Options action, on the desk, mike khouw, carter worth and brian stutland. As the markets close out a losing week, Financial Sector has been trailing further behind. Carter thinks thats indicative of a larger theme at work here. Carter . Interesting, of course, jp morgan has been the best but still the bkx index struggling. Theyre making alltime relative highs to the bkx and kre, on absolute basis they look to be rolling over. Lets look at a chart or two. Sticking with jpMorgan Stanley. First thing to note, its quite remarkable. Morgan stanley is the same police it was in september of 2000. So, now, if you have a stock thats gone sideways for 23 years, that means adjusted for inflation, youve lost about half your money. 23experience year, year over year, lose 2. 5 . Thats pretty unhappy. Zeroing in closer, this is the trend line in effect since the covid low. We have converging trend lines, one could say your arrow is wrong, carter, its going to break out. I think its going to break down. Lets go even shorter term and wrap here. What we have is that line is in play. Do we breach . It is, to be fair, a series of higher lows since the lows of about a year ago. I think were going to break. All right, so mike, do you agree with carters assessment and whats a trade here . Yeah, i mean, so lets just talk about the space first, i mean, whats kind of curious about the group, if were just talking about the banks and brokers, big ones would be goldman, morgan, jpmorgan, so on. On a historical basis, the valuations arent terribly expensive. Probably looking at something in the neighborhood of 10, 11, earnings Something Like that, but historical average, take a look at the news thats been coming out of these companies, basically since june, almost every one of them has been announcing a head count for productions, so weve got the barkley, heard that from schwab, and citi. Credit suisse. And jpmorgan and Credit Suisse to be fair mike, sorry to interrupt, were having issues with your audio here, were going to have to try and get that straightened out. We want to get those levels and what youre doing, loud and clear to the audience. Brian, whats your take on carters assessment . He mentioned the arrow could go up but he thinks the arrow is going to go down. Do you agree with that . How are you feeling about the brokers . Yeah, i think some of the banks and the major brokers have really been a trade where theyre kind of stuck in the mud. That wedging channel youre seeing that carter brought up is if the market goes south some of these brokers could break to the down side. Morgan stanley being one of them. Some of the big Major Players in the Financial Sector, one thing wed like to do is trade structured notes with them. That basically is a fancy word for saying selling a downside put, or vice versa, selling an upside call. We think theyre actually relatively pretty good premiums in some of these names. We think the fed comes to the rescue on any Downside Risk in big names, selling the way output, going a few months out seems to make sense, and maybe the top is capped off. Selling an upside call makes a lot of sense. Were looking at premiums 90 days out that are providing relatively good annualized returns over or near 15 . So, i think when something is sort of just stuck in the mud, or it maybe has the potential to break to the downside as carter mentioned, selling upside call makes a lot of sense in these names, taking premium. Mike, i think weve got you back, got the audio issues straightened out. So lets give it a whirl. Whats the trade here . Brian may have been alluding to it actually. What i was taking a look at was selling an upside credit call spread, and using one in Morgan Stanley that expires before theyre reporting earnings, which they do in the third week of october, specifically looking to the october 6th, weekly 86 88 call spread, collect 72 cents for that. Thats when stocks get rerated, repriced, and you could see basically all of that premium either coming in your favor or go needily against you and dont try to chase, you know, high premiums, essentially, you want to try to look for situations where youre range bound, neutral to bearish when you do these types of trades. Carter, you mentioned the regionals are the worst. Is there any hope for them since the stronger banks are rolling over in your view . I dont think so. I mean, lets just say one could say, well, theres no downside. Okay, lets cede that point to the other side. Whats the upside . Its always about that. Investing is always about risk. Its mapping managing it. See the point with the person whos bullish. What is thats going to make banks here and now get up on their feet and start outperforming . I dont see it. Theres also this, the largest financial in the Financial Sector is berkshire hathaway, making alltime highs, theres a reason for that, because its highly defensive. Thats an antimarket kind of thing. All right. Mike, last words to you. Yeah, i mean, as i was saying before, and maybe you guys heard this and maybe you didnt based on the audio issues. The fact is, you dont typically see an industry en masse laying people off when times are good. Thats not the pattern. It doesnt seem based on their actions like things are really good. Which suggests the cheap valuations were seeing in a lot of these stocks are cheap for a reason because they are below historical averages. Turning to one of the bigger movers from this week, that would be apple, the tech titan souring 6 this week, but there could be a better alternative in the software space. Carters peering into his crystal ball for this one, or maybe the charts. Carter. So, were going to look at some other old world names. For fun, lets get right to it. Do a little bit of fundamentals to put this in context. Its not clear whether apple is a growth stock or a value stock. And this is to be noted, apple has been in and out of the s p 500 growth or value index three times each, sometimes its growing, sometimes its not. Take a look here and youll see this is a stunner, i think, on a tenyear basis, 2013 to 2023, look at the difference between, of course, the shares outstanding, and look at the multiple. Basically, youve had earnings growth, youve had revenue growth, all very modest, but the share price is whats moved, its simply a buyback machine. There isnt really anything very impressive other than multiple expansion and at this point were starting to see it in the charts and looking at two relative charts, we looked at these earlier in the week. So the last week in september, a year ago, apple puts in its relative peak. On a oneyear basis apple is up only 14, 15 . The tech sector is almost double that at 30. The semis are up 42. You could have bought a broadcom up 60, so many other choices. So the opportunity cost here has been really a disaster, the final chart is the same relative chart, its a ratio, its one thing divided by another, we are breaking trend, topping out, apple over the past year has been a bad pick. Mike, whats your take on this . Its interesting he was talking about the buybacks. Ten years ago the company essentially bought back 5 of its outstanding shares and each year since the amount in dollar terms has either been flat or declining. But, of course, the value of the company has been increasing. What that means is that as a percentage of the company year theyre buying ever smaller and smaller amounts of it back. So, you know, the impact of those buybacks is going to diminish as that takes place. So, i get the point that carter is making, using essentially the tremendous cash flow the company has been generating, and nobodys denying it has been a cash flow generating machine to buy back their shares has a diminishing benefit over time. With all this said, brian, people might be looking for an alternative trade, and youve got one on oracle. I do, oracle is one of those names if youre looking to move out of apple oracle is one of those plays. Its also a play where if youve had highflying tech names in your portfolio, such as some from the semiconductors, up huge on the year, im looking to rotate to a safer tech bet, oracle is one of those. We have earnings coming up here. When i look at the charts, though, the stock has had a big run. Its trading at near alltime highs. Sometimes i get the feeling can i buy it here or am i just chasing it . I think theyre going to have some good earnings here. Were seeing double digit growth for their cloud applications, they have a play in the a. I. World, not to mention obviously there are continual customers they have and will have, by them becoming a bigger and bigger player of the cloud provider they are taking over this world and you get an a. I. World play with them. I think, though, if im here to just try and buy the stock i think theres a lot of risk. Theres a big catalyst event coming up, like i said, earnings, i want to be safer when i go in to first buy this stock. I think we can use call spreads to do that. Theyre a little bit pricey, but the earnings move big enough. Weve seen the stock. Its been a few quarters before its moved significantly to the downside. We have 7, 9 moves on the downside a couple years ago. There is some risk here when you step ahead of an earnings event. The call spread when im looking for the 125 145 call spread im going to buy the 125, call, sell a 145 call against it to lower my cost. This will expire. Give it time to run to the upside here, going out to november. On the call spread, break even 131. 34, above this i get to profit all the way up to 145, be called away from the stock at that level, but i think im risking a little bit here, i think 145 is sort of my price targets. Im willing to be called away at that level. Theres room to run and this is a call spread, a safe way to get into a stock and trade your alltime high. For everything options action check out our website and newsletter. Theres much more options action right after this. Announcer adobe stock is up more than 60 year to date, and ending this week sitting right under its 52week high. With its Quarterly Report out next week now is the perfect time to deploy an options trade. Well show you how to set up. Plus, calling all options action fans, reach into your pocket, grab your phone, and tweet us your question at options action. If its nice, well answer it on air. When options action returns. The power goes out and we still have wifi to do our homework. And thats a good thing . Great in my book who are you . No power . No problem. Introducing stormready wifi. Now you can stay reliably connected through Power Outages with unlimited cellular data and up to 4 hours of battery backup to keep you online. Only from xfinity. Home of the xfinity 10g network. Wow, you get to watch all your favorite stuff. Its to die for. And its all right here. Streaming was never this easy, you know. This is the way. You really went all out didnt you . Um, its called commitment. Could you turn down the volume . Here, you can try. Get way more into what your into when you stream on the xfinity 10g network. Good luck. Td ameritrade, this is anna. Hi anna, this position is all over the place, help hey professor, subscriptions are down but thats only an estimated 15 of their valuation. Do you think the market is overreacting . Howd you know that . The Company Profile tool, in thinkorswim®. Yes, i love you please ignore that. Td ameritrade. Awardwinning Customer Service that has your back. Welcome back to options action, another tech name out with earnings next week, adobe, the Software Stock surging this year, up nearly 67 . If you think photo shopping this one out of your portfolio after its big run is a good idea, think again. Mikes got a way to play it. Mike, whats the answer . Adobe is one of our holdings, and one of the reasons or two, really, the reasons for that is that they are at the intersection of a couple secular tail winds that i think are quite important. One is digitization, were talking about the fact that this was accelerated by remote work, where increasingly move to digital work, and, you know, if you think about how that impacts people just imagine Something Like docusign, their equivalent is esign, but that is a big benefit for them. Another, of course, is social media creators who will use a lot of their products, including things like creative cloud. Were talking about people creating videos and putting them on youtube and elsewhere. They create a lot of software that they use. So thats a real benefit. Of course, if were taking a look at Enterprise Spending if there is a little bit of caution there, that is one area and one other thing i would certainly say is that kind of like the oracle situation that brian was talking about before, this is a company thats had a heck of a run, up more than 60 year to date, it is trading at a slight premium to its own historical multiple, probably trading around 515, 520 area on its own historical multiple. If you dont already own the stock but want to be long going into a catalyst, and as we were mentioning before, the time to essentially look at things like call spreads, which is the trade were going to articulate here, you want to have an identified catalyst, got one in the form of earnings, so i was simply taking a look at buying a call spread here. Its a highdollar stock. Something important to remember, 550, 560 bucs. I was looking at the november 565 625 call spread, cost 21, 22 per call spread, a decent outlay of premium, an important point of people looking to reduce the amount of premium. One way to do that is by tightening up those strikes so essentially you have less reward, but lay out less premium and thats one of the things you face if youre doelg with options on stocks that cost 5, 600 a share. Carter, what do the charts look like . The key here, year to date performance is arbitrary, january year to date means nothing. So whats important is where you are in relation to where youve been. Apple has recovered all of its losses, and gone on to make new highs but is faltering, whereas oracle has recovered its losses and is making new highs. But adobe has yet to make it back to the highs, and thats the Reference Point that matters. So, i think you play this for a catchup, and we might have a comparative chart as well, just to make this point. As a matter of technique, you either go with a real winner, playing relative strength, that would be oracle, or you double back and find a laggard like adobe. But the one in the middle is the one thats not interesting, thats apple. Brian, do you like this one too . I do, actually, i like the length of the strikes that mike picked here, when you look at earnings prior adobe, 5 is about the norm for a stock to move after earnings, that could put you all the way up to that upside strike, which mike is short in this case, and as we know after earnings events those short strikes lose implied volatility, lose premium after the event is over, and so i actually like the distance between strikes. You have to have more stomach here, its a higherpriced stock, but using a call spread to play to that upside, especially on the charts that carter laid out, the alltime high to get back to level, seems like it could hit that. Up next, we have some look backs on consumer trades as a couple of our staple names saw big moves. Rinse and repeat. Dont go anywhere, options action is back in two. I need it cool at night. You trying to ice me out of the bed . Baby, only on game nights. You know you are retired right . Am i . Ya the queen sleep number c2 smart bed is now only 999. Plus free Home Delivery when you add an adjustable base. Shop now only at sleep number. Welcome back to options action. Last week we told you to skip the spam and laid out a bearish trade on hormel and the stock has dipped 4 since then, putting this one in the green. Carter, what do you make of this price action . Pretty bad. Staples have taken a hit as a group, hershey, general mills, but this one is under particular pressure. The setup is longer base, this stock has quadrupled if performance of s p on a 50year basis. Hormel foundations, 50 of the float. Its losing all of the luster of that very long period. My hunch is that its not over. I would continue to be a seller if youre long, and if youre a short seller, retain the trade. All right, and weve got a bonus, look back for you tonight, staples shares of kroger jumping after better than expected earnings, and updating investors on its deals move. Kroger represents an easily repeatable fundamental options strategy. Thats exactly right. The strategy we talked about was a buy right or cover right if you already own the stock, which is a situation where you sell upside calls to basically collect some premium along the way. And one of the things we often discuss is whether or not its advisable to sell calls going into catalysts such as earnings. When we discussed this, we sold a call that expired prior, although it would have still expired out of the money. Now that catalyst has come and gone. Other news out of kroger, they announced the Opioid Settlement which is important, its good to get that potential obstacle out of the way and another obstacle they faced was antitrust concerns with respect to the merger with albertsons, and theyre looking at a pretty significant divestment and hopefully thats going to get that across the finish line. For those reasons i still like the stock but i also think that this is one of those things where im not expecting any kind of explosive price action to the upside here. This is steady as she goes, a yield play, i think you can look to sell, additional upside calls against the stock that you own. Would you do that, brian . Yeah, in fact, i was taking a look at it, you look around the 48, 49 strike, the top end of this channel that its in, maybe lets call it out towards the end of the year. Theres decent premium to be left and after the earnings event is over with, im less afraid of getting called away too soon, and seeing the stocks collect premium on that, go a couple months out, look at that 49 strike area as a place to go ahead and buy right, and sell calls. What do you think, carter . Pair of twos, big hand, other things are better, pair of twos, not so good. All right. Up next, answers to your questions and the final call, options action back in two. How can you sleep on such a firm setting . Gab, mine is almost the same as yours. Almost is just another word for not as good as mine. Save 50 on the sleep Number Limited Edition smart bed. Plus, free Home Delivery when you add an adjustable base. Shop now only at sleep number. You ok, man . The internet is t