of its valuation multiple historically. this is a trade basically you're not looking to knock the cover off the ball obviously if you own the stock something you can consider is just selling the calls >> interesting, the technical setup looks nice and i think that when you pair that together with this whole notion of dogs of the dow and the potential for the outperformance in the new year, that to me looks like an interesting setup, especially

for a market a lot of people think is extended and think is expensive and you have a name underperformed and you have historical data and you have a good chart setup mike's trade is interesting process you don't, you know -- if you think it's going to be a bit more consolidating but if you think this stock is going back for the 65 level or so where it traded a month 1/2 ago you don't want mike's trade. but if you want the dogs of the dow trade i think you think about buying a call and playing for his reversal move. >> right, well, again the dogs of the dow as a psa one-year holding period which is of course not what we're talking about. you get the nice pop potential having had the initial pop and then the drift lower. >> could we use walgreen's as a lesson. >> because the double story here because talk about kkr wanting to take it private management wanting to take it private. difficult to do, a massive buyout but if you think it may be bought out, do this.

>> it's interesting you mention that because one of the things that people who are doing a original arbitrage trade. one of the favorite trades is to buy the stock and sell calls against it usually you try to sell calls at the price where you think the stock might be taken out in those instances you try to sell calls as long dated as possible why? because when a company is taken private, the extrinsic premium goes straight to zero. but if you think it's taken out at a premium -- the thing is the market isn't pricing that in i want to make that clear. there has been speculation but the stock is not behaving like that's what everybody thinks is happening. >> good stuff there and boeing by the way could soon join those three as the only three that are down from the dow's worst performed performer to the best performer what else, folks it's apple, the best year in a decade but dan says the amazing run might soon be done

dan, why and what is the trade >> well it's pretty simple here, the way that stocks and markets trade. they trade on the potential for future earnings. one of the things that's interesting about apple this year, the stock up 77% on the year, up 97% from the close on january 3rd, the day they had a negative preannouncement due to disappointing iphone sales in china. the most interesting thing about that is the fact that that in fiscal 2019 that ended for apple is that the earnings and sales did not grow yet the stock almost doubled from january 3rd and the way i think about investing is that that is anticipated a lot of good news to come. and therefore i'm not so certain in 2020 in stock gets rewarded when they put up maybe something that looks like the expectations for what the way the stock has been trading to me that makes me a little nervous, especially some of the data points we have seen out of iphone sales in november in china. the valuation thing, i think

it's obviously a $1.25 trillion market cap, gaining $600 billion-dollar in market cap i don't think that's happened in a calendar year for a stock ever i think the sentiment is pretty euphoric here. the way i think of this is if you own the stock and don't want to sell it because you don't pay taxes on, there are ways to think about hedging the position into the new year. obviously no one expected on january 3rd for the company to negatively preannounce they did ended up being a bottom after it gapped down but there is the implied volatility and options prices are low pretty cheap here in apple, which is affording you opportunity if you think about hedging or just want to make a bearish directional bet to buy options, define the risk and ink that bet to me it's simple. when the stock was trading at 280 today, you could look out to

february expiration that will capture the fiscal q1 earnings coming the last week of january and buy the 275 put paying $8 for that you obviously break even down at 2.67 that's down less than 3% or so or you risk 3% of the stock price. breaks even at 4.5%. you have two months. i'll make a point. the stock is up 77%. the implied move over the next month that should include the earnings event, about 7% in either direction so if you are long and you just want to make sure that you have some protection and let this thing run, for the next month or so, or you are really nervous and long and you want to put a stop in and define the risk, this is a way to do it i think it makes a heck of a lot of sense here because i think the multiple going from 12 at the start of the year to 21 right now which is a 10-year high is anticipating a lot of good news. if you get less than good news in the name the stock is going back towards 250. >> here is something to think about. you could get good news out of it and see nothing happen to the price. look at -- you were referencing 10-year highs.

back to 2010 when we last saw valuations like this look at what happened to apple in terms of the price through 2011 did they grow earnings yeah, killed it tremendous free cash flow. what happened? the multiple declined and the stock went sideways. when you trade at high multiples it becomes very hard to got follow-through price action even if the fundamental news remains good. >> right, what we do know is it's a very difficult thing to single out the point at which a very steepen and extended stock is going to stop it's a dangerous game. we do it all the time. actually we have some success with it as you both know and yet sometimes they just keep going. so i'm in this camp. in fact put in out in documents for clients and so forth but it is important to know this, up 78 -- it's only the eighth best performing year. apple had years up 200 multiple years up 150, 160. could it go further? it could that's the risk.

but at some point one has to say enough is enough take measures. >> and that 275 put is $8. >> less than 3% of the stock price. gives you two months of protection i just think that listen a lot of things people are excited about and this should be a 20 multiple stock love the air pods. think it should be higher multiple business. they love services but the streaming service, not so great and probably going to disappoint air pods, a month lead time. right now. there be could be bumps in the road for this. no one sees it right now and that's one of the reasons i think with options price as cheap as they are, bullish sentiment, turning of the calendar and potential for money to move other places, again it's a $1.25 trillion market cap. you could see some large institutions kind of take money off the table in the new year. >> good stuff there and good strategy especially if you are worried about the apple recent run. for everything "options action,"

check out the website, optionsaction.cnbc.com while there check out the news letter in the meantime, here is what's coming up. >> announcer: coming up. >> i'm not saying she is a gold digger >> but she is looking for a bank stock we just hinted at which could be the perfect one 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. >> announcer: "options action" sponsored by think or swim by td ameritrade ♪ ♪

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and welcome back to "options action." there is something brewing in the bond market. check out the yield curve. remember the big inversion scare back in august well it seems like ancient his toer history now the spread between the 2-year and 10-year which is what most look at is at the highest level of the year. good news for a big bank if there is a big bank breakout coming we have to go big too you know what that means ♪ that's right, it's time for tag team dan nathan and xp investment managing director joining us to tackle it. >> let's talk about the bank stocks you mentioned the steepening yield curve and the big money centers in the u.s. like jp morgan really started to

take off this fall when it looked like the fed's three 25 basis points cuts fixed that we saw jp morgan break out and not stopped over the last couple months let's broaden out to goldman sachs which is an investment bank and we know there is headwinds at goldman, issues that have been weighing on the valuation goldman has traded cheap to some of the peers we know they have this investigation with this one mdb situation. it sounds like it might be resolved in the near future. you might see the valuation come a bit more inline with a good resolve situation there. the other issue i would say is obviously there's a lot of talk about the global economy, and some green shoots here and the fact is all the easy money that we have over the last few years is now moving a little bit more to a fiscal situation or fiscal stimulus we see it in japan, europe, that sort of thing. goldman should benefit from that

i guess the last point -- i'll show you some charts -- the constructive technical setup here this is a stock that obviously has kept pace with some of the other peers but it's still well below its 2-year high or so. this is the 1-year chart it's obviously been a big -- a nice little uptrend. consolidating here between 190 and 220. we had the breakout right here in the last week or so and that looks constructive to me let's look at the 5-year chart this is where we are right now and what's interesting about this is that this is the area where the stock broke down from last year and literally cratered in the q4. spending all year getting back to that. this is the area that i'm kind of thinking out between 225 and 275 back to the prior high where if all these things align, if the market continues high, if goldman has resolutions to some issues like the one mdb situation, if we start to see them have the multiple, expand a little bit in an upward sloping

market, i think you probably have a shot in 2020 for it to kind of fill in the gap here that's my setup on the name trying to be constructive on a bank stock i'm handing it over to a very talented options trade a friend of mine >> if you like the thesis about bank stocks, investment bank stocks particularly and taking it more into goldman sachs i like upside call spreads don't want to spend too much premium at the money you are playing to get in the momentum and ride it high. break it down. specifically i like the march 240-270 call spread costing about $5, or 4.60 to be exact. you boy the 240 call with cash outlay is $5.03 against that you sell the 270 receive $43 cents net-net 49.60. round it up to five for the sake of ease.

what we're doing here is you essentially have your break even at 244.60 or five. you stand to make $25 one to five i haven't seen odds like that since my trip to vegas. i like sending the maturity to march for a few reasons. one you get the earnings call in january. typically they are a catalyst for movement you get the q1 positions that traders set up books to see how we play the year strategically and last it allows you to manage and use this as a trading position as opposed to buying and holding to short-term maturity you can put in stop losses as dan alluded to premium losses and you're not playing for one catalyst event that might lead to rapid option erosion. that's the way i look to play it great setup by dan. >> i really like the setup

what he is doing here basically giving time to play out. i like the idea he targets on the upside to the resistance level from early 2018. to me, i think this trade setup really candace kind of marries the fundamentals. >> mike your quick trade on that. >> i agree with the buy on goldman sachs here this is one of the few stocks if you look back four years trading about the same price they are making $22 a share versus 16.54 years ago. from a valuation perspective it's attractive. we are chasing when we consider how strong the market has been that supports the thesis of using a call spread. >> i like the tag team guys thank you. up next car max getting a bump today on earnings one of the traders is smiling on that believe it or not we're going it hit the car lot when we come back. "options action" sponsored by think or swim by td ameritrade

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♪ ♪ ♪ ♪ ♪ all right welcome back to "options action. this is the part of the show where we check in on one of our open trades. you remember last week mr. mike over here said car max was headed for a speed bump. >> this is a stock that generally speaking when it starts getting close to those

upper levels of its valuation as it is right now and we can see this orange line is the average analyst price target through time with the price underneath it this is the spread what we can see is that when these things converge very often what happens for the month or so after stock trades sideways or falls off a little here is the trade. if you own the stock, what you can look to do is sell the january 105 calls. >> so car max got hit hard by earnings this morning. stock fell 6%. mike how are you managing this one. >> this was a situation where we thought the stock was looking toppy. the options expensive. we identified a catalyst and said in these circumstances he said of year with the stock up so much you might not want to sell but sell calls against it collect yield. sold the calls for $2 bought them back for 20 cents in a situation like that there isn't more much more left. you cover the short call and

basically have to move on if you own the stock at least you mitigated the pain you felt after earnings >> good stuff there mike thank you very much. more headwinds for boeing and investors sending the stock down again today. and if you are stuck in boeing fear not one of our traders tells you you might be able to mitigate the risk. stick with us. we're back after this. >> announcer: "options action" is sponsored by think or swim by td ameritrade. so what do you s? 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 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 all right welcome back to "options action. check out boeing stumbling on the week united airlines cancelling flights until june stock down 4% this week and hanging on to 2019 gains by a thread under 2% now but if you are stuck in boeing stock, you like the company long-term. mike might have a way to manage it using options. >> yeah, one of the things i would say is that this is a stock that's going to continue to face headwinds here i think first of all, it isn't as if the only problem they have is the 737 max.

structural problems with the ng. valuation on the company is not cheap all things consider. implied volatility price of options a bit higher we've been talking about the strategies a lot on stocks that are maybe getting to the upper level. sell calls against it. i was talking to an institutional client short 350s in march you could go nearer dating i was looking at 345s in february. >> time for the final call around the horn here. >> carter. >> yields matter in 202 xlu. walgreen's boots long. >> if you want to play the dogs of the dow and buy a stock consider writing a call against it, buy right is one of the easiest trades you can get involved in options. that's what i would like at. >> also a good time of year selling calls against the stocks you own. the holidays are a good time apple is the opposite as carter said of the dog of the dow

if you want to hedge it tactically look out a couple of months to february 275 puts for $8 look interesting. >> merry christmas everybody. >> except maybe not apple based on dan's trade watching that one. good stuff that does it for "options action." we'll be back next friday night at 5:30 p.m. eastern "mad money" with jim starts right now. - [announcer] the following program is a paid advertisement for the nuwave brio digital air fryer, sponsored by nuwave. live well for less. we all love fried foods, but yuck that means scoops of grease, blobs of butter, or gallons of oil just to fry. this adds up to a lot of unhealthy fat in your diet year after year. stop! now you can cut out all the added fat, and still keep all the flavor with the new brio digital air fryer by nuwave, the world's first digital air fryer with flavor infusion technology. coming up next, you'll see how brio's compact design makes mountains of crispy wings