♪♪ ♪♪ -- captions by vitac -- good day, everyone, it's friday, and that means it's time for "options action. it's usually the time for melissa lee, but she's not here, i am it's great to be with you. no ordinary show, the first options action of the new year, and here's what's coming up. >> tonight as covid continues an inverse trade pinning two consumer sectors against each other, but not in the way you're probably expecting carter worth and mike khouw t tackle that. tony zhang flies solo on

cisco, a new pattern in the old school tech titan. plus, a look back on a specific bank trade before the barrage of bank earnings begins next week. it's time to risk less to make more "options action" starts right now. >> welcome, gentlemen. we begin with the first of two opposing trades on the consumer themselves caught between covid on the one hand, inflation on the other. carter worth is going to take us through the big picture and part one. >> you better so what we're going to look at first is an etf, the xrt that captures a broad swath of retailers, some 109 names, amazon and walmart and small ones like foot locker and gap. the key is it's an equal weight etf, so it tells a pure story. let's look at the first chart. this is the xrt, close out today at 8718, and no judgments, no drawings let's draw some lines. next chart, one thing one could

see or draw, that's what my eye sees a big topping out or a rolling over formation look at the next chart, you could draw the lines this way. could you call that a double top? you could, you can look at the next chart is it a well defined trend or a breaking trend, it is. put a few of them together, final chart. we have a double top we have a break in trend, and we have very poor relative performance to the s&p, to tech, to financials, to almost everything don't like it. want to be underweight, want to sell it short. >> i like the little eyebrows there over the double top. that's a good looking thing. mike, what's the trade here. >> yeah, so tyler, this is an interesting one. as carter pointed out, it is an equal weighted etf equal weighted etfs have had a tendency not to have the violent downside gap types of moves in real market swoons in the

caplated ones, and that's often because the high flying stocks have a disproportionate share of those. i would ask people to take a look at the levels of xrt now. it's near double the pre-pandemic level for these names, which is pretty remarkable when you consider all that we've been through. to my eye it doesn't really seem like this is the cheapest place to enter the market right now. now, the other thing to point out about equal weighted etf is this is a situation where simply going out and buying what's expected, that sharp downward move like i was just describing isn't really the play. i think what you want to use here is a put spread i was looking out to march certainly buying the at the money 87 strike put selling the 77 strike put against it when i was looking at that earlier today, that was going to cost a little over a quarter of the distance between the strikes. we are seeing slightly elevated options premiums in a couple areas, and those who were paying attention to the market probably understand why that is that short downside push is

going to help offset the decay of the one we own. it's also going to increase the break even level xrt is not going to need to fall quite as far before we start seeing profits at expiration on this trade i think this is a way that you can make a directionally short bet targeting around 77%, maybe a little higher, 80 or so on a 10% downside move over the course of the next couple of months. >> tony, what do you think >> yeah, so i think this is a really good chart to look at from a case study perspective because xrt spent the better half of last year between 90 and 100, and the question always when you have a trading range is which way does it break out? and in november we saw xrt actually break out above the $100 level the important part was the relative performance that carter was talking about. on that breakout above 100, there was no outperformance relative to the market subsequently that breakout failed now we're testing the bottom end of the range, the $90 range. this time we see not only do we break below the range, we see

the underperformance relative to the market and relative to the other sectors carter is referring to that is the signal that xrt is heading lower. typically the 77 strike price, which is the lower strike price than mike has chosen on this put vertical, that's about 11.5% away from the price. that's a sizable move to the downside if you look at xrt, the big catalyst that drove this etf significantly higher was gamestop, and now we've seen gamestop break below that 150 level, could potentially be a significant weight to the downside i think this is a great way to play for some downside get ago two to one risk reward. >> that's very interesting dissection of that trade really cool to hear that let's move on to our second part of our consumer crossroads, carter in the middle of another covid winter, you're looking at a hotel stock that would be hilton >> that's right. and so to some extent this is the other side, some of the best performers today in the market,

of course, were things that were post-covid or even as covid ends, which of course it seems to be. let's look at the first chart. this is hilhilton, and that lins now manipulated or drawn to fit. it is a 45 degree angle and hilton is checked back to the penny over and over and over every time it's bounced and importantly, look at where hilton is in relation to its pre-covid high, right? the covid high, the plunge, it's well above now by contradistinction, take a look at the sub sector that is the s&p 500 who tells reshotels resorts and cruises, expedia, carnival cruise. we've not gotten close to making back all the losses associated with covid you can see that there the third charlott is a comparae chart. this is the important circumstance of relative outperformance the last chart tells the tale.

this is a relative chart, a ratio chart only, right, of hilton's performance relative to its s&p sub industry group, hotels, cruises, resorts, and you can see that massive outperformance when it spiked, that's the covid low it was outpefrforming even as te stock was going down we've just now broken out to the upside again in this formation so hilton to the upside. >> all right, mike, once again, the trade is yours >> yeah, you know, thinking about the hotel business got me thinking about an options trade we can't talk about that often but is a very common one you know, a hotel gives you shelter, and i was thinking about a covered call you know, when carter makes a bullish case with a 60 to 90 daytim day time frame, typically he's thinking about the stock you can do that. he was trading right close to

150, 152ish, i think right around the close you know, a way that you can look to enhance the income that a stock can produce over time is by selling an upside call against it you would purchase the shares. i was looking out to the february 160 call. you would buy the stock here, sell the 160 call, when i was looking at that earlier today, you could collect about $4.80. now i think carter was talking about a price target somewhere in the neighborhood of 165ish, that in the two to three-month time window. consider what you're looking at here if you, in fact, had a price target of that level, essentially that's the break even if you sold that upside call of course in this case, if the stock stays here or drifts only mildly higher, you're going to get to collect that premium. of course if my february expiration is not exceeding that short strike or if it's maybe just only slightly above it, you can then roll that short call out and look to do the same thing, collect a little bit more premium.

that will lower your effective cost basis on the trade. now, when you do that, as this chart illustrates, you are selling off some of that upside. the point that you would make here as carter was saying is that take a look the pattern of how the stock is behaving. it's been moving in a very orderly and steady fashion he's not asking for something violent here to the upside if you believe that, whether you hold the stock or not, selling the covered call is a way you can do it. >> tony, does this trade work for you? >> yeah, it does especially if you look at the rev part of the major hotel groups hilton consistently outperforms its other two peers, marriott and hyatt. especially if you look at the chart itself you have this breakout above the $150 level there are a few things that concern me about hilton. it looks a little bit, there's some signs of exhaustion here, i think 160, 165 is about as high as you'll probably get here on hilton also a valuation perspective,

it's trading on a significant premium. for those reasons i really like mike's choice of a strike price here going all the way out to february, he's chosen the 160 strike price that's about a 35 delta. that translates to about a 35% chance hilton will be above 160 by the february expiration typically i would choose a higher strike price, a lower delta for covered calls. in this particular case, getting more aggressive, collecting that 4.5 bucks, which translates to 2.5% of the stock's value in the next 40 days or so makes a lot of sense getting more aggressive, especially as you're nearing a top from a technical and fundamental perspective. >> mike, do you want to raebt to tony's reaction? >> i hear what he's saying about the delta. that's true, you want to try to select short dated options that don't have a super high probability of being in the money at expiration. that's a situation you do not want to be in quitypically.

this company obviously seeing its valuation as high as it is, but not having seen quite the revenue recovery that you might have hoped to get at this point in the pandemic, you know, it is interes interesting. this is a company that navigated this pandemic efficiently. they got their expenses down significantly. the thing you would normally be worrying about, they're running a fairly asset light model so i think they are obviously demonstrating in terms of managing the business they can manage hardship too. >> all right, folks, one down. we got a lot more to go, for everything "options action," check out our website, optionsaction.cnbc.com while you're there, sign up for our news letter. here's what's coming up next >> remember cisco? >> no, not the one who sang that song cisco the old school tech titan, tony zhang has a new reason to believe it will be a blast from the past. plus, calling all "options

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♪ ♪ ♪ ♪ ♪ welcome back to "options action," my prompter says in intro tony cisco check out shares of cisco

pushing higher recently, tony cisco in the options up more than 12% in december if you think this disco and cisco is just getting started, tony's got a way to keep on dancing. what are you seeing, tony? >> yeah, i'm taking a look at cisco because the transformation that we've seen on this company towards a higher margins services type business is continuing to pay off, and i think we're going to still see that going sinto this year if we take a look at a chart of cisco, what we have is a breakout above a clear resistance level, $60, but a lot of investors may have missed out on that particular breakout. i think this is an opportunity to seek some upside exposure while reducing your overall risk on this pullback, and more importantly, when we look at cisco as a company relative to its sector, it is in the technology sector, but i do think it's worth taking a look at cisco relative to the communication sector, which it is a big part of, and if we look at that relative chart to the

communications, it has underperformed the broader markets for quite some time. over the last 18 months, it has completed this bottoming formation, and is starting to outperform the communications sector in addition to outperforming the tech sector, which it's formerly a part of all of those things signal that the breakout is correctnstructi and it's likely we're going to revisit that $65 level and continue higher. if we look at the business itself, currently it's trading at 18 times next year's earnings i do think that those valuations are justified given the fact that it's been able to generate more than half of its revenue than this higher margin service type business. i'm buying the 60 by 67 1/2 call spread i'm paying about $3.45 for that march $60 at the money call option, slightly in the money call option actually, and i'm selling the 67 1/2 calls against that for about $0.69

net net here i'm paying about $2.75 for this call vertical spread that will pay me about a two to one risk reward ratio if we do see cisco revisit that $65 level and continue higher from here. >> carter what do you see in the charts, and then, mike, i'll turn to you about the trade. >> you bet well, tony's described it perfectly. this is what's known in some of the history books as a reaction buy point. cisco had a huge move off the november low, up almost 25%. people react to strength by taking profits or trying to short, which halts the advance and often forced it back to the level from which a key reference point could be cited the 60 level, usually you're going to bounce right after that kind of level. >> mike, what do you think of the trade? >> yeah, it's interesting, tony referenced he sees it at a little over 18 times next year's earnings looking for about 3.5 bucks a share. that puts it at somewhere

between probably low 17s, i would guess, and probably about 7% annual eps growth the year following that when you think about valuations, you have to compare it not only to its own history but just to your investment alternatives in the marketplace. on that basis it doesn't look too badly priced it has a very solid balance sheet. i think obviously the place where cisco is encountering headwinds is part of that growth strategy has been motivated by m&a, and m&a has been a tough row to hoe when you've seen elevated asset prices. >> thank you so much up next, an update on a blank trade we laid out a few weeks back don't go anywhere. there's more "options action" next trading isn't just a hobby. it's your future. >> announcer: "options action" is sponsored by think or swim by td ameritrade. g™ is right there with you.

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we've now come all the way back to retest this level as sport, and i think this is an opportunity to seek some long exposure in this particular bank of i'm going out to january and i'm going to sell the $43 put options. now i'm able to collect at $1.21 for that put action. >> bank of america up 9% since we made that proposal. >> for investors who followed this, you were rewarded for that volatility expansion we saw on december 20th. earlier today you could have closed this out for about $0.07 or $0.08 that translates to a profit of 1.15 per share either you think bank of america's run is over, take your 1.15 and move on to the next trade or wait for a bit of a pullback here in the stock, buy the stock, and apply the 1.15 that you've collected on the short put to a discount on the

stock purchase i think bank of america will continue to outperform this year, and i think this is a great way to buy the stock with a small discount. >> so basically put that money back to work into b of a mike, your thoughts on b of a or more broadly on the financials >> yeah, so, you know, it's interesting we were just talking about this over the course of earlier this week, and that was, you know, how do the options market view financials going into the new year. we obviously have seen some sharp increases in rates, and i will tell you that financials were one of the top basically sectors in terms of the sentiment to the upside that we saw basically right at the end of 2021, and that continued this week we saw a lot of bullish activity in wells fargo, goldman sachs, bank of america, citi, and some other financial areas as well. my inclination is to continue to lean long in the financials. >> how about you carter, what do you think about the financials overall? what are the charts saying >> we know they've come to light as rates have moved.

i think the financials are full here >> all right, thank you very much up next, your tweets and the final call we'll be right back. it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. oh yeah, we gotta take off. >> announcer: "options action" is sponsored by think or swim by td ameritrade. 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. ♪♪ what does it feel like to sell your car to carvana? it feels amazing. when you get a great offer in seconds... (all cheering) it feels too good to be true. it's kicking back and relaxing as we pick up your car. and when you get paid on the spot, it feels like scoring big. you know the feeling.

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all right, welcome back to "options action. time to take your tweets our first viewer asks is shopify too expensive at this level. is there more pain ahead carter, what do you say? >> a couple of things, expens expensive, we can't use those terms for a stock trading at 34 times sales, price free cash flow of 300. it's expensive the real question is tactically, it's just sold off36% as of today's close from its high of november 19th. do you play it for a bounce here as a trade i think you play it as a bounce, but is it expensive? you bet ya. >> expensive but bouncy. >> our next viewer asks how do we manage the xlv 140 to 148

call spread from the show a couple of weeks. initially it was rocking, now it's getting clobbered should we buy to close the 148s and let the 140s we're long ride or something else? what's your move thanks, mike. >> if you didn't take profits when we saw that initial rally up to the peak we saw recently and you still carry this position, those 148 strike calls, you can cover those i think you might as well. you can probably buy them back for a few pennies. the other thing i would say is i still like the sector and i definitely still like a couple of the key constituents. the largest component stock in this thing, united health, the best managed care company there is pfizer is obviously a big constituent as well, trading at 17 times it's not particularly expensive. the way you could handle this and the way i would be inclined to is think about turning this into a risk reversal by selling

a 130 strike put maybe in march. i have a feeling that that is probably where we're going to see. that's that level from which it bounced most recently. i think we need to get carter's opinion on this one. that's the level i'm looking at for a put sale. >> very quick thought, carter, if you might >> after breaking out it's pulling back to where support comes into play. >> next viewer writes, i believe fedex will run up in the spring, more online shopping with omicron and the winter time looking to sell the march 18th, 320 call, and by the april 14th, 280 call for a cost of a little over 3/4 shares. tony, what do you think? >> i think the chart looks constructive i like the diagonal spread, i think i'd sell february calls against it hopefully those expire, and hopefully you'll be able to do april calls against it as well. >> final call, carter. >> on the long side, consumer in general on the short side. >> sounds good tony, you're next. >> cisco buy a call vertical

spread. >> all right and mike, you wrap it up >> xrt put spreads >> all right, carter, mike, tony, thanks very much, and thank all of you for watching. we'll be back next week with more "options action." don't go anywhere, jim cramer's "mad money" starts right now - [presenter] the following is a presentation sponsored by trusted luminess. - i have a lot of problem spots, redness, fine lines, dark spots. and now with the breeze, all that's changed. the breeze advanced foundation is amazing. it gives you skincare and makeup all in one. it's like a thin veil, but it has extraordinary coverage. at my age, all the other makeups made me look older. it was uneven, you'd have to layer them yourself. it never quite came out the way i wanted it to. the great thing about the breeze is it does your blending for you. i love the way the luminess smooths out