but most disturbing of all, the hangover is moral. we start seeing that behind many of these great fortunes, in the 1980s is the old cliché: a greed crime. happy friday, "options action" fans. i'm melissa lee. a nice trading lineup. here's what's coming up on the big show >> pop the champagne and prep those puts it's the final "options action" of the year. funny how time decays. so as we gear up for 20231, tony, mike, and carter lay out their ultimate options trades for the new year, but before the

ball drops, we've got to get through christmas. bah humbug don't be such a scrooge. tony zhang is the perfect stocking stuffer, the one retail name he's playing for some holiday cheer. and later, tesla is living life in the fast lane, the car company cruising into the s&p 500. so what does that mean for tesla options? professor khouw breaks it all down it's time to risk less and make more "options action" starts right now. ♪ rocking around the christmas tree ♪ >> let's get right to it you see the clock and heart music. that's right it's just one week until christmas, and that means it is crunch time for the shippers, but the chart master sees some trouble in the transport group as a whole is about to stall carter, take it away >> well, of course, it's an important index. it's the oldest that we have going back to the late 1800s and it's cyclical, right we know the two big package

haulers, u.p.s. and fedex, are a 24% weight before airlines truckers add up to 40, and the big four railroads about 35. concentrated index, and it is stalling of late let's look at three identical charts and then one or two at the end. the first of three it's a two-panel chart on top is the iyt, the "i" shares that mirror, the dow jones transportation average, and you can see, of course, that it broke out and it's now above its pre-pandemic high, but look at the bottom panel. relative performance to the s&p is nowhere near the level of the january swoon. second chart another way to draw the lines. the vertical line i've drawn, you can see transports have considered higher absolute over the past two months, and yet look at their relative performance to the s&p you can see the arrow i've drawn. stalled, not progressing, meaning not delivering alpha third two-panel chart. another way to draw the lines. you can see that the transports are still on an uptrend and yet

relative performance is just now starting to break trend. so where might the transports as an aggregate, as a group, as a theme be headed? final two charts here's simply the iyt and you can see the trend line drawn i think at a minimum we'll come down to trend as has been the case several instances since the march low, and so the final chart is that chart you just saw, and yet it's including the draw-downs there have been four distinct draw-downs you can see them there an 11% drawdown, a 14%, and then a 9% i think we're setting up for another giveback, pullback, dip, decline, whatever nomenclature you choose in the transports. >> all right that's pretty clear. mike, what's your trade off of that >> yeah, so there's a couple of things i would quickly point out. i mean, obviously when we think about the secular trends for the transports and especially the largest constituents of this index that carter is talking

about iyt, the largest of which is fedex, it would seem they have plenty of tailwinds here. we have the current global situation going on, but generally speaking, you know, package shipping is a good business to be in overall. there's something else i would say is that when you're dealing with cyclical stocks, you know, a lot of times we talk about fundamentals lik price-to-earnings ratios and things like that, but it's important to remember with cyclicals that oftentimes you'll see the highest pes basically at the trough of the cycle, so sometimes a high pe doesn't necessarily mean that stocks are poorly positioned, but in this particular instance we do have a confluence of two things which is we do see those high pes, but the stocks actually are trading close to these all-time highs. this is not the cyclical trough, so something else is probably going on in these technicals that carter is identifying the other thing i would add, of course, is that we still do see, as we keep referencing on this show, elevated implied volatilities in a lot of spaces, and this is one of them. right now iyt implied volatility

is probably 50% above its longer term average, so we do want to take a look at its spread. i was looking out to february, the 2/15, 195 put spread when i was looking at that earlier today, you could spend about $4.50 to buy that put spread that's a little less than 25% of the distance between the strikes which means that the payoff, if you hold it to expiration, and the underlying drops below that short strike, is going to be a little bit better than 3-1, and, of course, spending $4.50 against an etf that cost over 200 so you're risking just over 2% of the current stock price. not a great deal of risk to make this bearish bet going through the holidays, and, of course, you know, if we do see next year's news on shipping as a real positive, you're not risking a great deal, but i, like carter, think that we might be seeing a near-term top here. >> tony, what do you make of the trade? >> yeah. i like the trade if you look at the iyt and etf, there are clear signs of exhaustion here as the etf is making higher highs, momentum is

not confirming these higher highs, and that usually is a clear sign of a potential pullback here. but as carter mentioned the constitue constituents, you have almost 40% of the weight of this particular index in trucking and we've seen retail sales decline month after month over october and november so you've got two back-to-back month declines in retail sales, and trucking has almost a 55% exposure to retail sales, and the big weight, fedex, down almost 6% here on earnings it broke below the 50-day moving average. i think that could be another catalyst for this index to start moving lower here. and so for those reasons, i like the trade, and mike has laid out, you know, exactly why this debit spread works you're paying less than a quarter of the width here and you're risking only 2%, a very small amount of risk here for a trade to play for a short here in my opinion. >> carter, tony mentioned the weakness of the truckers and the exposure to retail i wonder how you think fedex itself looks versus the other big chunky parts of this -- of this index >> sure.

so, again, fedex beginning the biggest weight and then after that i think it's unp, but fedex has had a great move, and i think it's an example of, you know, buy the rumor, sell the news everyone knows they are jammed, they are busy, and yet, guess what the stock has appreciated quite a bit, and its action today is telling. >> all right let's move on here tony is getting into the holiday spirit, aren't we all. he says this retailer could be the perfect present for your portfolio this year. so, tony, why don't you unwrap this one for us. >> yeah. i want to take a look at best buy because this is one of these stocks that just continues to surprise us year after year. you know, recently the stock recently declined about 15% after announcing earnings a few weeks ago, and i actually think that now is an opportunity to pick up the stock going into the end of the year. now, if we first look at the chart itself, the chart actually looks quite weak you've had a recent breakdown below the $105 support level it actually came back to retest that level as resistance and actually got rejected. especially if you look at best

buy to its receptor, the xrt, the retail sector, it's actually severely underperformed the sector itself. so this severe underperformance for me is actually the opportunity that i see to take a look at this stock now, if you look at retail sales, i did mention that november, we've seen the decline in month-over-month retail sales, but if you compare november to the same time last year, we're still up 4% versus same time last year, but consumer electronics is up 29% compared to the same time last year as consumers are mostly working from home and taking schools from home. so all the zoom materials requiring us to bialek tronnics, i think best buy is an interesting opportunity in the backdrop of strong retail sales, but the stock is down 15% since the earnings the stock itself is very strong. it hasn't cut a dividend one of the few retailers that hasn't cut dividends this year. it generates alarming amount of cash flow, almost $6 billion in cash which it could return to shareholders by share buybacks or dividends so for those reasons i really like the stock.

now when i first took a look at this, i was actually looking at selling january $100 puts. they were collecting about $3. but given the current weakness that i'm seeing from this particular stock, i am a littl concerned that you might see so further weakness. so i chose to go out to january 29th, the weekly options, to settle a put spread. i've told the 102.95 put spread, collecting about $2.75 which is roughly the same that i would collect from that selling january $100 put option, but i have limited risk here by buying that $95 put for about $2.10, i'm limiting my risk here to just a little over $4 on this particular trade, and i'm still collecting about 40% of the width here on this credit spread, and this really allows me to gain some potential upside exposure in best buy and potentially own this stock if i see a little bit of weakness between now and the january 29th expiration

>> interesting because goldman sachs just cut this one to a rare celebrating on wall street, mike khouw, citing, you know, pull forward people bought a lot of laptops, bought a lot of stuff that tony had mentioned already. they are not going to buy it again. what do you make of the trade, mike, both the direction and the trade itself >> yeah. so let's talk about the trade structure first. i mean, if i was going to look to sell puts at this point with the market not trading that far off of all-time highs. we've seen a massive run-up here we have plenty of bad news that seems to be percolating out from a lot of quarters, and all of those things could present some material weakness if the market rolls over. so selling puts untight or naked at this point in time is a risky proposition. you get to take advantage of the fact you see elevated premiums you still get to use basically a yield-collecting strategy to your long directional bet, so selling a put spread makes a lot of sense obviously i can understand where goldman sachs' rating is coming on the stock it's interesting because tony actually mentioned this.

this is a stock that people have basically counted out, i don't know how many times over the last several years this was just a sense that the brics and mortar retail, and also electronics retailers in particular as they were basically the only surviving one among them were basically as good as dead, and yet they continue to thrive what we've seen is some retailers have been able to transition to basically the more modern economy they seem to be making their way through it so i'm not going to count them out just yet they are trading at a slight discount to the market, a little bit higher than their historical premiums, but i think the trade structure makes accepts if you like it here. >> carter, what do you make of that chart >> well, tony said it. he said the chart is not good, and so he qualified it by saying that and perhaps this is a so bad it's good moment it is making a new 52-week relative lows to the xrt and almost to the s&p 500, so weakness is sometimes an opportunity. you get to buy something at a more favorable price, or it's weak for a reason. maybe the goldman sachs judgment, for instance, and there's more trouble ahead

it's on a knife's edge here. the risk to the downside, just for what it's worth, is the stock gapped up on its earnings on july 22nd on a big beat from 90 to 100, and that gap looms below. this is the kind of thing we have to do with your options, buying the stock outright here is too risky >> all right for everything "options action" check out our website optionsaction.cnbc.com while there sign up for the newsletter here's what's coming up next buckle up "options action," fans tesla just zoomed its way into the s&p 500. professor khouw takes the wheel and explains why that's a big deal for the entire indecz plus, calling all "options action" fans, reach into your pocket, grab your phone and tweet us your question @optionsaction. if it's nice, we'll answer it on air when "options action" returns.

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♪ ♪ ♪ ♪ welcome back to "options action." check out shares of tesla. they are moving lower in the after hours as the company zooms into the s&p 500 with a market cap of roughly $632 billion. tesla is now the sixth largest company in the entire index, and mike says it's time to pump the brakes on this high-flying e.v. option he's here with his call to, a.

mike >> you know, this is an interesting situation, tesla, isn't it i mean, basically you could kind of think of tesla as the most popular but arguably the rowdiest party guest as it enters the s&p right here. we're measuring popularity by its multiple if you compare the multiple missing trading 20 times sale right now, and it's had an epic run, which is particularly extraordinary given the business they are in f you think of an auto or industrial type of company, consumer discretionary company. extraordinary multiples. and this is a stock that right now, despite the very high valuations, this is also a very volatile stock as well if you compare the volatility of tesla to all of the other top ten names in the s&p, names like microsoft and amazon, this is trading at more than two times the volatility, so there's really going to be implications both for tesla having entered the s&p and then the s&p itself as a result of it. so, you know, when i think about the s&p, i just want to point

out that when its biggest constituent -- the biggest constituents are more volatile and they are more core related with each other, the s&p itself could also see some increase in volatility you are highlighting the increase in valuations basically by seeing cheaper stocks falling out and more expensive ones coming in like tesla earlier on "fast money. i think that given the fact that the short interest has dropped considerably, the stock is trading at all-time highs, we've already seen the boost that comes from the split, we're already seeing this big boost that came from the entrance into the index, that maybe there isn't as many things lying around to basically continue to propel the stock to new heights, and so i was inclined today to take a short bet on tesla, and the way i did that earlier today, and i should point out the stock closed very close to 700. it was about 670 when i did this trade. i decided to sell the january 700/720 call spread. i put the 720s to cover my upside, and i collected about $7.50 in order do that spread.

the thing is i'm expecting this stock to either stall or potentially fall back. this is one of those situations, you know i mean, tesla is obviously a very popular company they make very popular products. i'm not saying any of that is going to change, but what is going to be the marginal buyer once all of the indexers have purchased it, that's the hard part for me to see, especially at these very heady valuations and especially with the short interest dropping, that was basically the last layer of support that you had in other situations, and i don't see that one here >> carter, what's your take on this crazy chart >> yes it's -- we have a couple of charts, but first put this in context. i mean, the market cap at 658 billion, and yet the total value of shares traded today, 148. 148 billion and the value traded, only 45 companies in the s&p in the entire market cap is worth that said differently, 220 million shares in volume on a billion outstanding, a quarter of the float turned over today. tesla charts, the first one, no drawings, judgments, annotations made

you see it for what it is. now look at the second one, i tried to characterize it this way. you have strong advances, and then you get periods of consolidation, and then you advance again. it's the way an army moves forward. it's the way an athlete works out at the gym you assert yourself and then you rest so take a look at the next chart. you can see this big powerful advance, and then you consolidate and you rest, a powerful advance and you rest. it's good sequencing but the final chart, the sequencing, even if it's intact, it calls for a rest. you can see that there this is not a time to be chasing tesla. in fact, it's a time to sell calls or to reduce exposure. >> so tony, after all of that, what do you say? >> yeah. i couldn't agree more. i can't help but think that the highs that we saw today is likely what we'll see as the relative highs for quite some time for this stock, but this is one. toughest stocks historically to ever short, and mike has a good reminder of this on his book shelf with a pair of the tesla

short shorts, but i hate to say this i do think of it a little different this time in terms of pushing a shortly, and the credit spread he's spelling here isn't quite a short. if you look at the stock itself, it's run up 60% since the news it would be included in the s&p 500. that's a helluva mount of a front-running for this particular stock because i do feel like that's gone too far too fast, and stocks that make a big run-up before being included in the s&p 500 advantages a 1% gain over the next month after they are actually included so tesla, i think, is in, you

know, likely going to consolidate here as carter puts it now, if you look at the credit spread that mike is selling, he's selling a credit spread that's almost 6% out of the money based on today's close, and he's still collecting about 37% of the width that's a fair amount of width to collect for something that has that much room to the upside so he's not exactly short here because tesla can still trade up almost 2% between now and january expiration, and he'll still be profitable on this particular trade now, the same -- the same -- i will say the same thing as i did about the black rock trade last week is that this is a fairly short day to trade 25 days to expiration by the time investors put it on next week so that's going to be a little higher for this particular trade it will be a little more consecutive. get a continuation to the downside next week you could probably take profits very quickly on this particular trade. >> mike, a lot of people out there might be included not to trade tesla at all it's a little too volatile they want to stay away but in terms of thinking about the impact of the s&p 500, you mentioned the impact on volatility what should we expect when it comes to the vix, when it comes to the swings and the s&p 500 because this is being added? >> yeah, so, you know, it's an important question it obviously is relevant to tes larks but it's a broader question, too. what causes volatility in an index? you know, when you buy an index what you're buying is a diversified basket of stocks in

theory so there's two principal components to what creates volatility in the index. one, of course, is the weighted volatility of each constituent itself if those are more volatile, then the index in theory would be more volatile, but the other one is in correlation. in other words, how much do those stocks move together. if i have two highly volatile stocks but they always move in opposite directions, the index will be less volatile. what we're seeing right now in the s&p, and all of us who are on the show right now and many people watching, will remember the tech wreck, and in the tech wreck one of the things that happened to the nasdaq was that you had highly volatile stocks you also had highly correlated stocks they were all tech stocks. they were all high-flyers. and what we're beginning to see right now is that the s&p is increasingly consisting of stocks that are viewed similarly. so we're talking about technology stocks. and where you could potentially

see elevated levels of volatility, so the expectation, therefore, in the volatility of the s&p should be that it will also be a little bit higher. so, you know, that's kind of the way i think about it and as for whether o not people trade tes larks not just the stock which carter referenced traded epic amounts of volume. the options traded over 2.5 million contracts today. >> wow. >> tesla and that's a $200 stock. that would be the equivalent of 25 million contracts trading 2.5 billion shares of a $70 stock. it's trading, trading a lot of a lot of you people watch probably traded it today, too. >> up next, we're going to take your tweets. you can spend them our way @optionsaction back right after this. >> announcer: "options action" is sponsored by thinkorswim by td ameritrade. thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪

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and you can even see how your predictions might affect the value of the stocks you're interested in. now this is what i'm talking about. yeah, it'll free up more time for your... uh, true crime shows? british baking competitions. hm. didn't peg you for a crumpet guy. focus on what matters to you with thinkorswim. ♪ welcome back time for tweets. one viewer asks what is the best way to hedge volatility at the end of the year without closing profitable positions resulting in a tax bill? vix calls, s.p.y. puts mike, what do you say? >> yeah, the answer is going to be s.p.y. puts or put spreads. >> simple. good advice. up next, final call. >> announcer: their award-winning content is tailored to fit your investing goals and interests. and it learns with you, so as you become smarter,

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visitthere were tsunamisearn fourtin the world. and once they happened, we were in a major hurry to get to those regions to provide aid and support. it was very humbling to be able to help out all those people.

it's my dream now to go into clean energy and whatever the next new fuel source is, that's where i want to be. i want to be on the front lines of implementation. ♪ ♪ final call time. carter. >> sell transports ioyt the vehicle. >> tony. >> sell put credit spreads on best buy.

>> mike khouw. >> short tesla call spreads and to go short shorts. >> hope you don't wear those that's all for "options action." happy holiday, happy new year. stay tuned "mad money" with jim cramer starts now - [announcer] the folg program is a paid advertisement for nuwave oxypure smart air purifier sponsored by nuwave llc, featuring deborah norville on award winning journalist and new york times bestselling author. - we are all living in strange and unsettling times. never in history has everyone on the planet been challenged by the same thing. covid-19 has changed the way we work, the way we interact and we're all still trying to figure out what it means for our future. amidst the uncertainty, all of us are trying to take care of our families as best as possible. i've lost track of how many masks i've made and we've all been wiping down door knobs and surfaces.