♪♪ it's friday, and that means it's time for "options action. i'm dominic chu in for melissa lee, live from the nasdaq market site here in times square. right now, sifting through the financials from a regional route to a hidden set of gems, could this be a way to ensure gains. and then betting on the big daddy of the banks our power trader this is going to be a power player in the new year and later on an open house options trade. we'll hit the nail on the head and open the door on the home builders with me tonight, carter worth,

mike khouw and a special appearance by scott nations. but before we get to tonight's trades, let's wrap up this week's action. carter, what do you make of the action in the markets? >> i mean, by all accounts it has to go on the ledger every week at positive or negative, and it's owe down week it was sloppy. and what's really important is it's happening in the context of this bizarre notion that you have to have a year-end rally. i will point out the notion of a december strength or christmas rally it's simply momentum trade. when markets are up, and most years they are, 70% of the time, you continue in downyears, the so-called december rally is not a thing to rely on. >> all right scott nations, what do we think? >> i'm a little more pessimistic than carter. this was a horrible week s&p down 3.5%.

look at the last hour of the last day of the week it was terrible. and people are not afraid. volatility for shorter dated options, which catch next week's spread meaning, they got a boost, out of the money puts, that only rallied 13% and it's still very, very close to its all-time low some people are not afraid of what the fed is going to do next week, and that may be a real problem. >> mike khouw, to scott's point we just showed the s&p 500 and that last half hour looked pretty terrible. so what do you make of the action >> i think one of the things that we've seen is actually, if we just looked back a couple of weeks, i think that people have gotten a little bit too optimistic we know the rate environment, inflation environment, there's a lot of signs that we are likely to be entering a slowing economic condition, possibly a recession, maybe very likely a

recession, and yet the market haven't been behaving that way up until perhaps this week people have been dismissing that consideration. i think they're reminded slightly with today's inflation data a tenth of a percent this way or that in the inflation data shouldn't concern us that much but i think inflation is a persistent problem we should not be expecting rates to come down any time soon that is going to pressure the economy, and that has to get priced in sooner or later. you cannot have a decade of declining rates, a bull market for risk assets, a bull market for bonds and all of the fuel that runs the economy and then reverse that condition and not expect there to be some pain i think the action we saw this week makes sense as people come to their senses, if you will >> let's get to some of the financial wes mentioned before carter, you're taking a lack at one part of the group people

don't often think about when they think about financials. what are we looking at >> we're going get around to insurance and talk about met life, but first let's set the table with the very first chart. and this is the inconvenient truth for financials this is an all-data chart back to 1989 when they changed the sector nomenclature. the top line is s&p and bottom is s&p 500 financial sector. basically the market has doubled performance of the financial sector, and that's because big banks have been a chronic underperformer let's look at the next chart this is a two panel. what you're looking at here the xlf financial sector on top relative performance to the s.p.y. so even as it ascends it's all about the opportunity cost, the choices you could have made. look at the bottom panel financials just don't deliver. moving on, look at the bkx now, this is -- talk about sequencing drop, rally back, drop, rally back, drop

if bkx's relative performance to the xlf is making new all-time 20-year lows right now banks are a problem, and they're really a problem if you get into a recession. let's look at met life two charts met life with no drawings, no lines, annotations. let's put some in. met life after checking out has checked back to a level from which it came. often you get a bounce there i like it for that. a bounce here. >> metlife, the trade there. mike, what is that do you like it and do you trade it >> first of all, let's think about financials more broadly. just the xlf, if we want to use that as our proxy. the narrative, obviously, in the declining rate environment from an economic perspective was good, and a lot of folks talking about things like net interest margins. of course that's only true if

the yield curve is upward sloping. if it's downward sloping not that great exclude the top banks. they're not paying anything on their deposits compared to smaller ones like pnc, citizens and so on. you combine that with declining mortgage, declining loan growth, it just doesn't spell a very good recipe, so rather than shorting xlf, go to put spread in february, costs over 70 cents, and that would be a way to hedge your bank exposure or repress a bearish bet after a week, if you will. take a look at met here you have a company trading at a similar valuation as some of the big banks but doesn't face some of the big pressures in fact work higher yields right now and also their prt business -- that's their pension risk transfer business, and that's when defined pension benefit plans transfer to life insurers, and they just did a

big deal with ibm. although they're not completely immune, we see the employment picture deteriorate a little bit, they might get hurt by that, because their employment benefits packages are going to be associated with that a little bit and they're being hit by declining asset prices but for the same multiple they're a better bet and cost the same i would look at the february buy-in money cal met life trading at just over 72 bucks you can buy that for $3.85 that costs you less than the decline we've seen today they presented at the gold man goldman sachs conference earlier this week, and i think what management was saying was pretty positive they seem to be meeting their goals, their targets if you're going to be in financials that's the place to be. >> interesting because some of these insurance stocks are at or near record highs still in this current environment.

scott nations, you're looking at -- the best in breed, so some of the big banks what do you think of the trade there? >> i think that mike and carter are right, but in a situation like this, where a sector is troubled, the best of the breed can really benefit, and the best of breed in the big banks is by far j.p. morgan. it's the best bank by a mile it has the best risk management of the big banks by a mile and mike pointed out none of the big banks are paying very much for deposit, but j.p. morgan is paying even less than bank of america and citi, so i want to invest in the quality name, because i do think j.p. morgan is going to pay well, particularly because they manage a risk so well, but i want a margin of safety, and the way to do this in j.p. morgan is with a risk reversal. when i was putting the trade together earlier we could

execute that by selling the 120 put and we're going to use most of the premium to buy the february 145 call. we're pocketing 50 cents, but that's not how this trade works. the trade works if j.p. morgan falls and i definitely want to be a buyer, get to buy at at $119.50, or get to buy it if it rallies above $145, so i love the fact i get to buy the best bank in the business, which is taking business away from others and has the best risk management in the business. i like the name and i like the structure because we have a margin of error here >> all right, so carter, no doubt j.p. morgan chase has been an outperformer over banking rivals, especially the money center side of things. what do you think about the charts there what do they tell you about j.p. morgan >> just what you started out, best in breed and what scott said, best in class.

but is the market aware of it? i think the market is completely aware of it. this is a three-month chart. consider these three lines the top is j.p. morgan it's up 10.5%. the bottom, bkx, is down 10% the middle one is xlf, hunch j.p. morgan outperforms. people figured this out. look at the second chart that's a ratio chart, plotting j.p. morgan's relative performance to the bkx you see how we've spiked here? that spike, we are as over sort of an extreme reading as you were at the covid low, meaning at the covid low, banks plunging and so is jp morgan, but jp morgan's relative out-performance spikes because people hide. we're as extreme now as we were at the covid level i think everyone's here. just to point this out, if banks do trade -- j.p. morgan's one

and a half times booked, citi is 1.5. wells fargo is one times booked. it's already priced in perhaps. >> mike khouw, excellent point on valuations, so what are you thinking in terms of the trade >> it's the best house on a bad block. you can have good management, a well-run business, but this isn't a situation like apple versus blackberry where consumers are trying to choose ultimately when the price is better it could move some of those deposits just really in a tough business and a tough environment, so i'm not a buyer. >> all right mike khouw thank you very much for that on the trade, and of course carter and scott as well. >> coming up, are home builders trading on a strong foundation for everything "options action" check out our website and newsletter more "options action" coming up after this

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good luck. td ameritrade, this is anna. hi anna, this position is all over the place, help! hey professor, subscriptions are down but that's only an estimated 15% of their valuation. do you think the market is overreacting? how'd you know that? the company profile tool, in thinkorswim®. yes, i love you!! please ignore that. td ameritrade. award-winning customer service that has your back. welcome back to "options action." the housing trade has been trapped in the basement all yearlong as rising rates wreak havoc on one of the backbones of the u.s. economy the home builder etf and construction etf down 25% in 2022, but professor khouw says

rather than taking a wrecking ball to the space you can use options to build a solid foundation for the profits mike, show us the blueprints, please. >> yeah, it's interesting after all of the things i was just saying that i might actually be taking a bullish bet on the home builders, because a lot of the time things i was talking about before have implications here. we see employment weakening. that's going to hurt consumer confidence, and that's going to be a head wind obviously for home purchases obviously we have much higher borrowing cost and we've seen the implications for that. it's obviously hit this space hard and increased the cost of purchasing a new home significantly. all of that said, though, because this has fallen more than the market, because we are seeing valuations falling bock to, on a relative historical basis relatively low numbers here, and also the response of tole we have a couple more earnings coming up. lanar is one of them now, these businesses are

running a more asset-like business model now and it is possible i think we are starting to see the bottoming take place in these, at least in the short-term so i'm inclined on the basis basically, the price action that i saw in toll brothers following their earnings to make a bullish bet for lanar next week. i was looking at january and looking at a call spread as a way to purchase some up side here and minimize my down side risk particularly the 61, 67 call spread. spending in this case a little over $2 for it when i was looking earlier today, this was slightly in the money, so that helps account for the fact it's spending a little more in term of premium than i would normally look to do. but that's also risking just 3% or so of the current price of itb. i think that's a way you can risk very little and possibly participate.

the upside, if some of the other home builders follow suit. >> all right, so a well defined risk range in term of risk reward for that itb trade. thanks, mike carter, what do the charts tell you? >> they have all the elements of bottoming out formation. bearish to bullish reversal. let's look so, four identical itb charts and what you're going to see on the first iteration a break above the down trend line. look at the next way to draw the lines. this is what bottoming out looks like let's put the first two together we have a cup and handle if you want to call it that, but it's a reversal a move above the downtrend line, and finally you can use a moving average to tell you the tale the smoothing mechanism is flat and rising. >> okay, that's the trade there. scott nations, i wonder what's your take on housing and mike's trade as well. mentioned toll brothers with the

earnings report. also this week lowe's on home improvement reiterated its forecast for the year and added $15 billion to its stock buyback. sounds pretty bullish. >> it does, and if you look at home builders, it's easy to shrink away, but i think most of the bad news is out. lumber prices down precipitously, and where we are with mortgage rates, they're high only if you were born ten years ago. if you were born a little mitt more than ten years ago, you realize there are actually still relatively low and so this may be one of those thing where is people think it's so bad that it's good, particularly in a situation where energy prices are coming down, lumber prices are coming down and everybody's got to have a place to live. >> all right, so there's the trade there. mike, i'll give the last word to you. is this something constructive that we can feel lasts more than just a few weeks into 2023?

>> yeah, here's something to think about in terms of valuation for home builders generally. one way to think about their valuations is they're book multiples. and that means the value of these companies is relative to their land they own. now, this has ranged as high as maybe 1 1/2 times. they're at about 0.9 times right now. so that means essentially what's going on is the market is just discounting the value of their assets let's just forget about their profitability for a moment because they're trading at single digit multiples and that makes sense. some of them have tried to tow the line, not all. companies have really tried to encourage home purchases with incentive plans and things like that, getting aggressive on pricing and deals. i think these companies are much more nimble than they were before the credit crisis that was a wakeup call they are asset heavy at this time management is doing a good job, and i have a feeling

they're going to be able to navigate this. as scott pointed out, the issue we have here is there remains heavy demand people need a place to live, and i think that's essentially going to be the support. maybe not the level of profitability we saw, but it should create some level of support. >> all right, a good look at the housing trade. thanks very much still ahead on the show we are taking a look back on one of mike's very recent metals trades what should you do now, when "options action" returns we're back in two minutes.

welcome back to "options action." time to take a look back on one our open trades. just last week right here on the show, mike khouw and carter worth said hi ho silver. >> as currencies weaken we often think of industrials, the metals and precious metals rallying now, based on what he was just talking about, you might think that the rally that we've seen in silver recently in that case would be done. my thinking, though is we actually might still have more upside i was looking at a call spread i was looking at the january 21 call spread today. cost about 85 cents.

>> okay, there it was. since then shares have barely budged so, mike khouw, why modify this one so soon after the first call >> we did see outperformance of about 4.5% what that has done is make it possible for us to roll the 21 call up to the 21 1/2s or 22s. if you roll to the 22s you could take 50 cents of the initial 80 cent wes spent for this off the table and still have a couple bucks potential upside it's moving in our direction i'm staying with it. but you can adjust it. it's time to take tweets now. our first fan is asking, i have call in amazon, sam, and crispr all of which are green would you cash out for smaller gains or let them ride for bigger returns scott nations, what do we think

here >> first, congratulations. second of all, please don't look at percentage return as the point where you're going to get out. the market doesn't know, the market doesn't care. be in the trade until you've gotten all the juice out of the orange as far as just these names in particular, i love amazon. not a big fan of the other two crispr chart looks horrible. but i would look at it differently. be in the trade until it no longer works, until there's a reason to get out, and then get out. all right, our next tweet says, quote, i have been buying leaps on amazon and google for january 24 at $150 to $220 levels do you feel those levels are too high given their lowered price to earnings? carter, this one to you. >> sure. so, again, priced earning valuations are a terrible timing tool as history shows but let's talk about amazon first. amazon, you strike at 150, was at 150 in august, so you've got a year plus time i think that's doable.

it'll all depend on whether we have a continuation of a bear or bull google on the other hand, if the strike really is 220, the stock's trading at 90. it's all-time high is 50 the odds of google going up 150% in the next year i would say are zero. >> all right thanks very much for the tweets. keep them coming in. up next, final calls coming up, so keep right here

you ok, man? the internet is telling me a million different ways i should be trading. look!

what's up my trade dogs? you should be listening to me. you want to be rich like me? you want to trust me on this one. [inaudible] wow! yeah! it's time to take control of your investing education. cut through the noise with best-in-class education resources that match your preferred style of learning. learn your way. not theirs. td ameritrade. where smart investors get smarter℠. all right, time for the final call carter worth, to you first. >> you'll want to be involved in precious metals and the stocks that traffic in them, so gld, slv or gdx all of them, any of them >> all right, scott nations to you. >> best in breed is an advantage that will persist, and that's why i like a risk reversal in the best of the banks, j.p. morgan. >> mike khouw, finally to you. >> i don't think all financials are created equal, and if i'm

taking a look at jp morgan and metlife, i prefer metlife, and i use february calls to make that bet and maybe a bullish bet can be played with call spreads >> that does it for "options action." we are back next friday at 5:30 eastern time have a great weekend mad money with jim cramer starts right now. >> it's every parent's worst nightmare. your child is born with a deformity -- a face no one wants to see. in poor countries, over 200,000 children a year are condemned to a life of pain and rejection, hoping for the miracle that will change their lives forever.