it really is. because it didn't have to be like this. ♪♪ it's friday and time for "options action. i'm melissa lee live at the nasdaq market site at times square here's what's coming up. >> carter continues his offensive/defensive series with another health care haven that just hit a 52-week high. then, tony is looking at a home builder that could be a discounted catch-up to a larger macro rotation finally, not everything that bounces back is worth holding on to mike is hedging one specific sector that's traveling out of step with his own history.

it's time to risk less to make more "options action" starts right now. >> let's get right to it, despite the market's winning week, investors are still facing many large unknowns, so chart master carter worth is continuing his offensive/defensive theme. also just like unh last week, he's continuing to favor the healthcare sector for best bets. carter, what's next here >> you bet we're going to look at a name in particular, but i think it's important to state that the objective here is to find something that can participate in market upside, but has some downside protections so just as united health care are idiosyncratic, we'll look at lily first, i want to look at some sector charts. the healthcare sector relative to the market. here's the first one all we're looking at is a ratio. we're looking at the sector's relative performance to the spx, depicted in one line and you can see where i've drawn an arrow you can say, carter, you can draw an arrow anywhere remember where that line is drawn. that's late november, and look at the next chart.

that line is the trend line that's been in effect, for the past 15 to 18 years. we're looking at the relative performance line of healthcare to the s&p and it bounced off that trend line to the penny repeatedly let's look at the next chart this is the all-data chart going back to the beginning of s&p sectors as we know them now in 1989 and simply stated, every single time that the relative performance line has come down to this trend line, it has bounced and it bounced again the november four months ago, it's been outperformance ever since healthcare is outperforming the market now, lilly, final chart is that not what a breakout looks like it doesn't matter what you call it, it's an ascending wedge. what we have is a strong stock that just now is moving out of a range it's been mired in for

six months one could say, aren't we chasing this here's the thing, lilly has underperformed in the health care sector going back to the inception of the sector in 1989. you have a marquee name that's underperformed its sector long-term and outperforming its sector right now that's a good set-up to play for the breakout >> mike, what's the trade here >> yeah, so, i mean, there's several things i like about lilly. there's a few things that worry me a little bit. so, let's start with the things that i like. so, first of all, you know, just in terms of what they've got going on, on the drug side, which is the business they're in they have some very promising stuff going on in the diabetes area in fact, they have some drugs that are going to be released mid-year this year, and that's obviously a huge market segment. they are delaying the accelerated filing of their alzheimer's drugs, but they also have an adolescent dermatitis drug i'm not going try to pronounce any of these things, because i tried practicing it and i couldn't figure it out but a lot of these things represent some potential growth in the future. and that's obviously a positive. the thing is, a lot of that is

also priced in the company right now is creating about 32 times full-year earnings for 2022, just under 30 times 2023's 972 a share earnings estimate, and that's 20-year highs in terms of valuation. and obviously, we've seen the market bounce back, and this one is trading at all-time highs i think there is some fundamental backstory to the strength that we're seeing right now in the price action, but in a way that we can take a bullish bet, but mitigate the risk of a potential pullback when i was looking at that earlier today, that would cost about $10. about one third of the distance between the strike, risking about 3.6% of the current stock price, and obviously a way to get into it, if you're looking to get into around it for considerably less than the $275 or so that the stock was trading, as of the close >> tony, what's your take on the trade?

what's your take on lilly? >> from the chart's perspective, i think you have the hallmarks of what you would consider a great technical set-up not only do you have the breakout that carter is showing you, but when you look at the relative terms, not only is the sector outperforming the market, the stock is outperforming the sector you really have everything you're looking for from a technical perspective, but i share the same concerns that mike has on the fundamental side you have a revenue growth at last largely flat that's expected over the next couple of years, earnings growth is starting to decelerate here. and when you're trading as those 27 to 30 times next year's earnings, which is at its historical upper bound of its range, these are some of the concerns i have from a valuations perspective but that's exactly why using a debit spread that mike is using is the only way that i think is worth trying to play this potential breakout when you use a debit sprea like this, it's one of the most capital-efficient ways to take upside exposure, while reducing your overall risk. here, he's risking only about 3

percent of the underlying stock's value, and using a debit spread here, where he's paying about 30%, he has a risk/reward. if eli lilly does rally and breakout, which is a conservative target from a technical perspective. >> carter, your final word on this trade >> valuation is always important and yet, as we all know, valuation is not a timing tool let's play the chart >> okay, from healthcare to homebuilders, the hxb home builders chart down, but tony is laying out a trend on one name that could construct some gains by building on the greater industrial's rotation. tony, take it away >> home builders have lagged behind, but i think that's the opportunity here so if we first take a look at a chart here of xhb, the home builder's etf relative to the market and the industrial sector, we see that home builders have outperformed both

since the pandemic by nearly double but we really have seen home builders struggle over the last six months or so, but as we start to see a bit of a silent rotation into industrials over the past month or so, i think this is an opportunity for home builders to play a little bit of catch-up and there's quite a few differen names or ways that you can potentially play this, so the one that i want to take a look at here is dr horton, because it is by far the most liquid from an options perspective and if we look at the chart here for dr horton, it broke out from that $80 level in march of last year and despite a strong year from both a profit and revenue growth perspective, we're back at that $80 level. so i think that right now, the timing is specifically great for a long exposure from a risk/reward perspective. and if you consider the housing market right now, there's certainly a sheer number of risks that i currently see here, whether you're talking about a potential recession coming up, rising interest rates, and even inflation. these are all headwinds for

this industry, but when you consider the valuations that dr horton is trading at and utilizing an options strategy to reduce my overall risk, that's how i get comfortable with taking on the risk of this particular sector when i look at the trade structure here for dr horton, i'm using one similar to mike on eli lilly, using a debit spread. i'm going out to may, buying the 85/97.5 call vertical, spending about $4.72 and collecting about $1.17 for 97.5 call, paying $3.55 for this debit spread. that's just about 4% of the underlying stock's value that will give me about, again, a two to one risk/reward ratio, if we d.r. horton resume back towards its recent highs around $100 or so >> mike, what's your take on this trade do you like home builders here >> first of all, demand for housing remains quite high the pace of anticipated rate

hikes is relatively low and relatively slow. in fact, i would argue it is too low and too slow, but if you're a borrower, i suppose, that's a good thing >> in terms of the trade, i want people to think about this when you buy a debit call spread, and tony has chosen the same structure that i selected in lilly, this would be comparable if you already owned the stock to owning a downside put at the 87.5 side and selling the upside call. so essentially a collared stock position and when you consider where we are right now, i think that's a position that makes a lot of sense. why? because options premiums aren't really cheap we've had very shaky ground recently, not to mention having 7.5% below the all-time highs, as of the close today. that's not that far off of them, when you consider what's happened and owning some downside protection, given everything

that's happened also makes some sense, but this is one of those areas where valuation, i think, does lend itself to potentially getting into the name. i like the structure and i do like the space >> the man who says, forget about valuation, look at the charts, carter what do you see in the chart for d.r. horton and does it stand out in any way versus other home builders >> not so much a couple of things relative performance, relative strength, something we all talk about as a group, it's very poor compared to consumer discretionary sector we also know, and this is fundamentals and valuation, whatever you want to call it one year ago a 30-year fixed mortgage is at 45 still low. but that will start to bite. my hunch is it doesn't have a lot of downside, but it doesn't have a lot of upside i think this sector, this area, this stock, about where it belongs. >> all right for everything "options action," check out optionsaction.cnbc.com

and sign up for our newsletter here's what's coming up next still to come, as professor khouw reminds us, you buy insuranc before the house burns down. plus, calling all options action fans. reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air when "options action" returns. 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. because once you experience thinkorswim® by td ameritrade

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welcome back to "options action." the xlf has rebounded sharply, but that's not quite an all-clear for the space, because there's a lot of nuance under the surface here professor khouw is getting to it once again it is that important now to remind us of one of his favorite adages, you buy insurance when you can, not when you have to. mike, explain. >> it does very little good if your neighbor comes to you when your house is burning down and says, you might want to think about getting some insurance of course, when you're already in trouble, you know that full well the time to buy insurance, of course, is, you know, when things are looking pretty good it's going to cost you less and the protection it's going afford you is significantly greater i know that financials were basically one of the favorite sectors for full-year 2022, and

when you asked me six months ago, it probably would have been one of the things that i have said but net of the big rally that we have seen, we had powell's comments earlier this week i think we need to put some things in perspective. first of all, rates are still very low and one of the things that people have talked about as a reason to buy financials, they were talking about expanding net interest margins, as an example of how financials could see greater profits if interest rates rose while that's true, that doesn't necessarily correspond to higher share prices, and there's a couple of reasons for that the other thing i would quickly point out is that the pace of rate increases is looking incredibly modest. especially when you consider that our most recent inflation data is looking like 8% and here we are hiking 25 basis points at a time, which i have to say is really probably a joke it just is not very effective. and that could potentially mean that we're dealing with a stagflationary environment, where you have inflation that's essentially exceeding the pace

of economic growth that's not good for cni loan growth and one other quick point i would make is that when we think about rising rates, oftentimes, we can talk about net interest margins and talk about multiples. stock multiples will tend to decline in that type of environment. that is not bullish for financials and not for anything else the other thing we need to talk about is financial assets. when rates rise, what happens to the value of a financial asset that is paying you fixed amounts of money over time the longer that period of time, the higher the duration, the worse it's going to be and the lower rates are where you start from, the higher the convexity. none of those things get talked about that much, but that is a potential area of weakness as we look at the space. and when we take a look at the rally we saw this week, that's an opportunity for us to potentially hedge. i was looking out to may, the 35/39 put spread normally, when i'm looking at vertical spreads, i'm normally looking to spend about 25% on

the downside with put spreads and oftentimes you can get that. part of the reason why this was a little bit more, xlf was just under 39 this was slightly in the money when i was looking at this today. that was about $1.20 still, the payoff better than 2-1 if we see further declines, you know, in the future after this nice bounce that we've seen in the space i think that's an opportunity to put a hedge on, frankly. >> carter, what's your take here >> well, i would characterize it simply as a rally to a difficult level. but let's look at a table or two and then one chart so the sector, it's important to say this, right? financials -- it's the lifeblood of the system. they're the transmission mechanism, the big bang for the economy. but it's 67 stocks in total, 4.6 trillion, you see it there on the screen, and it's 11% of the s&p. here's the thing next slide the biggest names dominate, and here's the thing, berkshire is the biggest of all and is it a financial? it is, because it's insurance, but it's also railroads and et cetera, and so forth

so berkshire at 14, almost 15% when we make a bet on the sector, we're often making a bet on just a handful of names but finally, look at the chart if there ever were a pair of twos, this is a one-year chart that line drawn is the actual midpoint of all of the trading over the past 12 months. we have a 52-week of 4150 and right at the midpoint having bounced 8.5% a great time to take measures and to look into insurance >> tanya, what are your thoughts on this sector >> i think nuance is the right word here, because if you look at xlf, it is a very broad etf with a huge number of some industries within it mike pointed this out. one asset managers you have declining asset prices that will put a fairl significant limit in terms of the upside for these asset managers, but the big banks, not

only interest rates, but the curve. the two and ten year at about 20 basis points that's going to put downside pressure on net interest margin. when you consider that i think the upside for xlf is extreme limited and worst-case scenario, you could see this heading significantly lower, especially in the inflationary environment we're heading towards. as you take a look at the put debit spread that mike is looking at, what's quite interesting about xlf brown, as he said, because things are calm, the implied volatility of xlf is actually quite low. so he's actually able to buy an at the money strike price, the $39 strike price on xlf for a relatively cheap price and only spending about 30% of the vertical spread.

normally when we look at these types of hedges, we usually buy an out of the money option to do so so by using an at the money option, you have a higher delta, getting better protection for a relatively cheap price with a two-to-one risk/reward ratio, if that does decline down to that 12-month low of around 35 that carter was referring to. >> up next, we're mowing into trade that is near and deere to our hearts "options action" is back in two. we're carvana the company who invented car vending machines

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so we gave 'em thinkorswim® web. because platforms this innovative aren't just made for traders -they're made by them. thinkorswim® by td ameritrade welcome back to "options action." last week, carter and mike laid out a way to play deere. >> the stock has been resting for a year it is exactly the same price as it was 12 months ago in fact, march 18th of 2021, it was at 392 and here we are march 11 of 2022 it is 389. punch and ready to break out >> i was looking at the april 420 calls, you could sell those for $5.70. you want to keep that expiration relatively near-dated. you want to collect in general more than 1% of the current stock price. >> now, there isn't a lot of time left on this trade, but the stock has already hit a new all-time high that prompted one

of you to ask, i put on the deere buy right last week with the stock moving quickly higher, is it time to roll out of the $430 calls to higher ground? mike, how do you manage this one? >> that's a really good question this is a situation where, you know, typically where you do a buy right, your hope is that the stock rallies to that short strike the stock is up more than 12% in a very short period of time. still not quite to the point that we're short here's an important point. the stock is up materially i think we closed close to culture 414 a share, something like that. that call option, which we sold for $570 was about ten as of the end of the day you could, indeed, consider rolling that strike up if you choose, because here's what's going on, is that as we approach that strike, the upside of this trade, as this diagram shows us is essentially capped. if we roll that, we'll play a small penalty in terms of paying

ten bucks for that call but give ourselves a little bit more upside but usually, i also like to extend the life of the trade, so it's about the same length of time as what i put on originally in that case, we would be going out the month end, april, or even possibly to may expiration. >> is there more upside to this spike, carter? >> sure. in the sense that if the concept of a breakout is the preconditions is a long, sideways, quiescent period once you start to break out, there's only session one or two making you less, it's usually not contained to one, two, three sessions it's the kind of things that goes for weeks and months. all right. up next, we have your tweets and the final call ♪♪ ♪♪

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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. ♪♪ welcome back to "options action . we have time for a tweet one viewer asks, what's your tweet on metals mining

tony, do you want to take that one? >> so my view is fairly simple i think the inflationary forces driving these stocks higher is not over i think my view is to remain long >> carter, how do the charts look on this >> the spider xme is up 50% in four weeks i think it's the kind of thing you want to be long, but you want to be selling premium, have calls written against it >> is that the way you'd approach it, mike? >> we do see, you know, when you start seeing these kinds of moves in commodities, to the upside, you often will see increases in applied volatility. that's uncommon in a lot of other sectors. i think that probably makes some sense, also if you think the rally is going to get exhausted, that's a trade you might want to take a look at >> time for the final call carter braxton worth, what would you say? >> healthcare generally. eli lilly specifically >> tony zhang? the risk/reward ratio favors dr horton, buying, and call debit spreads. >> mike khouw? >> i also like debit spreads call debit spreads in the case

of lilly and put debit spread in xlf. >> that does it here for us on "options action. we'll be back here next friday at 5:30 p.m. eastern time. don't go anywhere. "mad money" with jim cramer. >> 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 collectibility, in terms of