and there's a man standing there with a gun pointing at me. >> a mysterious bank robber terrorizes the suburbs of chicago. >> i don't believe this person's going to give up peacefully. i believe this is absolutely gonna end violently. it is friday and that means it is time for "options action." i'm melissa lee live at the nasdaq marketsite in times square here's what's coming up. smoke 'em if you've got them carter is looking at an under the radar consumer staples play that could light up soon. then tony continues the under the radar theme, but on a very opposite tact with a health care giant that could get overshadowed next week >> finally recovering from the widely held wipeout, mike khouw crafts a sequel that should be better than the original

it's time to risk less to make more "options action" starts right now. >> let's get right to it we're kicking things off with a smoking hot stock, a twist on the consumer staples sector. carter and mike are laying out a way to play the name if you think this tobacco stock is going to burn higher carter, what are you looking at? >> smoking, burn higher, we have it all here. let's go right to the charts it will be similar and these are weekly bars that puts in context the high almost five years ago at 120 plus. we have broken the downtrend next chart, is it a head and shoulders bottom, which is another way to characterize a reversal formation it is, the next chart. it doesn't matter what you call it the sequencing is some of the most time tested and markets look at the next chart same timeframe

what we have here is basically a very symmetrical orderly, bottoming out process and the presumption is it will return to its all-time high. philip morris closed today at, well, where did it close i don't remember but the all time high was 123 and it went out today i think 103, 104 i think you have an upside and this is important. this is a two-month performance. relative performance is one of the most important factors in investing. look at philip morris the past two months up 60, almost 70% mondelez is up only 10 proctor up only nine colgate up only 7.8 and the whole sector, xlp, consumer staples up only 5.5, and acting well at an important level it looks good. >> 103.5 is the exact close. you're pretty much on the money,

carter mike, what's the trade off on all of this? >> what's interesting, tobacco companies used to be a core holding for investors for a very long time and 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 and still much cheaper overall at 16 times earnings and it 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 can look to do is sell a cash-covered put. selling a cash-covered put is essentially an alternative to buy right where you sell an upside call. the idea here is this will generate a standstill rate of return and you will sell it at a discount to the current price and of course, you'll have a profitable trade and the stock sits right here or if it rises and even if it declines slightly, you have a higher

probability than if you bought the stock at the 103.52 closing price that you referenced. i was looking out to march, the 100 strike puts, those were trading at about $2.65 or so 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 hundred strike or below the stock put to you so you will end up buying the shares there and of course, none of the premium that you collected you're paying $97.34 per share and that's a 6% decline from the current stock price if you are to own it on a standstill basis, $2.66 over that $100 strike price is a yield of 2.66% annualized, that's almost 20%, and that actually is a little bit better than you might expect to get in staple stocks.

one quick point i would make on a fundamental take is because they have more international exposure, dollar strength could turn into a headwind which had historically been a tailwind if we see rising rates here and this is something and you can sell some calls 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 that you have a case here with philip morris where both technical, fundamental and from a volatility perspective aligns very well with the trade structure that mike has set up if you look at the chart itself, we've seen philip morris break out above $100 and so far has held that level and it speaks to the defensive nature of this stock and just to quantify the outperformance that carter was

referring to, philip morris has outperformed its sector by 11% over the past two months and outperformed the market by double that. it speaks to the outperformance metric if you look at the fundamentals here it's trading at a fairly substantial discount to historical valuations at 16 times next year's earnings and you add on top of that the 5% dividend yield, and that speaks to a strong balance sheet and you factor it to the heavily implied volatility and it currently stands at 57%. everything from my perspective lines up really well for selling a cash-secured put that mike is using. and th amount of premium, i was not for investors who want it take into this trade, and you might want to the consider buying a 95 1/2 put and it allows you to

take a similar trade structure with just a few hundred dollars worth of risk. >> i'm curious to get your take in terms of what mike brought up in terms of other factors with rising dollar, rising rates and how you see that factoring in. >> yeah. it's all in there, right that's the point of charts, and that is all considered so many participants weighing those factors. one of the key things is this and its yield is almost 5%, 4.8 and pays a $5 dividend and projected to earn $7 in the next 18 months and that's juicy in this kind of environment. >> from morris to merck, possibly lost amid the continued tech focus next week we are gearing up for this pharma stock to deliver earnings shares are trying to recover from a rough couple of months and tony is putting on the lab coat and laying out the report tony, take it away >> yeah, melissa among the tech names next week, i want to take a little bit off the beaten path with merck because if you take a look at

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

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

amount of risk you're taking to make a bullish bet on merck here is $3 a share or thereabouts of course, that doesn't necessarily mean that people should rush out and do the trades up by doing that many more of them and this is obviously a trade that's similar to selling a cash-covered put and three things can happen, and the stock can rise, stay where it is and the two provide an outcome and i do like the structure going into earnings. >> do you like the stock in particular and do you like the sector overall >> the double bottom is going to be key and tony cited that so when you have a formation like that, you need it to play, and let me make a statement. that is incontrovertible that relative performance chart, not only were those two-year lows and they're five-year relative lows and 10-year relative lows and all-time relative lows to the health care sector merck is making basically in the last month and perhaps it's the

bottom, but it's awfully tentative. >> it sounds like a little bit of caution for carter, tony. for everything options action, check out optionsaction.cnbc.com while there you can sign up for the newsletter >> still to come, after netflix panic, mike khouw is looking for 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. and just might change how you trade—forever.

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♪ welcome back to "options action." it's been a little over a week since netflix's quarterly results sent the stock crashing. it's now down 25% since then if you are still keen on bingeing money heists, mike khouw has a trade made for you mike, it is your call to action. take it away >> yeah. so this is an interesting case, netflix because this has been one of the market's darlings and leaders for a long time. part of the famed faang acronym and it's hard to imagine why it wasn't taken on friday one of the reasons if you watch "fast money" or "options action" you probably herd heard us say the three-day rule once or twice.

you have the three-day rule when you have a shocking outcome when the stock dropped so precipitously. oftentimes you want to give the market a couple of days to sort out and digest what it's seeing. we've had the time to do that now and one of the things that i have observed is that it doesn't look, number one, like netflix will recover its mojo any time soon, but the other thing is it seems like this has been a complete reset instead of seeing it plummet and follow through after the following days what we saw after the 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 one of the things that people can do is try to find a way to profit from this new level and what we were looking at here was an iron condor if you are using an iron condor what you are doing is you're selling two credit spreads number one, you have to have a range-bound thesis we believe the stock will not go significantly higher or lower and presumably some catalyst

tests have come and gone and you don't see another one between now and the end of the trade date the second thing is you're limiting your risk to the distance less the total amount of premium that you collect on the trade. and the other thing, of course, is that because the stock can go mildly higher and mildly lower and where it is and you have a profit that's greater than 50/50. i was looking to the february 18th expiration, and you usually when you're doing credit spreads and we want to keep that expiration short if you can. the 330, 350, 420, 440 iron condor put simply, i'm selling the 350, 330 put spread and selling the call spread. net-net, i would be collecting close to $5.50 to do that. my profit range is 3.45 on the down side and 4.25 on the upside now i wanted to add one other quick thing, too some folks who are watching this might be thinking, that's fine, except that i already owned

netflix before all of this happened how can i do something to try to fix my trade 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 upside in the case that over a somewhat near data period of time the stock does recover a little bit so if you did happen to own the stock through earnings and i realize that was probably a relatively painful situation, one of the things you can do is overlay a call spread against your long position i was looking out to march in this case, and the march 425, 45 call spread and you would sell two of the 450s against it you will lay out essentially no premium to do this and what's going to happen is, if the stock does by march expiration get above the 425 level you'll notice which is the break even for the february trade, then you will actually double the gains

between that 425 and 450 strike price, and you know, this is a situation where i think regaining the levels that we saw right before earnings any time soon is highly unlikely. >> options can do a lot, but it's not alchemy here. carter, what levels are you looking at >> i have two charts before i look at them, on the day it drops, and restate your accounting and whatever it might be and netflix was news-related and when you drop 3% it's usually not enough to price in the problem, but when you have a 20% drop and you trade 60 million shares versus the average daily bond, you have effectively put the stock where it belongs i say put the stock. what i mean is you have thousands of man hours, hundreds of thousands man hours going into it. this team spent two hours. this team of analyst, 14 analysts spend an hour each globally and so the stock has been re-rated to where it belongs and it's an instance

where it's not likely now to go much higher or lower it's likely to become an asset and that's an important thing to note and the second chart, this is important look where it stopped right on the trend line, does it also 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 the fix my trade part of it or the iron condor part of it >> last week we covered iron condors with the xlf trade, i do think from a timing perspective, netflix is one of the prime examples of a short volatility, directionally neutral trade that the iron condor provides personally, i think that the 365 level and the intraday lows from the last few days is likely going to hold. so for me i think i would like to get more aggressive and this is where as a trader you have a selection with the iron condor and you can play around with it

and i would use the 350 put vertical, and i'm going to reduce my probability of profit significantly compared to mike's trade and the risk/reward ratio for every one dollar i can potentially make, i am only risking $1.50 that mike's trade is risking so you have a lot of choices depending on the view from the technical perspective and i think that 365 level would hold and i would adjust the iron condor a bit and as i said there is no magic bullet with respect to the repair trades be realistic and the best thing that you will do is reduce the pain a little and it's certainly not going to get yourself back to break even. you might consider is your capital better used somewhere else >> there's an opportunity cost in the trade. up next, we are taking a look back on an ark etf trade from two weeks ago see how it turned out. much more "options action" right after this

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>> the big problem that you have here is that cathie wood strategy of buying the highest growing and highest multiple, most exciting technology companies is a risky strategy in a market environment where 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 and i was looking at a put diagonal and buying the may 78 puts and selling february 18th, 64 spot 22 strike puts against it >> and that put diagonal worked well as ark continued to slide diagonally down to the right mike, what do you do now >> the trade is targeting that short strike one could have put this up and 50% profits on the risk and if you closed it at the end of the day today. i don't think all of the damage is done, though. i don't think that holding on to

a deeply in the money put is the best way to play it. so i might roll the long one from the 78s down to the 68s you can take almost all of the premium that was put into the trade initially off the table if you did and you would still have exposure to the down side should ark's woes continue. >> all right up next, your tweets and the final call 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. ♪♪ we're carvana, the company who invented car vending machines and buying a car 100% online.

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♪♪ ♪♪ >> welcome back to "options action." time to take your tweets first viewer asks what is the best course of action for a 418/420, 440/442 iron condor tony, any ideas here >> so one of the things we can do with an iron condor is on the untested side which is a lower put spread is you can move that up to the upper strike and turn that effectively into an iron butterfly to try to collect more premium, but if you approach

expiration and still a loser, simply cut it out so that you don't end up long or short the stock on monday. >> up next, our next viewer is looking at small caps, and can russell etf bounce before 190 share and change today so carter, what do you say >> it's interesting. it's low today at 180 or 9 it did bounce and it's well above 190 and do we get back to 190? eventually, yes. small cap have done what you expect it hasn't done what you would expect they're 23% down versus the s&p only 12. there's risk here. >> all right it is time for the final call, carter, back over to you for it. >> an offensive long that's defensive. philip morris. >> tony? >> i see a slow limitation into merck, sell and put vertical into earnings next week. >> mike khouw. >> cash covered puts are an

investment strategy that are a good replacement for a buy and i think we ought to do that with philip morris international. >> that does it for us here on "options action. meantime, do not go anywhere "mad money" with jim cramer starts right now - [announcer] the following is a paid commercial program, paid for by ancient nutrition. these statements have not been evaluated by the food and drug administration. this product is not intended to diagnose, treat, cure, or prevent any disease. this content is for informational and educational purposes only. it is not intended to provide medical advice or take the place of medical advice or treatment from a personal physician. - as we age, certain things start to happen to our skin, our hair, and our joints, and even our digestive system. most people are getting zero amount of this incredible and unique substance we're going to discuss today.