>> you've made a lot of strides in a short period of time. >> i just wanna thank you for everything that you've done for us, for the business. you really saved us. and you gave us hope. and it means a lot to me, personally. >> i wish you a lot of luck. and, you know, i'll be around if you need me, okay? >> yeah. happy friday, "options actions" fans. here's what's coming up on the big show >> announcer: 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 2021, 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 but 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 khow breaks it all down it's time to risk less and make more "options action" starts right now. >> let's get right to it you see the clock, hear the 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 transports. he says the 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 late 1,800s, and it's cyclical, right? we know that the two big package haulers, fedex and u.p.s. are a 23% weight before airlines the truckers add up to about 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. that's the i shares that mirrors the dow jones transportation average. you can see it broke out and is 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 continued 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. stall, 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 drawdowns. there have been four distinct drawdowns. you can see them there, an 11% drawdown, a 14, 14, and then a 9. and i think we're setting up for another giveback, pullback, dip, decline, whatever nomenclature you choose in the transports >> all right so that's pretty clear mike, what's your trade off of that >> so there's a couple of things i would quickly point out. 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 certainly seem like they have plenty of tailwinds there. obviously, we have the current global situation that's going on, but generally speaking, package shipping is a good business to be in, overall there's something else i would say, when you're dealing with cyclical stocks, a lot of times we deal with fundamentals like price-to-earnings ratios and things like that but it's important to remember with cyclicals, often times you'll see the highest p\es at the trough of the cycle. sometimes a high p\e doesn't necessarily mean that stocks are poorly positioned. but in this particular instance, we have a confluence of two things, which is we do see those high p\es, but the stocks are trading close to those all-time highs. this is not the cyclical trough. something else is kind of going on in these technicals that carter is identifying. the other thing i would add, of course, we still do see, as we keep referencing on this show as evaluated implied volatilities in a lot of spaces a lot of them iyt implied

volatility is 50% above its longer-term average. we do want to take a look at a spread i was looking out to february, the 215/195 put spread as i was looking at that earlier today, you can 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 exploration and the underlying drops below that short strike is going to be a little bit better than three to one. 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? >> 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 pull back here. but also, as carter mentioned, the 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 in october in november. so we'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 broke below the 50-day moving average. that could be another catalyst for this index to start moving lower here for those reasons, i like the trade. and mike has laid out exactly why this debit spread works. you're paying less than a quarter of the width and rusk only 2%. very small amount of risk here for trade to play for a short here in opinion. >> tony had mentioned the weakness and exposure to retail, i wonder how you think fedex itself looks versus the other big chunky parts of this index >> sure.

so, again, fedex being the biggest weight, and after that, i think it's unp but fedex has had a great move and i think it's an example of by the rumor, buy or sell. everybody knows they're jammed, they're busy, and yet, guess what, the stock has appreciated quite a bit. and it's action today is telling. 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. 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 over year you know, but recently, the stock recently declined about 15% after announcing earnings a few weeks ago, and i think that now is an opportunity to pick up this stock going into the end of the year if we first look at the chart itself, the chart looks quite weak you've had a recent breakdown. it came back to retest that level as resistance and got rejected

and especially if you look at best buy to its receptor, the xrt, the retail sector, it's severely underperformed the sector itself. this severe underperformance for me is actually the opportunity that i see to take a look at this stock if you look at retail sales, i did mention that november, we've seen a decline in month over month retail sales if you compare november to the same time next 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 school from home. so all the zoom materials requiring us to buy electronics, 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 a large amount of cash flow, has almost $6 billion in cash, which it can return to shareholders by share buybacks or dividends

for those reasons, i really like the stock. when i first take 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 little concerned that you might see some further weakness. so i chose to go out to january 29th, the weekly options, to sell a put spread. i've sold the 102.95 put spread, collecting about $2.75, which is roughly the same 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 are expiration >> interesting, because goldman sachs just cut this one to a rare sell rating on wall street,

mike khouw, citing, pull forward. people have bought a lot of laptops and bought a lot of stuff that tony had mentioned already. they're not going to buy it again. what do you make of the trade, mike both the direction and the trade itself >> let's talk about the trade structure first. 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 orders. and a lot of those things could present some material weakness if the market rolls over so selling puts on tight or naked at this point is a risky proposition. i prefer selling a put spread. you still get to take advantage of the fact that you see some evaluated premiums you still get to use basically a yield-collecting strategy to make your long directional bet so i think selling a put spread makes a lot of sense obviously, i can understand where goldman sachs' rating on the stock is coming from, but 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 of years. there was just a sense that the bricks 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 continued to life. what we've seen is that 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're trading at a slight discount to the market, a little bit higher than their historical premiums but i think the trade structure makes sense if you like it here. >> carter, what do you make of that chart >> tony said it, he said the chart is not good. so he qualified it by saying -- and perhaps this is a "so bad it's good moment," which means it is makinging new 52-week lows to the xrt and almost to the s&p 500. weakness is sometimes an opportunity whereby y opportunity, you get to buy something at a more favorable price, or it's weak for a

region it's on a knife's edge here. the risk to the downside, for what it's worth, is the stock gapped up on its earnings on july 22nd on a big beet from 90 to 100 that gap looms low buying the stock outright here is too risky >> for everything "options action," you can check out options action.cnbc.com. while you're there, sign up for our newsletter here's what's coming up next >> reporter: buckle up, "options actions" fans, tesla just zoomed its way into the s&p 500 professor coat takes the wheel and explains why that's a big deal for the entire index. 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. "options action" is sponsored by

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help the world believe in holiday magic.thing and this year was harder than ever. and yet, somehow, you all found a way to pull it off. it's not about the toys or the ornaments but about coming together. santa, santa, you're on mute! just wanted to say thanks. thanks for believing. ♪

♪ ♪ ♪ ♪ welcome back to "options action." check out mushares of tesla, wi a market of cap of roughly dl l billion. it's now the sixth largest company in the entire index and mike says it's time to pump the brakes >> this is an interesting situation, tesla, isn't it i mean, basically, you can 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, this thing is trading better than 20 times sales right now, and has had an epic run. and that's particularly extraordinary, given the business they're in, if you think of them as an auto and industrial type of company, consumer congressional company, these are pretty extraordinary multiples. the thing is, this is also a stock that right now, despite these very high valuations, this is also 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 the s&p itself, as a result of it. so, when i think about the s&p, i just want to point out that when its biggest -- the biggest constituents are more volatile and they're more correlated 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 propel the stocks to new heights. 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 it decided to sell the january 7 700/720 call spread. paid the 700s, bought the 720s to collect my upside and collected about $700 in credit to do that spread. so the idea is that i'm

expecting the stock to either stall or potentially fall back and i think this is one of those situations tesla is obviously a very popular company and 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 with the short interest dropping, that was the last layer of support you had in other situations and i don't see that one here. >> carter, what's your take on this crazy chart >> we have a couple of charts, but first, put this in context the market cap at $658 billion, yet the total value of shares traded today, 148. 148 billion in the value traded. there are only 45 companies in the s&p, their entire market cap is worth that. said differently, $220 million shares of volume on $1 billion outstanding. a quarter of the float turned over today tesla charts

the furs one, irst one, no draw, judgments made look at the second one i've tried to characterize it this way you have strong advances and 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 of the gym you assert yourself and you rest take a look at the next chart. you can see, this big, powerful advance and you consolidate, you rest, a powerful advance, you rest it's good sequencing but the final chart, the sequencing, even if it's in tact, it calls for 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 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 of the 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, but i think it is a little different this time in terms of pushing a short here and the credit spread that he's selling here isn't quite a short, but if you look at the stock itself, it's run up 60% since the news that it was going to be included in the s&p 500. that's a hell of amount of a front running for this particular stock as i do think it's gone a little too far, too fast here and stocks that make big run-ups before they get included in the s&p 500 average only about a 1% gain over the next month after they're actually included. tesla, i think, is 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 still collecting about 37% of the width. that's a fair amount of width to collect for something that has much room to the upside. he's not exactly short here, because tesla can still trade up, almost 7% between now and january expiration and will still be profitable on this

particular trade now, the same -- i will say the same thing as i did about the black rock trade last week, this is a fairly short day to trade only 25 days to expiration by the time investors put it on next week, so gamma is going to be a little higher here for this particular trade it's going to be a little bit more sensitive if you get a continuation to the downside next week, you can probably take profits very quickly on this particular trade. >> now, mike, a lot of people out there might be inclined to not trade tesla at all it's just a little bit too volatile they want to stay away but in terms of thinking about the impact on the s&p 500, you mentioned the impact on volatility what should we expect when we comes to the vix, when it comes to swings in the s&p 500, because this is being added? >> yeah, so, you know, it's an important question obviously, it's relevant to tesla, but 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, right? so there's two principle

components to what creates volatility in the index. one, of course, is the weighted volatility of each constituent itself if those are more volatile, the index in theory would be more volatile but the other one is 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 beless volati less volatile what we're seeing right now in the s&p and all of us 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 is you had highly volatile stocks and highly correlated stocks, they were all techstocks, all high flyers. and what we're beginning to see right now is 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 evaluated 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 that's kind of the way i think about it and as for whether or not people

trade tesla, not just the stock, which carter referenced, traded epic amounts of volume the options are true over 2.5 million contracts today, tesla that's a $700 million stock. that would be the equivalent of $25 million contracts trading. $2.5 billion shares of a $70 stock. it's trading a lot a lot of you people watching probably traded it today, too. up next, we are going to take your tweets you can send them our way at options action we'll be right back after this r. fifteen minutes until we board. oh yeah, we gotta take off. you downloaded the td ameritrade mobile app so you can quickly check the markets? yeah, actually i'm taking one last look at my dashboard before we board. excellent. and you have 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. ♪

it's got all my favorite shows turn oright there.boom, i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists.

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. mike, what do you say? >> the answer will be spy puts or put spreads >> simple! good advice. up next, final call. i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. oh. 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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♪ ♪ final call time. carter >> sell transports, iyt, the vehicle. >> tony? >> sell put credit spreads on

best buy >> mike khouw? >> short tesla call spreads and to go with my short shorts >> hope you don't wear those that's it for "options action. we'll see you back here in the new year happy holidays, happy new year stay tuned, "mad money" with jim cramer starts now. [announcer] the following is a paid commercial program for rotorazer, sponsored by razor tools llc. (upbeat music) - uh-oh. can't find the right saw for the job? you need a handsaw for this, a circular saw for that, a bandsaw, a miter saw, and a jigsaw? and with all the different blades, that job's turned into an expensive jigsaw puzzle. not anymore. (saw buzzing) hi everybody, i'm joe fowler, and this is the rotorazer. over 3000 screaming rpms of workshop muscle,