i -- i have a long way to go, i think. and i definitely don't want this for any other family or any other mother. ♪♪ -- captions by vitac -- it is friday and that means it is time for options action. i'm melissa lee. here's what's coming up. smoke em if you got em carters is looking at an under the radar consumer staples that could light up soon. a health care giant that could get overshadowed next week finally, recovering from the widely held wipeout that has been netflix a sequel that

should be better than the original options actions starts right now. >> let's get right to it we're kicking things off with a smoking hot stock. staple for some, shares of philip morris starting the year strong, up nearly 9% and carter and mike, if you think this tobacco stock is going to burn higher what are you looking at? >> smoking, burn higher, we've got it all here. let's go to the charts the charts will be similar but different annotations. the first one these a weekly bars and puts in context the high almost 5 years ago, 2017 up there at 120 thplus so one way to draw the line we have broken the down trend next chart is a head and shoulders bottom which is another way to characterize the formation. it is. the next chart it doesn't matter

what you call it, these sequences are some of the most time-tested in markets what we have here is basically a very symmetrical orderly bottoming out process, and the presumption is the stock is going to return to or close to its all-time high. philip morris closed today at -- actually i'm not remembering but the all-time high was 123 and i think it went out today 103, 104. i think you've got up side the final slide is a table, but this is important. this is two-month performance. relative performance is one of the most important factors in investing. look at philip morris up 15, 16%. colgate up only 7.8% and the whole sector, slp, consumer staples up only 5.5%. acting well an important level, looks good >> mike, what's the tradeoff o

this >> yeah, so what's interesting tobacco companies used toby a core holding for many investors for a very long time sort of a staple, if you will. this is a sector that probably unsurprising to most viewers is trading at a discount to the market philip morris international is trading at a slight premium to the group but still much cheaper overall at about 16 times earnings this also doesn't tend to move that violently and sort of keeping with the investment theme idea here, i think one of the things that people could look to do is sell a cash covered put and selling a cash covered put is essentially an alternative to buying the stock or doing a buy right, where you buy the stock and do an up side call if the stock declines you'll own it as a discount to the current price. and of course because the stock, you'll have a probable trade if the stock sits right here and if

it rises and even if it declines slightly you have a higher probability of profit than if you simply bought the stock at the 103.52 closing price when i was looking at this earlier today so you would sell that put, collect $2.66 it turns out per share if you sold that and of course if the stock declines to that 100 strike or below at expiration you'll end up buying the shares there but of course none of the premium you collected, you're actually essentially paying $97.34 per share that's about a 6% decline from the current stock price if you are to own it. snow, on a standstill pasz these expire 49 days from now and the math is easy because $2.66 over that $100 strike price is a yield of 2.66% annualized that's almost 20%

and that's actually a bit better than you might expect to get in staple stocks. one quick point i'll make on a fundamental take here because they have more international exposure dollar strength could turn into a headwind, which had historically been a tail wind, and you might see that of course if we see rising rates here but not internationally, you could see some currency swings this is a way you could essentially engage in an investing strategy, and you could sell some calls against it to essentially keep it going after expiration >> tony, what's your take on this trade >> yeah, so while the tobacco industry generally doesn't align with our investment thesis i do think you have a case here with philip morris where both technical, fundamental and even from a volatility perspective aligns really well with the trend structure mike has setup philip morris broke out above $100, and so far has held that level and really speaks to the defensive nature of this particular stock

just to quantify that outperformance carter was referring to philip morris has outperformed its sector by 11% the last few months and outperformed the market almost double that. and then if you look at the fundamentals here, it's trading at a substantial discount to its historical valuations and you add to that the 5% dividend yield currently i think this speaks to a fairly strong balance sheet for this company then you factor into the high elevated implied volatility. the ideal rank currently stands at 57% so everything from my perspective lines up really well and the amount of premium he's collecting is a fair amount. it is a relative expensive stock. so the one thing i will say for investors who want to take into this trade you might want to consider buying perhaps a 95 or 92.5 put it does reduce the amount of premium you collect but allows

you to take a similar trade structure with just a few hundred dollars worth of rick. >> i'm curious to get your take on some of the other factors to the stock trade rising dollar rising rates and how you see that factoring in. >> right it's all in there, and that's the point of the charts it's all considered, so many participants weighing those factors and coming to a judgment i think one of the key things, though, is this is that its yield is important here. pays a $5 dividend, projected to earn $7 in the next 18 months. that's pretty juicy in this kind of environment >> yep from morris to merck, we're gearing up for this pharma stock for earnings on thursday tony is putting on his lab coat so tony take it away >> yeah, melissa i think amongst the tech names next week i want to take a little bit off the beaten path

here with merck because if you take a look at the chart here i think the best way to describe the chart where we've seen over the past two years where its been range bound between roughly $70 and $80 is really uninspiring. it's not surprising to see this stock has underperformed its sector over the past two years over the past few months we've seen a bit of a bottoming formation called a double bottom since we've seen that double bottom formation merck has outperformed its sector by 16% over the past two weeks. that is a good clue going into earnings slated next week. merck is expected to earn nearly double what it earned in 2019 next year. so when it's trading at just shy 12 times next year's earnings i think it really speaks to a fundamentally sound story for merck going into earnings next week and if you look at the options market right now it's implying about a 4% move that the market

is expecting versus the 3.1% we've seen over the past eight quarters so implied volatility on these options are quite elevated to take advantage of that elevated volatility what i'm trying to do is going out to march i'm selling by 80 to 75 put vertical here. i'm collecting about a $1.81 as of earlier today which is about 37% of the taking a conservative approach that merck will trade higher here over the next month after earnings >> mike, what your take on this trade? >> yeah, so it's interesting because this is what tony was talking about, you know, versus say a cash covered put when you sell a cash covered put which is similar to a buy right, essentially the amount of capital you should be mentally prepared to commit to the trade is equivalent to actually purchasing the stock when you sell a credit put spread the way tony is doing it here, that's a very, very different trade because of course the risk is limited on a per share basis between the distance on the strikes less of the amount of premium you're

actually collecting. so the total amount of risk you're taking to make a bullish bet on merck here is just $3 a share or thereabout. now, of course that doesn't necessarily mean people should rush out and try to lever the trades up by doing that many more of them this is a trade similar to selling a cash covered put three things can happen. the stock can rise, stay where it is and fall and two of those are going to provide a good outcome for ininvestor >> carter, do you like the stock in particular? do you like the sector overall >> well, the double bottom is going to be key and tony said that when you have a formation like that you want to play out and need it to play out. that relative performance chart not only were those two. year lows, they're five-year relative lows, 20 year all-time relative lows to the health care sector merck is making basically in the last month. perhaps this is finally the bottom, but, man, it's awfully

tentative. >> okay. sounds like a bit of caution from carter, tony. for everything options action check out our website. while you're there you can sign-up for a newsletter here's what's coming up next still to come, after last week's netflix and panic mike is looking at a way to get your chill back plus calling all options action fans. reach into your pocket, grab your phone and tweet us your question at options action if it's nice we'll answer it on-air when options action returns. thinkorswim® by td ameritrade is more than a trading platform. it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective. and a dedicated trade desk of expert-level support. that will push you to be even better.

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♪ welcome back to "options action." it's been a little over a week since netflix's quarterly result sent the stock crashing. if you're still keen on binging money heists and want a way to play the game mike cook has a trade made for you it is your call to action. take it away >> yeah, so this is an interesting case, netflix, because of course this has been one of the arket's darlings an leaders for a long time, part of the famed faang acronym. it's hard to imagine right after earnings wewe weren't taking a look at this maybe last week on friday one of the reasons if you watch "fast money" or watching options action you probably heard us say the three day rule once or twice. that means if you have a really

shocking outcome like we did in the stock dropped so precipitously, oftentimes you want to give the market a couple of days to sort out and digest whatites seen. we've had the time to do that now, and one of the things i've observed it doesn't look, number one, netflix is going to recover its mojo anytime soon. but the other thing is it seems like this has been a complete reset. instead of seeing it plummet and then see some follow through over the following days, what we actually saw after that first one day decline the stock has only moved about 3%, 3% or 4% since that time. it seems like it has found a new level. and i think one of things people can do is then try and find a way to profit from this new level. and what we were look at here was an iron condor now, if you're using an iron condor essentially what you're doing is selling two credit spreads. number one, you have to have a range bound thesis you believe the stock is not going to go significantly higher or lower and presumably some

catalyst has come and gone and you don't see another one between now and the end of your trade date your limiting your risk to the distance between the strikes lest the total amount of premium that you collect on the trade. and the other thing, of course, is that because the stock can go up mildly higher, mildly lower or stay where it is, you have a probability of profit that is greater than 50-50 i was looking only to the february 18th exploration, regular way exploration because usually when you're doing credit spreads want to keep that expiration short if you can. put simply i'm selling the 350, 340 foot spread. net net i would be collecting close to 5.$5.5 to do that. i wanted to add one other quick thing, two, because some folks watching this might be thinking

that's fine except i already owned netflix before all of this happened how can i do something to try to fix my trade well, we hear this a lot, and there's no way that the options market can magically deposit money into your account that was lost due to a bad trade, but there are things we can do to enhance our near up side in the case that over somewhat near period of time the stock does recover a little bit so if you did happen to own the stock through earnings one of the things you can do is overlay a 1 by 2 call spread against your long position i was looking out to march in this case, the march 425, 450 call spread. you'd buy one 425 call, sell two of the 450s against it you're actually going to lay out essentially no premium to do this and what's going to happen is if the stock by march expiration get above that 425 level, which by the way you'll notice is close to the break even for that

february trade then you'll actually double the gains between that 425 and 450 strike price this is a situation i think regaining the levels right before we saw before earnings anytime soon is highly unlikely. >> options can do a lot, but it's not alchemy here. carter, what levels are you looking at >> right, i've got two choices but before we look at them i think this is the most important thing. on a day a stock drop ends gaps fda approval or no approval, restate your accountings, whatever it might be netflix of course was news related. when you drop 3 and 5, 6, even 10% it's usually not enough to price in the problem but when you have a 20% drop and you trade 60 million shares average daily number you have effectively put the stock where it belongs what i mean is you have thousands of man hours, hundreds of thousands of man hours going into it. 14 analysts spent an hour each globally, and so the stock has

been regraded and it's ans not likely now to go lower or higher the second chart if you will and this is important, look where it stopped right on the trend line. does it always work that nicely, no but it did >> a fallow asset. i always feel like that word has so much meaning in it. tony, what's your take on either the fix my trade part of it or the iron condor part of it >> yeah, so last week we covered iron condors with their xlf trade. i do think from a timing perspective netflix is one of the prime examples of a short volatility directionally neutral trade the iron condor provides personally i think the 365 level, the intraday low from the last few days is likely going to hold so for me i think i'd like to get a bit more aggressive. and this is whereas a trader you have a lot of selection with this iron condor

i would use the 375, 355 put vertical, so substantially higher put vertical than mike. i'm going to reduce my probability of profit significantly compared to mike's trade, but the risk rags crow for my trade i'm only risking about a 1.5 versus the nearly $3 mike's trade is risking. you have a lot of choices depending on where your views are from a technical perspective. i think that 365 level will hold so i would adjust my iron condor a little bit and there's no magic bullet with respect to these repair trades the best thing you're going to do is reduce the pain a little it's certainly not going to get yourself back to break even at any point. you might consider is your capital better used somewhere else >> yeah, there's an opportunity cost in keeping capital tied up in one trade up next we're taking a look back on an arc etf trade from two weeks ago. find out how it turned out

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innovation fund wasn't over. >> the big problem that you have here is that cathy wood strategy of sort of buying the highest growing, highest multiple, most exciting technology companies is a risky strategy in a market environment when you begin to see a focus on sort of real earnings and things like that. and i believe that that's essentially the market we find ourselves in i was looking at a put diagonal, specifically buying the may 78 puts and selling much near, david two strike puts against it >> and that put diagonal worked well as arkk continued to slide diagonally down to the right so mike, what do you do now? >> yeah, i mean the trade essentially is targeting that short strike now, one could have put this on and already taken about 50% profits on the max risk if you closed it at the end of the day today. i don't necessarily think all

the damage is done, though yolk holding onto it deeply in the money is the best way to play it. so i might roll the down one when i was looking at you could take almost all the premium put into the trade initially off the table if you did and you would still have exposure to the down side if arkk woes continue up next your tweets and your final call n minutes until we bo. 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. ♪♪ what does it feel like to sell your car to carvana? it feels amazing.

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♪♪ ♪♪ welcome back to "options action." time to take your tweets our first viewer asks what is the course of action on an -- iron condor if it's losing trade at expiration? tony, any ideas here so one of the things you can do with an iron condor is on the untested side which is a lower put here you can move that to an upper strike and turn that

effectively into an iron butterfly. if approach expiration and still a loser simply cut it out so you don't end up long or short the stock on monday. >> can the iwm russell >> it's interesting low today and obviously it did bounce and well above 190 we closed as you said at 195 do we get back to 190? eventually yes 23% down versus the s&p only 12. there's risk here. >> it is time for the final call carter, back toover to you for it >> offensive long, it's defensive. >> tony? >> i see a slow limitation into merck, sell and put vertical into earnings next week. >> mike kyle >> covered puts are an

investment strategy a good replacement for a buy right. i think we ought to do that for morris philip interalgs. >> that does for options action. meantime do not go anywhere. mad money with jim cramer starts right now. >> announcer: this is a paid advertisement for csn. >> you know, many times, i've been out here with a new coin release, and i have asked for a drum roll. and in all honesty, in the past, it's really just been nothing but hyperbole. but this time, i really would like a drum roll. i don't think i'm gonna get one, but i really think i should have one. this is, i think, the singular most important numismatic event certainly of the last quarter century, perhaps in my entire professional career, in terms of interest, in terms of