nobody came in. nobody shut them down. so the greed brought forth this amazing sense of immorality, and it made them feel as though amazing sense of immorality, and it made them feel as though they could do no wrong. 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 tyler matheson the first "options action" of the new year and here's what's coming up. >> tonight, as covid continues, an inverse trade pitting two consumer-driven sectors against each other, but not in the way you're probably expecting. carter worth and mike khouw tackle that. >> then tony zhang flies solo on cisco. he spotted a new technical

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. "options action" starts right now. welcome, gentlemen we begin with the first of two opposing trade on the consumers themselves caught between covid. carter worth will take us through the big picture and part one. carter >> you bet what we're going to look at first is an etf, the xrt, that captures a broad swath of retailers. some 109 names, big ones like amazon and walmart and small ones like foot locker and gap. it's an etf. it tells a pure story. let's look at the first chart. closed out today at 87.18. and no judgments, no drawings, let's draw some lines. next chart one thing one could see, that's

what my eye sees, a big topping out or rolling over. the next chart, you can 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 and break in trend it is. put a few of them together a 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 look mike, what is the trade here >> yeah, so, tyler, this is an interesting one, as carter pointed out. it is an equal weighted etf. equal weighted etf have had the tendency not to have the violent down side gap types of moving in

real market swoons we have seen in the caps weighted once, that means they always have a disproportionate share, but i would ask the people to look at the xrt levels it's near double the pre-pandemic level for these names, which is pretty remarkable, when you consider all that we've been through. tim, to my eye, it doesn't seem like the cheapest place to enter the market the other point is this is the situation where simply going out and buying what's expected a sharpdown ward move isn't really the play what you want to use here is a put spread i was looking out to march, essentially buying the at the money 87, selling the 77 strike put against it when i was looking at that earlier today, that was looking at a little over a quarter of the distance between strikes it's also going to increase the break-even level i think this is a way to target around 77%,

maybe a little higher, 80 or so, bringing on a 10% downside move the important part was the relative performance that carter was talking about. on the breakout, there was no outperformance relative to the market subsequently that breakout fail. now we're testing the bottom end of the range, but 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. that's a signal that i think the xrt is heading lower typically the 77 strike price, which is lower than mike as chosen, that is about 11.5% away from the current price that's a pretty sizable move, but if you look at xrt, the big catalyst that drove this etf significantly higher was gamestop, and now we've seen it break below that 150 level, could be potentially a significant weight to the down side i think this is a great way to play for some down side, getting a 2-to-1 risk/reward. while risking less than 4% of the etf value. >> that's very interesting, cool to hear it carter, in the middle of another covid winter, you're looking at a hotel stock. that would be hilton. >> this is the other side, some of the best performers today

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 hilton that line is not manipulated or drawn to fit it's a 45-degree angle and hilton has checked back to the penny over and over and over every time it's bounced. important, look at where hilton is in relation to the pre-covid high the covid high, the plunge, it's well above by contra-distinction, take a look at the subsector that is the s&p 500, hotels, resorts and cruises. we're not where near we've not gotten even close to making back all the loss associated with covid. you can see that there the third chart is a comparative. looks at the two together. this is the important circumstance of a relatively outperformance in fact the last chart tells the tale

this is a relative chart, a ratio chart only built-in performance relative to its s&p subindustry group, hotels, cruises, resorts you can see the massive outperformance on its spike. that's the covid low outperforming, and with just have broken out. hilton to the up site. hilton to the up side. mike, once again, the trade is yours >> yeah, you know, thinking about the hotel business got me thinking about an options trade we don't often think about, but it's very common a hotel gives you shelter. i was thinking about a covered call you know, when carter makes a bullish case with a 60 to 90-day time frame, typically he's thinking just about the stock. of course, you can do that you can go out and simply buy the stock here it was trading close to 150, 152-ish, i think, right around

the close. 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 so you would purchase the shares i was looking out to the february 160 call. so you would buy the stock here, sell the 160 call, you could collect about $4.80. now, i think carter was talking about a price target somewhere in the neighborhood of 165ish in the two to three-month time window if you in fact had a price target of that level, essentially that's the break even of course, if the stock just staying away here or drifts only mildly higher, you collect the premium. if my february expiration is not exceeding that short strike, you can then roll that short call out appeared look to do the same thing. collect a little bit more premium.

that will lower your effective cost basis on the trade. when you do that, you are selling off some of that up side, but the point of would make here, as carter was saying, take a look at the pattern of how that stock is trading. it's been moving up in an orderly and stationary fashion what he's saying is this trend will continue. if you believe that, whether you hold the stock or not, selling a covered call is a way to consider doing it. >> tony, does this trade work for you? >> yeah, it does, especially if you look at the red part of the major hotel groups hilton consistently outperforms marriott and hyatt, and if you look at the chart itself, you have this breakout here above the $150 level there are two things that concern me about hilton. if you look at the chart itself, there's some signs of exhaustion here i think 160, 165 is probably as high as you'll get, but also from a valuation perspective,

it's trading at a fairly significant premium to its historical valuation i like mike's chose here he's chosen a 160 price strike that's about a 35 delta, translating to about a 35% chance that hilton will be above 160 by the february expiration typically i could choose a higher strike price but getting more aggressive. collecting the 4.5 bucks which translates to the stock's value in the next 40 days makes a lot of sense getting more aggressive especially as you're nearing a top from both the fundamental and technical perspective. >> mike, do you want to react to tony's reaction? >> i hear what he's saying you do want to try to select short options that don't have a super-high probability of being in the money at the expiration that's a situation you don't typically want to be in. a quick point i would make with

respect to valuation you know, this company, seeing its valuation as high as it is, not having seen the recovery that you might have hoped to get at this point in the pandemic, you know, it is interesting. this is a company that navigated this pandemic pretty effectively. you know, the thing you would normally worry about, debt covenants, they seem to have negotiated that situation fairly well they are demonstrating that. in terms of managing the business, they can manage hardship, too. >> one down, we've got a lot more to go for everybody "options action" meantime check out our website, and while you're there, sign up for the newsletter here's what's coming up next >> announcer: remember cisco, no, not the one that 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

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♪ ♪ ♪ ♪ ♪ welcome back to "options action." everybody in my conference says intro tony cisco tony, cisco sounds like a lounge singer check out shares of cisco

pushing higher recently. tony, up more than 12% since december if you think this disco in cisco is just getting started, tony has a way to keep on dancing what are you seeing, tony? >> yeah, i'm taking a look at cisco, because the transformation we have seen toward a higher-margin services type of business is continues to pay off. i think we'll still see it going into this year if you look at a chart, what we have is a breakout of a clear resistance level, $60, but a lot of investors may have missed out on that particular breakout. this week we've seen a pullback to that level and i think this is an opportunity to seek some up side exposure while reducing your overall risk on this pullback more importantly, when we look at cisco as a company relative to its sector, it is in the technology sector, but i think

it's worth looking at cisco relative to the communication sector if we look at that relative chart, it's underperformed the broader market for quite some time the last 18 months it's completed a bottoming formation and start to go outperform the communication sector, in addition to outperforming the tech sector. so all of those things from my perspective signal that the breakout above 60 is constructive and we'll likely revisit the 65 level and continue higher. the business itself, currently trading about 18 times next year's earnings, which is a premium, but i think those valuations are justified given the fact it's been able to generate more than half its revenue now from the higher-margin services business. the trade structure i want to use is going out to march, i'm buying the 60, and paying about $3.45 for that march $60 at the money call option, slightly in the money call option, and selling the 67.5 calls for 69 cents

net net i'm paying about $2.75 for the call vertical spread that will may be about a 2-to-1 risk/reward ratio if we see it visit that $65 level and continue higher from here. carter, what do you see in the charts and then mike i'll turn to you for the trade >> you bet tony's described it perfectly. this is what's known in the history books in the '40s as a reaction buy point, meaning cisco has a huge move off the november low, and people react to strength by either taking profits or trying to short, which halts the advance, obvious forces it back to the level. the 60 level, just what tony said, usually you get a bounce off that level. >> mike, what do you think of the trade? >> yeah, it's interesting, tony referenced he sees it as a little over 18 times earnings. different analysts have different estimates, looking for

$3.5, looks it at low teens, i would get, so, you know, when you think about valuations, you have to compare it not only to its own history, but your investment alternatives. on that basis, it really doesn't look too badly priced. it has a solid balance sheet i think obviously the place where cisco is encounters some potential headwinds is part of the growth strategy has been motivated by m&a that's been a tough row to hoe when you're seeing elevated asset prices >> gentlemen, thank you very 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. so you don't lose sight of the big picture, even when you're focused on what's happening right now. and thinkorswim trading™ is right there with you.

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>> we saw the breakout above the 43 1/2 level we'll retested this level as support. of going out to january. i'm going to sell the $43 put options. now i can collect about $1.21 for that put option. >> tony, up 9% since you made that proposal. what do we do now? >> yeah, so for investors who followed this, earp rewarded for that volatility expansion that we saw on december 20th. earlier today, you could have closed this out for about 7 or 8 cents. that translates to a profit of $1.15 per share. i think there's two things you can do either you think bank of america's run is over, or what you can do, which is what i would prefer, wait for a bit of a pullback, buy the stock and apply the $1.15 that you collected to a discount on the stock purchase that's a 2.3% discount

i think bank of america will continue to outperform here this we're, and i think this is a great way to buy the stock with a small discount. basically put that money back to work into b of a mike, your thoughts? >> it's interesting. we were just talking about this over the course of earlier this week you know, that was how do the options market view financials going into the new year? we obviously have seen sharp increases in rates i will tell you that financials were one of the top, basically reat the end of 2021 my inclination is to continue to be long in the financials. >> carter, what are the charts saying >> we know they have come to life as rates are moved. i'm in the camp that rates are not going meaningfully higher and the financials are full here.

thank you. up next, i don't remember 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. 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. ♪♪ (announcer) carvana's had a lot of firsts. 100% online car buying. car vending machines. and now, putting you in control of your financing. at carvana, get personalized terms, browse for cars that fit your budget, then customize your down payment and monthly payment. and these aren't made-up numbers. it's what you'll really pay, right down to the penny. whether you're shopping or just looking.

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welcome back to "options action." time to take your tweets our first viewer asking, is shopify too expensive? carter, what do you see? >> expensive is probably -- we can't use those terms for stocks trading at 34 times sales, a pe of 290 it's expensive the real question is tactically it just sold off 36% as of today's close. you play it for a bounce here. as a trade, i think you play it for a bounce, but is it expensive? you betcha. >> expensive but bouncy. our next viewer asks, how do we

manage the xlv from the show a couple of weeks ago? initially it was rocking, now it's getting clobbered and the xlv has actually broken the 50-day moving action should we buy to close the 148s and let the 140s we're long ride or something else? thanks what's your move, mike >> first things first, if you didn't take profits when we saw the initial rally, and you still carry this position, the 148 strike calls, you can cover there. you might as well. you can probably buy them back for a few pennies. the other thing i would say, i still like the is sector definitely still like a couple of the key constituents. the largest component stock in this thing, unitedhealth the best managed care company there is pfizer is a big constituent as well, it's not particularly expensive. the way you can't handle this and the way i would be inclined to is actually thinking about turning it into a risk reversal

selling at 130 maybe in march. i have a feeling that's probably where we'll see it i think we need to get -- that's the level i'm looking at for a put sale >> very quick thought, carter. >> it's what are to cisco. to where support comes into play fedex will run up with it in the spring, more online shopping with omicron in the wintertime, looking to sell the march 18th 320 call and buy the april 14th 220 call tony, quick, what do you think >> i think the chart is less constructive, but i think i would sell february calls against it, hopefully those expire, and hopefully you'll do some april calls against it as well one, two, three, quick like bunnies, final call. carter >> on the long side consumer >> sounds good tony, you're next. >> cisco, buy a call vertical spread. >> all right and mike, you wrap it up

>> xrt put spreads. carter, mike, tony, thank you very much. thanks to 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 the defending 450 champ arrives at angel stadium the challengers have webb firmly in their sites in the 250 club, he looks for back to back 250 titles. we're ready to lift the curtain on professional races