♪ happy friday, options actions fans we have a big show lined up for you. here's what's on deck. first up -- >> the energy. >> don't get spooked carter worth thinks the demons may have been exorcised from the energy sector. then -- >> stock junk -- it's stock junk. >> or is it? >> tony thinks it is a way of a high yield to yield you high returns. finally -- >> tesla fell madly in love with a pigeon.

>> and that would not be the weirdest thing that happened this week with tesla mike khouw downshifts on the name and it's time to risk less and make more. "options action" starts now. >> welcome to "options action",e wti rallying 25% as investors bet that the worst is over for the energy space our carter worth says he's got the chart to prove it. what are you seeing, carter? >> well, a bunch of charts something that happened this week, seven weeks in a row, the energy sector is up and that's only happened eight times in the 32-year history of the sector and the probability of occurrence of 0.5% the follow-through is usually pretty big what do we know? we know that the sector bottomed actually before the market we see on the first slide here that the energy sector bottomed on the 19th, a thursday, and the market went out and made its

low on monday the 23rd we know this ricochet has been huge and we're talking about double the market and it dropped 65% and the ricochet is up 70% twice that of the s&p up 34 and then this is the interesting thing. the next slide you'll see here very clearly, it shows something again that's only happened eight times in history and the sector itself is up seven weeks in a row and what i have there is a brief table of what happens thereafter three months, six month, 12 months and what you see and there is the median and the mean, but the performance plus 2.6 over three months and plus 6% and plus 14.7 over 12 months and that is very robust and interestingly, the market in those other instances did not do all that well. anyway, some charts. first, look at the xle and the plain chart and the year to date chart and the plunge in the ricochet and then take a look at the next chart how well it is tracking this little trend line off the low

and then the final chart, wa there a gap, a sharp drop in gap on the 6th of march, and the premise here is that we will quickly fill that gap. the xle closed at 38.78 and it's on its way to 42 and i want it to continue to be long and big on the long side >> thanks, carter. so mik what do you make of that move, those charts and what's the trade? >> this is an interesting situation that we have here in energy because obviously, in the near term the fundamentals for the sector and for the -- you know, for north american oil remain exceptionally weak. we obviously haven't had a significant uptick in demand yet. so this is really a technical trade that we're looking at because it's very hard to make that fundamental forecast, but what's interesting is that we have been seeing some activity in the options market, specifically the crude oil futures markets this week that indicated that some institutional participants might be thinking that in the 12 to 18-month timeframe there could be a recovery in wti that was the one, of course,

that traded negative on the may future earlier and what we were seeing essentially was that there was a bet being made, that the futures could curve, and when the near-traded futures could be more to the longer traded one and that's the exact opposite of what was going on this year and that is a situation that typically arises when you have near-term demand that outstrips near-term supply here's the thing people need to remember about the energy space. we had a big and very rapid drop in demand, and supply just simply can't move around as quickly. think about it trying to turn a super tanker around and that's the way the industry works from a logistical point of view what you get is these pendulum swings where it overshoots to the down side and it may shoot to the upside in 12 to 18 months equity prices will probably price that in before it happens and if you're inclined to make a bullish bet, bear in mind that there will be more fallout from the fundamental point and

there's bad credit in the space, an you can use options to make a tactical, upside bet and it might actually be on to something. specifically, i was looking at the june-september diagonal spread specifically the 3821 september calls, buying those and selling the june 4121 strike calls and spending $2.85 for that. this spread is only $3 wide and the reason it makes sense is because you're buying a longer dated option, and thi will expire more rapidly and we're trying to sell the near dated premium which i highly elevated without taking the downside risk that the purchasing xle right here might encounter. >> tony, how do you like mike's trade? >> so i'm not as confident in the long run here because of the fundamentals that mike was referring to, but if you look at the chart on xle, i think it's constructive for a short-term momentum play as carter laid out.

you have this tap at 36 and we broke out above that two weeks ago and we retested that at 36 and we're starting to move higher you couple that with the recent momentum and relative strength you have a compelling case for xle to reach up back to 42 and reach the gap that carter was talking about. but my preference as far as a moment play to the upside is to focus on the specific name without the xle sector like philips 66 that's relatively strong, and i think it has a higher probability of the stock moving higher and i would use it somewhat as a bull call spread that allows me to take the short-term momentum play and risk 3% to 4% of the underlying stock price to take this type of thing. >> that's exactly where i would go, tony and carter, i asked you this in your view, what is the strongest member of the xle? >> well, remember, the xle, interestingly, of course, the whole sector is only 3% of the s&p and two stocks, exxon and

chevron are essentially half the weight of the sector so if one really wants to be aggressive and play the theme overall then it's the oih and the etf that has the most beta and was beaten up the most in terms of the biggest sort of safest name, i like chevron better than exxon. >> all right let's turn from one beleaguered area of the market to another. that would be corporate debt and we see movement in the space including a brand-new bond offering from united airlines yesterday. check out that stock surging today and investors are starting place bets that th worst might be over in terms of the damage done by the shutdown. could it be in store across the board. >> what do you think, tony >> yes so i want to take a look at high-yield bonds because we've seen some pretty record inflows over the last five to si weeks into this particular segment of the market. if we look at the chart, if we look at hyg i want to first point to the $80 level which is the 2018 december low that we are just about to retest as resistance

it was $78 and that's the base it needs to propel itself above the $80 resistance level and on to 82 and potentially $84 extended target to the upside. when we look at the fundamentals, there are two primary reasons why you will start -- you will still continue to see inflows into hyg and that's predominantly first of all, because of investors seeking yield. if we look at u.s. ten-year yields you are looking at an average of 66 basis points on treasuries versus hyg is offering nine times that at 550 basis points so investors seeking yield will look for these types of yields and then you couple that with the fact that the fed is outright going to start buying these high-yield etfs. they've never done that before that's going to provide investors with a sense of security on these types of funds as well as provide a bit of a floor here on these asset prices

so the trade structure that i'm using to use here for hyg is a risk reversal, is a call spread risk reversal where i'm going out to july and i'm selling the $75 puts and collecting about $1.40 and i'm using the proceeds to buy the july $80 call option which costs about $1.75, and i will collect, and net-ne for this call spread risk reversal i'm trading it for a net-zero cost. so this strategy will be profitable if hyg breaks above the $80 resistance level that i'm referring to and it's profitable all of the way up to 84 where it's capped for any gains above 84, but i do think that's a fairly extended target for hyg to the upside. to the downside, if hyg does not break 80 i have no losses between $75 and 80 which gives me a 6% buffer for hyg and this strategy only suffers losses

below 75 which gives me a 6% buffer to the downside and that's comfortable given that the fed will start buying these etfs starting perhaps as early as next week >> mike, i guess two questions do you like tony's trade structure and we've seen a sizeable move in hyg based on the expectations that the fed will be in the market. where do you think it goes from here >> i think that's quite interesting. i know that you and karen have spoken about that fairly extensively and just how much the high-yield market has basically bounced on the notion that they would do this even before the fed started to engage in these types of purchases. >> two things end up happening when you create and this literally becomes a fed put situation here number one, it creates other buying interest that does create a floor and one thing is to compress the elevated volatility

in that space and for that reason, making sure that the premium could make sense here and one other thing i would point out is 6% in a lot of stocks given the volatility that we've seen wouldn't seem like much of a buffer and of course, high yield is an index of high-yielding bonds and 6% moves to the downside would be a materiel one and i like the structure and the setup and i think this will probably work out nicely >> actually, we do have breaking news considering the united airlines debt offering and phil lebeau is on the line and it looks like they pulled it, phil. >> they have, melissa. this is not a surprise yesterday afternoon it started to percolate around the bond market that there was limited appetite for $2.25 billion in bonds that united was essentially offering rick santelli said yesterday afternoon that it didn't look like there would be a whole on the of appetite and united his pulled that offering and the significance of this is that

there's been so much debt that has been brought to the market by the airline industry just since march, well over $24 billion. you have to wonder if the debt market is saying we've got enough for now. >> phil, thank you phil lebeau with the latest on united airlines. mike, i'll go back to you. what do you, quickly, it sounds like it's an airline-specific issue. >> it is an airline-specific issue and there will be businesses that will be able to hit the reset button and i'm not sure that that necessarily applies to the airlines. there has to be some evidence that there will basically be a return for levels of air travel that's significantly higher and each if it increased dramatically, we've all seen the statistics to levels that haven't been seen since the 19

notice, and of cours we're dealing with infrastructure in a very capital intensive business where investors are skeptical about where they recover quickly that's one of the things you need when you're lending to someone. i'm not surprised to see what we're seeing here, and i think there's a lot more uncertainty to come in that space. >> it does look like the stock is dropping in the after-hours session down now 3.3% very quickly, carter, what does this chart look like to you? >> united? let's say this it's been bankrupt three times in my lifetime that says it all >> it is dropping as we speak. down 4.6%. check out options action.cnbc.com and while there sign up for the newsletter here's what's coming up next up next -- >> tesla or tesla? >> don't pretend nothing happened this week mike khouw will bring some calm to this week's comedy. >> 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. it ♪ ♪ ♪

it's a thirteen-hour flight, tfifteen 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've got even more breaking news and again we go to phil lebeau for it. phil >> tesla has just filed an 8k and in the 8k they have opened up basically a revolver with the industrial bank of china and it comes out to $565 million that tesla will be able to borrow to fund the expansion of the shanghai gigafactory and that's a gigafactory that they are in the process of expanding it's already up and running, but they're going to be expanding it

and again, they'll open up a $565 million revolver with the chinese bank, again, to expand the production facilities in shanghai melissa? >> all right phil, thank you. phil lebeau on a busy friday for them let's stick with tesla, the stock gained 16% if you're convinced that now is the time to play this high flyer through options, mike has a plan for you and here is his call to action. mike >> we were talking earlier about how the energy market is a technical trade. i think the most technical trade that is available in almost any instrument has got to be tesla's stock at this point. it is very hard obviously for those taking a look at it to get a grip of the appropriate valuation of the company should be and here's a couple of things kboen about it obviously investor love the company and there are some long term and substantial holders of the company including elon musk as well who are not inclined to sell the stock and what ends up happening is you end up squeezing the shorts with

this thing and we have high, implied volatility and gee, i really wish i'd taken the opportunity to buy it when it was almost half the price and only a couple of months ago. so for those of you who are inclined to take that bet, there are a couple of things to take a look at. first of all wye we ought to look at technicals we might presume that there might be some resistance to that level and also there is an unfilled gap right between 650 and 685 so trying to take advantage of the elevated, implied volatility and being mindful of the gap while also trying to collect a little bit of premium and i was looking at with something called the june 685 and 650 won by two put spread in this trade i would buy one of the 685 puts and normally when people are buying put spreads you consider that to be a bearish trade and in a way it is because this would see the highest profits if the stock drifted down to the 650 strike, but actually you will collect 1250 every time you put this trade on

so you will make money as long as the stock stays above that level and in fact, it can drift down through that stripe by some substantial amount and you would end up being put the stock close to about the 600 level if you're in this, which is a significant discount to where the stock closed today bear in mind, this is a stock that can move around a lot and it is a modestly bullish bet on the stock and if you really wanted to own it you could and you might, but it would have to drop quite a lot before you purchased the shares >> carter, what's your take on the stock and mike's trade >> i think it was set up bullishly and the epic run on 569 and the collapse, the 60% sell-off, but day to day action, the week over week action is so steady despite the volatility, i think we will reapproach the highs. >> mike, last word >> yeah. i mean, this is one of those

situations where i know the shorts are inclined to go after from a fundamental point of view i would caution anybody who is inclined to do that. i think the only way to play is with options whether you're making a bullish or bearish bet. implied volatility's high. you can collect money doing trades like this one >> one taking off with earnings and we'll tell you how the traders just cashed in on this move ♪ ♪ ♪ ♪ ♪ ♪ ♪

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take a check on shares of united airlines that the company is pulling its $2.25 billion bond offering. we knew that demand was tepid and they were forced potentially to jack up the yield to as much as 11% and they pulled it all together and we are seeing airlines falling in the after-hours in sympathy. let's take some time and look back at some of our open trades. last week tony said activision was about to level up on earnings take a listen. >> we recently broke out above a $63 major resistance level, came back to retest that as support and is now starting to rise higher from that, so this type of relative strength is exactly what i typically look for going into an earnings event and i'm going out to may and i'm selling the $64 and $61 put credit spread here. >> and he was right. activision soared on its earnings report and it is up double digits since the trade. so tony, what are you doing now?

>> so this trade actually exceeded my expectations, but if you sold this put credit spread you would have collected roughly 97, 98% of the credit and it's time to take profit and move on. i will say you have one more stock in this particular sector which has yet to report earnings which is take two interactive and i think you could have a similar setup for that stock, as well. >> let's move on here. last week carter predicted paypal would cash in on its earnings results. >> look at the authority of this level the stock has approached this and reapproached this and this is a setup for a news-related breakout and earnings are coming next week. >> instead i'm trying to look at a trade that maybe not swinging fo the fences and i was looking for a strangle swap and it sounds complicated and it's like calendar spreads and in this

strategy you would sell the may 8th weekly, 115, 130 strangle so you're selling the put and the call and then buying that exact same structure in june. >> they were right paypal took its earnings report to the bank and the stock is up more than 20% since we put that trade on so, mike, how are you managing this trying to bat a single when the stock hits a home run. carter made a great call and i think the trade i came up with was too conservative for this. i actually tweeted this out, how i adjusted the trade and by the way, for anybody who is watching you should follow us on twitter. carter made a great call, my trade structure -- >> carter, what do you see next to the stock. there's only one other time when it was up 20% in a week, and my hunch is to harvest gains and likely to consolidate for a long

time and take the money and run. >> what are your thoughts on this and how mike is managing this trade >> i think mike's doing the right thing, but we were surprised by a lot of these earnings announcements and such as the activision one that i had, and i think a lot of names are exactly the same thing and take your profits and run. >> all right nice week, guys. >> up next, we've got the final call so what are you working on? >>i'm searching for info on options trading, and look, it feels like i'm just wasting time. wasted time is wasted opportunity. >>exactly. that's why td ameritrade designed a first-of-its-kind, personalized education center. see, you just >>oh, this is easy. yeah, and that's >>oh, just what i need. courses on options trading, webcasts, tutorials. yeah. their award-winning content is tailored to fit your investing goals and interests. and it learns with you, so as you become smarter, so do its recommendations. >>so it's like my streaming service. well exactly. well except now, you're binge learning. >>oh, i like that.

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>> we've got time for a tweet. one viewer asks how would you play cisco heading into earnings next week? mike, why don't you take that? >> it's slightly elevated for a name that moving around 6% on earnings and i'd take the call here because i'm not expecting the big pop out of this one that we've seen out of other stocks either calls or puts would work with the money. >> carter, how does the chart look going into earnings >> think it's okay >> a man of few words. i don't know how to take that, carter when you say things are okay does that mean that -- >> i mean, you're either in or you're out you're buying or selling i like it. >> you like it >> i mean, carter, it's like pulling teeth sometimes. time now for the final call. >> sometimes less is more. >> carter, less is more. >> what do you say final call >> energy, long. >> tony?

>> the fed's buying hyg. i'm going along for the ride and i'm calling a buy spread risk reversal. >> mike khouw. >> you know, i like tony's hyg trade, and i also like using calendar diagonals in xle if you're inclined to follow what carter's talking about. >> that does it for us have a great weekend don't go anywhere. cnbc's special report is up next - [man] the following program is a paid presentation for the oxypure air purifier brought to you by nuwave, llc. asthma and allergies are at an all time high, and it seems to get worse every year. it's not your imagination. allergy season continues to get longer and more intense as temperatures rise, and airborne viruses are becoming an epidemic problem worldwide, with the changing environment, and unseen dangerous air pollution surrounding all of us. you need clean air more than ever. if you suffer from mold, dust, pet dander, smoke, odors, or sleeping problems. discover the nuwave oxypure air purifier.