it is friday, so that means it is time for "options action." i'm brian sullivan in for melissa lee tonight. here's what we've got coming up as always live here at the nasdaq marketsite in times square >> announcer: health care. when it's top of mind, it should be at the top of your trading radar. tonight, carter worth highlights a new name that you might not have picked up yet on your screen then, health care is just one part of what all consumers need mike khouw looks at how to safely get bullish on all the other bear necessities finally, meh-tah

tony things the virtual world needs to come back to reality. it's time to risk less to make more "options action" starts right now. all right. welcome, everybody thanks for joining us on a friday hope you had a great week and a good end to your week. we are not quite done yet. we've got a lot to do in the next 30 minutes. let's talk health care because while covid still gets all the headlines, let's not forget there are a lot of really bad things out there that medicine and science will need to treat and the health care sector is big, and it's also divided in terms of its winners and losers and types of companies tonight carter worth is highlighting one winner that you might not have even heard of yet. carter >> we thought we'd look at managed care stocks, not to say an unknown one, but we all think of united health care or anthem. i want to focus on sen teen, cnc. let's look at a couple charts.

you're looking at three lines. the winner is a three-year chart comparative. the middle line is the s&p 500 health care sector and the trailing behind line is centene, up only 35, less than half of the s&p. but the setup here and now, centene is excellent by my work, look at the next chart. so you can draw your lines many different ways this is one way to draw the lines. but just today we gapped up, moving above those well-defined tops at the 75 level you can call that a head and shoulders bottom look at the next chart it's the identical time frame. you can draw the lines this way, which is to say an ascending wedge and again breaking out the important thing about that top line, that's the 75 level. look at the next chart this is now going back two years. look at the authority of the 75 level. let's go to the next chart

the stock has been mired at 75 for almost four years, and we are just now breaking out above those well-defined tops. the final chart going back a long way, some ten years, shows the formation and how important it really is is this stock worth more or less than it was 3 1/2 years ago as an enterprise, as a business in principle, more so when you consolidate like this, it represents multiple compression. at some point it gets too cheap, and it breaks out. i think that's exactly what's going on here. >> centene, cnc, not a name we talk about very much at all, but of course we will now. so let's talk about how to trade this in a way. again, one thing i love, mike, about doing this show is i get to learn as well i am no options master whatsoever a call diagonal. that's your call and that's your trade here how do we make money off cnc >> yeah. so one quick point

obviously carter has a bullish technical view, and, you know, normally when he makes a forecast, we're looking out 60 to 90 days i'm trying to look out at least a half a year. the reason is we have an activist investor. we do have a lot of compression in terms of valuations it's trading 15 times full year earnings this is a consistent but very low margin business. their margins are just over 2%, but their competitor, molina, has margins of over 3% the company itself is saying by 2024, they might expect margins in the 3.3% range, and that activist, he has put $900 million into this thing, which is about 2% of the company. he obviously wants to see that happen as well this thing could be trading something like nine times 2024 earnings if they manage to get those margins up where they're talking about and we see the same kind of revenue growth. i was looking at the the june 80

calls. those were about $7.10 when i was looking at those and then selling the january 85 calls against it, collecting about $1.15, net/net spending about $5.95 for this for a stable business, you might think some of these options are looking a little pricey. the fact there's an activist involved might account for that. usually with diagonals we're looking to spend the distance between the strikes or less. you're trying to target that upside strike by the first expiration if you get it it would have to blow through that quite significantly for this to see losses to the upside so we're trying to take advantage of accelerated decay in that near dated option while getting some longer dated optionality in this name i do think the stock itself represents quite a considerable value, and i expect having an activist involved does create a bit of a floor under it as well. >> interesting price points there. 77 and 108 thanks very much tony, your take on that call diagonal, mike's trade on centene. >> yeah, i think this is one of

those prime examples where i think the technicals and fundamentals line up very well carter's charts show you the breakout potential and the potential catchup to its sector. as technicians, we see we're in the business of what and not why. when we look the at the company guidance from today, i think it really tells a strong story for the personal breakout and why it might continue, especially if we look at that margin compression that mike was talking about. we've had 18 straight quarters of trailing 12-month revenue growth, but eps growth is really nowhere there over the past 18 quarters now the guidance from this morning goes out to 2024 they're really focused on that eps d eps growth and that margin expansions i think fundamentally you have a good story for this catchup play if you look at mike's diagonal spread, i like the fact he's going out all the way to june, buying himself some time because these types of fundamental turnaround stories take time that's exactly what he's doing with this diagonal spread. especially with the announcement this morning, i think there's a

low chance he's going to see a big breakout to the upside between now and the january expiration so i think the diagonal spread here makes a lot of sense. >> we'll move on from there but we're going to stay with tony. let's get a little meta, the company formerly known as facebook it may have a new name, but tony says it's going to be the same old underperformer you've got a call spread, and it looks to me fairly sheort term tony, talk about the trade. >> exactly so i think both the consumer and regulatory headwinds are fairly well known here for meta or facebook i think currently the strength we've seen over the past few days is an opportunity to fade that particular strength so if we look at the charts here, looking on a longer term chart, the stock is essentially back to its august 2020 highs, around 300, 305 or so. if we zoom in here, since the september highs, the stock has been in a down trend again, the consumer and regulatory head winds that we're currently facing on this

particular stock we're certainly currently at the top end of that channel. i simply think we're headed back to that 300, 305 level here in the short run. the most important chart i think we should pay attention to here is facebook relativeto its sector, the technology sector. it printed a new six-year low relative to its sector here today. that really shows us kind of what is ahead here for this particular stock, underperforming its sector by a significant margin if we want to take a look at the options itself, the implied volatilities here are fairly elevated the implied volatilities are about a 25% rank so looking at trade structures here, i want to take advantage of this elevated implied volt tilt so i'm going out to january and i'm selling the 300, 355 call spread that's a $25 wide call spread. then i'm collecting $13.5 on the january 330 calls and i'm paying

about $4.70. i'm collecting about $8.85 for this $25 wide credit spread. that's about 36%, 37% of the width trying to play for what is a short term move here to the downside, fading this strength we've seen over the past week. >> definitely not a lover of meta mike, your take on tony's trade. >> yeah. so, you know, it's interesting the challenge with meta or facebook, if we want to continue to call it that, is that this is a stock that just on the numbers looks cheap. obviously we know that they have some regulatory headwinds, but if it's trading around 20 times forward, that's pretty cheap for a company like this. the implied volatility is relatively high. i have a feeling if i was looking at this, it doesn't have a lot of upside because of its headwinds on the regulatory sides, concerns about their business practices on the downside, i think there's going to be some measure of support, maybe not right here but a little bit lower based on

the fact that the valuation looks a little cheap if it does dip, would consider selling some put spreads and maybe leg into an iron condor or sell out of -- excuse me, buy it back and put in the credit put spread in you see that move. >> the old iron condor reference. carter, i don't want to throw you on the spot. any chance to chart out facebook slash meta >> well, sure. some of the big ones, you have it in your mind's eye. key here is how it bounced off the 300 level. considerable support bounce, and the question, does it revisit that level but a 22% sell-off, a to the penny bounce at that level and now back at the 330 level. options is the way to do this. that's the most important point. >> there you go. that is the options trade. we're going to move on because remember this, folks for everything "options action," check out our website,

optionsaction.cnbc.com sign up for our newsletter here's what's coming up next >> announcer: still to come, the indirect benefits of using options to play the consumer mike khouw explains why something they lack can still benefit you in the end plus, calling all options action reach into your pocket, grab your phone and tweet us your que question at @options action. "options action" is sponsored by think or swim by td ameritrade to help you become a smarter investor. with an innovative trading platform full of customizable tools. dedicated trade desk pros and a passionate trader community sharing strategies right on the platform. because we take trading as seriously as you do.

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♪ ♪ ♪ ♪ ♪ welcome back to "options action." let's talk about you, the american shopper, because for

obvious reasons, this time of year the consumer is king. consumers can also be a big deal in times of volatility professor mike khouw explains in tonight's "call to action. mike >> yeah. so i realize this is the season for consumers. you know, one of the areas that of course you're going to continue to buy things is in consumer staples we're talking about soap, toothpaste, ctoilet paper, that sort of thing. when you're thinking about staple stocks, they have a couple characteristics one, they tend to have lower volatility than some other areas of the market. the other is that they tend to have higher dividends. the combination of those two characteristics means that they also typically have lower call premiums because if you buy call options, you don't get a dividend whereas if you buy the stock, you would so taking a look at staples as a sector, one of the interesting things that we're seeing is that the multiples here really have not expanded all that much we have seen large margin expansion in the p/e of the s&p,

but meanwhile consumer staples have remained relatively constant now, one reason someone might expect that to be the case is they might think, well, consumer staples don't see the same kind of revenue or profit growth. but in fact it might surprise folks that the revenue growth for staples has been about 85% of that of the s&p overall over the course of the last ten years. and earnings per share, the earnings that you would get if you owned the sector index or if you owned the sector index etf, have increased nearly 90% as much so we're looking at about 5.4% year-on-year earnings growth versus about 6.1% for the s&p over that time frame but you'll also notice if you keep your eye on this chart that it tends to be much more stable. these are attractive characteristics, and obviously over the course of the last couple of weeks, we've seen increased volatility this could be an attractive place to be. so i think the simple thing to do here is just look out to june

and simply buy and at the money call option. when i was looking at this earlier today with the sector etf, which is xlp, the 74 strike june call was just over $2.80. so you're risking a very small amount to make essentially a directionally bullish bet here i would say that if you happen to own xlp, which is collecting a 2% dividend, this is a different way to play it because, of course, you're not looking for yield. you're looking for capital appreciation but what i'm thinking here is that we might see a little bit of catchup if rates remain low and we have actually seen the ten-year rate not expand that much despite all of the inflation data that we're getting, that is a way to play for some margin expansion or just to see the share price increase as a function of its natural growth >> all right good stuff there so, carter, do the charts, the technicals, support that play? >> well, they do just as depicted in the top of the hour, i have really the same

charts let's look at two of them. this is the first. it's the xlp, which captures the s&p 500 consumer staples sector. now, it's important to know that despite having dozens of stocks, five stocks are basically 50% weight you've got coke and pepsi, procter & gamble, costco, walmart. and it's breaking out. look at the second chart it's a little bit longer term, but it sold off to trend it bounced beautifully to the penny. it is now moving above its prior high it's the definition of a bullish chart. >> tony, do you have a critique or a compliment maybe on this consumer plan? i don't think the xlp has gotten more love on any show in history? >> i have a few thoughts here. first of all, the charts really line up with this breakout the etf has been range bound for the better half of this year, so the fact we have this breakout now is significant from a timing perspective to outright by a call option, which is usually

quite sensitive to timing. especially if you look at the big names in this etf like procter & gamble and pepsi, these multinational conglomerates, they've been able to show an extreme ability to navigate the supply chain issues that we're currently seeing and actually gaining market share right now. that's really what i think is attractive about xlp at the moment the stable revenues and their earnings in this time of volatility and uncertainty, i think this is really the flight to safety and quality investors are seeking. like i said, buying a call option, it's always tricky because you're paying premium, and that premium is decaying as you're holding on to this. so you really have to get the timing right so the fact that we've identified a breakout at this particular time, i think is the right time to buy a call option. normally i'd like to use a spread on something like xlp that is underperforming the market significantly but the call premiums on the upside is not very much. you're not collecting much so i do think in this particular case, the outright buy and the call option is the right strategy. >> okay.

mike, we'll give you a final thought on your own trade after you heard from carter and tony. >> yeah. i mean the important thing to think about, $2.80-ish for that call option which is about 20 cents in the money as of the market close represents less than 3.8% of the current underlying share price and gives you basically time-out until june expiration. you're going to have a decent amount of time to decide whether this trade is working for you or not. if you get the move, you'll be able to monetize it. if you don't see it within the next month or two, you're not going to lose all of that premium. up next, we're going to break out the way back machine well, all the way back to last week because we're visiting 0 a trade on an ev play as well. more "options action" after this short break. stick around

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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, so do its recommendations. so it's like my streaming service. well except now you're binge learning. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn ♪ welcome back last week carter and mike had tesla taking a hit

listen >> often after breaking out from a well defined top at a common level, you'll check back to it so if you simply take the highs from which the stock gapped up on the hurts news, that gets us back to the 9, 10 level. >> i was looking at the january 1100, 1120 call spread this is where i'm talking about how much capital you want to allocate even though this stock is $1,000 a share, you can find smaller ways to make bearish bets. >> since then shares have indeed pulled back. what gear may be next? carter, we'll go to you first. what do you think? >> well, we had a nice crack there, a really aggressive, down 6% to 7% tesla has bounced back the question is, is this period of distribution, selling, whatever you want to characterize it, is it over? i think not. i think we're still going down to about 900, 910.

>> mike, what do you think >> so the call spread we sold has collected about a dollar week over week, which is okay. here's the important thing to remember we've had some big insider selling. some of that is probably tax-related because elon had some options he has to pay taxes on those options because he had to exercise them, otherwise they would expire i think that helps create some pressure into the end of the year if we see this come in another three bucks or so on the call spread, i'd probably cover it and take my profits then. >> carter seeing maybe 100 bucks more in downside. up next, you it's a thirteen-hour flight, r tweets and the final call st look at my dashboad 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.

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♪♪ ♪♪ ♪♪ all right. let's start to wrap it up. welcome back time now to take some of your tweets our first viewer asks, how is the xbi biotech etf looking now? so bad, it's good?

>> it sure comes to mind you're talking about being down 39%, peaked in february. it's a great etf with 190 tickers. no one's bigger than 2%. i think it is so bad it's good >> all right our next viewer asks, our old friend alibaba been trading like a steel mill that's about to g out of business for a year to me, it felt like a big volume capitulation on december 3rd i see an unfilled gap around 150. do the traders like targeting that gap for a bounce, and if so, what is the trade? mike, why don't you answer the world's longest viewer question but a good one >> that's a good question. it's a long question for a reason, because it's a long story with all the chinese stocks, including alibaba, which by any other market would look exceptionally cheap. but of course these chinese headwinds could persist for some time options are also quite expensive here, i would point out. the straddle expires in march is more than 20% of the stock

price. you'd probably best target that upside about a call spread to mitigate the high expense. but the chinese headwinds are going to continue for a while, i think. >> our next viewer asks this thoughts on microsoft making all-time highs in the coming weeks, please. tony, they're so polite, we have to take the question. >> yeah, i like microsoft, especially if you look at the stability of the azure cloud growth here alongside with the migration over to a higher multiple business, the office 365 cloud business and couple that with the margin expansion, i think this justifies the multiples that microsoft is trading at. i think it justifies further upside i will use a call spread or a call diagonal to play for further upside so that i can reduce my exposure if there is a pullback from that all-time high. >> okay. 20 seconds for the final call. let's go carter >> centene, a defensive stock acting offensively >> tony. >> facebook. fade the strength using a call

spread >> aka meta. mike >> staples, i like 'em. >> the consumer, not the retailer >> that's right. >> all right carter, tony, mike, thank you for taking it easy on me thank you all for watching "options action. id'll see you right here next fray at 5:30 eastern.options ac. "mad" with jim starts right now. have a great weekend, everybody. >> my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere. and i promise to help you find it "mad money" starts now >> hey, i'm cramer welcome to "mad money. welcome to cramerica other people make friends, i'm trying to make you money my job is to entertain and teach. call me or tweet me @jimcramer decent session today dow gaining 216 points s&p climbing .95%. the nasdaq jumping