happy friday, options action fans we have another big show lined up tonight first up, carter worth might have found a marvel in marvell technology tony zhang explores another covid candidate, and he'll outline how to proceed with caution. plus, as the saying goes, you don't know what you don't know mike khouw dives deep inside the complications and implications of implied volatility. find out why you might want to review the fundamentals. time to risk less to make more let's get to it. semi-stocks getting a boost this week as strong results fro names like nvidia helped restore

confidence in the space. closing the week in the green. it is now less than so %10% away from its 52-week highs so if you're looking for a way to play catch up with the space, carter has a marvelous pick for you. take it away >> that's right. trade here is to find within a laggard group and semis are good, but they really lag the tech sector by almost 800 basis points year-to-date, and marvell within it acting quite well. a few charts, so let's go. just to give the facts and figures. we know there are 30 stocks in the stocks index and we know it's value total $1.65 trillion now if you look at the second slide, this is the issue semis are still some 9.5% their peak and only five stocks have made new highs. actually the time of writing,

marvell was 1.5% below the february peak, and closed at 4.5% big surge. best performer on the day, which is usually a good setup. so one of three charts the first. a simple way to annotate note the well-defined tops at the common level move the authority of 28 level and this stock is just breaking out $30 on the close take it another way. next chart to draw the line. basically, you want a range bound security stuck between 28 and 22 and then you get this plunge. market related, it drops 40%, 50%, and now it's recovered all that ground and broken out to a new high we think the breakout has legs and then finally, relative performance. this is really the opportunity marvell on top last chart its relative performance to the s&h. marvell underperformed for almost ten months and now you're

starting to see relative performance to its peers one of only five we like this a lot aggressive move today but we think it foreshadows even more to come on an earnings beat. >> so, mike, what's the trade on this >> it's interesting. first of all, i should give a shoutout to carter it's tough here he's caught chasing a stock that's up 3% today and this was a name he liked when i was talking to him earlier this morning, so he is probably frustrated that he has a bullish call and we've already seen a big pop but that seems to be confirming what he's talking about. we've got earnings coming out next week and here's the thing one of the reasons the stock may have performed poorly was that you know there was some basically eps issues, but looking forward, this is a company that'll probably make close to a dollar and a and a half in about 18 months time on a run rate basis that makes the company not very expensive.

right now, options aren't expensive either because this is a stock that's moved an average of about 5%. that's what the options market is implying, suggesting that options are reasonably priced given everything else that's going on so given the fact we're making a bullish bet in the stock that's had such a strong move, i thin the way we want to play is this is with the call spread. i was looking at the june 30, 34 call spread that would cost about $1.20. up to 34, which happens to be one of the most recently revised price targets. one of the analysts covering the stock came out with the price target today so we're trying to look to a move up to around $33, $34 up to about ten or more percent. try to take advantage of the fact that options aren't overly expensive and not trying reach out and just go out and purchase stocks that are trading at all time highs >> tony, do you like the stock and what do you think of mike's trade? >> so, first of all, i really like this chart set up i really like this play that carter has identified.

the massive top at 28 that had just broke out above and you have strong, relative strength, as he said i think it is a good recipe for a move higher going into earnings now mike's trade, i really like even more because of the fact that he sold the $34 call option for 50 cents he was able to offset almost a third of the cost of buying that june $30 call option now, he's only risking 3% of the underlying stock price on earnings play, which is rare to mix that small amount. even if it breaks below 28, you're only risking 3% to try to make almost 2.5 times that, if this trade rallies on earnings >> the benefit is that we've gotten some names that have reported and their commentary has been good about those end markets so that could help this trade as it goes into earnings >> yeah, no, i think you're right. of course it has helped the stock. i think if we take a look at how

the stock has behaved this week, we've seen it has traded higher. even ahead of its own earnings report basically on the backs of what we're hearing out of the other parts of the industry. of course that's one of the reasons into your own earnings report because in the off chance they happen to announce something idiosyncratic to them not related to other chip makers, we're mitigating our downside exposure by doing this and as tony pointed out, in a high volatility market environment we've got, it is not easy to find cheap options plays. all things considered, this one is fairly priced >> moving on from big tech to biotech. it's been a crazy week for the space which has flown all over the map on a series of headlines surrounding moderna. that shock shot up 20% on positive news regarding a potential covid-19 vaccine before spending the rest of the week crashing back to earth. data came under the microscope but if you think there could be more to the story in the space, mike -- tony, excuse me, tony has a plan

tony >> yes, so we've been seeing a lot of news out of companies that have been working on vaccines for covid-19 that's been driving a lot of bullis sentiment, but there are a handful of companies working on treatments with existing drugs for some of the symptoms of covid-19 that's really what i want to look at here the company is insight, who has a phase three clinical trial with novartis using their drug to treat the lung damage or to reduce the lung damage of covid-19 patients. and this is something that i think is quite interesting to take a look at because if you see, the clinical trial announcement lines up with the technical chart breaking out above the $95 resistance level it spent the last month consolidating between $95 and $105 and i think it's primed now for a potential breakout higher and if we look at the implied volatility, which is the measurement of its future of volatility of the stock, it's

also a way we use to measure the cheapness or expensiveness of an option insight has been trading between roughly 30% to 40% vol, even though it is off its peak of 70%. insight's implied volatility, the options here, are not particularly cheap so the trade structure that i want to utilize here to take a bullish view on insight is t use a similar trade structure and using a call spread here i'm going out to july and i'm buying the july 110 calls for about $5.50 and i'm selling the july 115 calls against that for about 90 cents paying about $4.60 which is about 4.5% of the underlying stock price. the reason i'm doing this is because whenever you bet on these types of biotech clinical trials, they tend to be a buy nar bib binary event that works or doesn't. they neither work out or don't i want to make sure i'm risking

the smallest amount possible i also want to make sure i'm selling premium. that's why i'm selling that july 115 call against it it offsets a fifth of the cost of the long call, reducing my risk on this bet to about 4.5% of the underlying stock price. >> carter, what do you make of the insight chart? >> well, what i think has to be said, and this is the constructive thing is, yes, it is a breakout candidate, but it is a massive laggard that's coming to life you know that essentially biotech, ibb, is making all-time highs, and this stock peaked at 153 as far back as two, three years ago. here it is only at 100 meaning, it's got the one-two setup of underperformance over a long period of time, and now a pretty important out performance. it looks great >> mike, what do you think of the trade? >> it's one of the situation where you have a binary outcome. if it is drug related. this is a company people thought might make as much as four

bucks, which wouldn't make it overwhelmingly expensive it isn't a one trick pony in that sense it's not playing off a vaccine you're inclined to make a bullish bet. i don't have -- i have no insight on insight, you can say, but i like how tony ask structuring the trade. stoil coill to come, just we you implying why you should be asking that question mike schools us with a little reflection on the fundamentals of the game and illustrates them with a real world case study everything "options action," check out our website. while you're there, you can sign up for our newsletter. >> announcer: "options action" sponsored by think or swim by td ameritrade ♪ ♪ ♪

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welcome back to "options action." volatility is the name of the game in the stock market this year, but when it comes to trading options, the vicx is the tip of the iceberg if you're joining us for the first time, or a seasoned vet with a napkin with you, mike is here to guide you through the nuts and bolts of options pricing and a way to play one of the market's worst performing sectors. professor mike, take it away >> what is implied volatility? it is the annualized standard deviations of the movement of the underlying securities. sounds like a mouthful and it is, but it doesn't need to be that complicated we can break it down into simpler ideas. the first thing to think about is that options are a form of insurance if you will on stocks and etfs and indexes so the more they move around, the more volatile they are, the higher the premiums will be. that's one of the reasons that options traders tend to think about the implied volatility as basically the price of options

so for people who are at home trying to figure out how to think about it, the thing to do is actually use a back of the napkin calculation to see how much the options market is expecting something to move around by looking at the cost of a straddle what is a straddle it's when you combine a call and put of the same strike and expoor expiration. if we look at xlf, the financial etf, we can look at the straddle when i was looking at this today, it was trading close to about $22 per share so i'll look at the june 22 call and the june 22 put when i was looking at this today, that cost about 1.65% that is 7.5% of the current stock price. you can think of that as how much the options market is expecting this thing going to move on average between now and june expiration. and to put things in perspective, before we had all this pandemic, the at the money straddle with xlf trading over

$30, just 3.2% of the price. that gives you a sense of how much options premiums are now than they were before this broke out. now as it happens, i'm not particularly constructive on financials despite the fact that they've seen these big declines. a lot of the things going on will continue to present a head wind now a lot of people will have exposure to financials maybe you own the s&p 500, maybe jpmorgan the best of breed amongst the big banks. but you want to have some way to hedge that exposure. i was taking a look at the july 21/18 put spread earlier today, you could spend 60 cents to put that on. why are we using a put spread? exactly what i was talking about. options premiums are more than double what they were in february if we get a v-shaped bond, where we have remarkably good news and these take off, you don't want to be short the stocks outright. if you have exposure to the space, hang on, but hedge it using xlf put spreads. may be a good way to play it.

>> good explainer, mike. tony, what are your thoughts on using volatility to figure out the movement in stocks >> so, it makes a lot of sense if you look at xlfs, implied volatility, it is elevated financials is one of the only sectors i currently have short positions in xlf is the only sector outside of energy that is still trading below the december 2018 low. so i would agree with the directional view here, but because of the fact that xlfs implied volatility still fairly elevated here, my preference here is selling premium. partially because the fact that mike's trade requires a sizable move to the downside in order for it to be profitable. i'm not as bearish on xlf. i'm simply not bullish on xlf. so my preference here is to identify weaker names within the sector, such as wells fargo or goldman sachs, and i'm selling

call spreads on the names. if they stay where they are and move mildly lower, i'm still able to be profitable on these trades >> we're showing them, mike, but can you walk us through the levels of your xlf trade >> yeah. sure i was looking at buying the july 21 puts, and those would cost about 90 cents per contract. the 18 puts were about 30 cents, roughly a third of the premium that i would have by collecting the lower strike put and that's how i got to the 60-cent net debit. when you're dealing with financials you're dealing with immense balance sheets small differences on the balance sheets make a big difference to the equity during the credit crisis, they started to swing around violently. you can see steady earnings for a long time, but if you start having credit problems or you start seeing the book value of these companies deteriorate, it could have a meaningful impact and you have to think about the

headwinds, whether they'll have good cni loans there are a lot of things that don't look great for the space just the fact that it's come in doesn't necessarily mean they're all that cheap >> carter, your take on the xlf? >> the real problem, of course, if you think of the financial crisis, the peak of '07 to the plunge of '09. the s&p 500 financial sector could never get back above the '07. we've plunged again and it's not just banks and it's asset managers and life health insurers and all of it there's something wrong. relative performance is poor you heard tony, i mean, it is one area he remains short. we love it on the short side no reason to be buying >> what does that mean for your view on the broader markets, carter pretty dismal, huh >> at some point -- right. we know banks are the transmission mechanism for the economy, and something has to get solved here.

it cannot just all go to microsoft and apple and facebook and so forth top five names are now almost 23% of the s&p >> final word, mike? >> yeah. i mean, i do think that there are some parts of the economy that are continuing to work and there are some that are clearly broken like energy, but i think financials are a no-touch here unless you're using it in a hedged capacity. because they have so much exposure, and we don't entirely know, at this point, what the exposure is. coming up next, target hitting the market on its earnings and we'll tell you what the move means for one of our options traders. plus, we're taking your tweets send us questions at options action and we will answer some of them on air we are back right after this >> announcer: "options action" is sponsored by think or swim by td ameritrade. 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.

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♪ ♪ ♪ welcome back to "options action." it's time to take a look back at a couple of our open trades. just last week tony bet that target might hit the earnings bull's eye >> the stock managed to break back above 118 earlier this week retests as support on thursday, and is now starting to trade higher and the you couple that with the recent relative strength of this particular stock, it is fairly well-positioned going into earnings next week by going out to the may 29th weekly options i'm selling the 121/114 put vertical >> target is down almost 3% this week on the back of its earnings

report, and this trade dropped into the red later in the day. tony, what do you do now >> so target's earnings report actually was quite spectacular and the stock pulled back and it's now below the 118 support level that i had mentioned on that trade so at this point, it's time to cut your losses on this particular trade at the moment, this trade is still pretty much flat so you're not losing a lot of money, but it's time to cut your losses and move on. >> carter, would you agree on that in terms of the chart >> yes, i mean, it's a flare-up like that was very strong and then it faded aggressively we know walmart did the same thing and it kind of puts a cap on it. >> mike said one troubled travel stock was headed nowhere fast. >> we don't see real ends in sight for this either. the pressure that they're under is going to require not only a reopening, but travelers to decide that's where they're going to focus their time and attention and re-engage in that way. the one thing i would say

prevents this from falling out and one of the things that people can take a look at is private equity is investing in the space. the ones that expire next week, may 22nd, 65-puts, selling those and buying the junes net-net, cost $2.75. >> now a couple of things have happened since then. expedia rocketed higher on moder moderna's hopeful vaccine news, and the first leg of mike's trade expired, leaving him long on the june put. so mike, what's the story of the trade now? >> that's a great point. when moderna's news came out monday, every name in the space rocketed higher. they were up 15% to 20%. which means if you were watching the show last friday it was never trading close to $65 or $66, which is where the stock was when we referenced this trade. which is why you should follow us and "actions options" on twitter.

i adjusted the trade and did the selling of the 23s in the weeklies and long the 75s and that actually worked out fine because the stock actually traded dead sideways, kind of what we were expecting anyway be sure to follow us and if you're long those other puts you can sell premium against it. >> it is time to take your tweets one of our favorite segments of the show the premice of the intu trade was that it was going to do what paypal did, and it didn't. so what do we do with intuit now? that's a very good question. carter, what do you make of the chart? >> sure. this is the hardest circumstance of all if the stock breaks out and does what it's supposed to do when they're long, you know what to did. take the money and run or reduce and it collapses get out. this stock went up 1% and that's not what we were playing for the earnings have come and gone and the pattern isn't damaged and the hunch here is to stick with it, but push out your time frame. >> mike, do you agree? >> yeah. this is interesting because our trade structure, we're short the

$10 put spread, risking a little over 3% of the current stock price. we're not taking a massive amount of risk by sticking with the position we have we have june expiration. we have some time, and i'll stay with it. >> our next tweet and next viewer asks saw some unusual options activity this morning on masterca mastercard, calls expiring may 29th does mastercard have a chance of breaking out above 300 next week tony, what do you think? >> so mastercard got rejected at that 300 level early this week, but i do think mastercard with its strong relative strength and the credit card data we're currently looking at, has pretty good chance of breaking above 300. those calls do expire next week so you don't have a lot of time. i think if you want to play that breakout, a call option is a great way to do so with limited risk, but i might go out a little further and maybe a week out further than may 29th. >> all right time now for the final call. last word from the options men

carter braxton worth >> marvell, marvelous. long >> a man of so few words >> mike khouw? >> look, the way to play marvel going into earnings, options aren't overpriced and use the 30/34 call spreads specificall is the one i was looking at. >> tony, your final call. >> i'm looking for insite to beat clinical trials and i'm buying the call vertical spread, going out to july and buying the 100/115 call spread on incisite >> we are back next friday bonus hour of "fast" is coming up next. i'm searching for info on options trading, and look, it feels like i'm just wasting time. >> announcer: "options action" sponsored by think or swim by k ameritrade tailored to fit your investing goals and interests. and it learns with you, so as you become smarter,

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