happy friday, everybody. time for "options action." we have a big show lined up. here's what's on deck. carter worth explains why small caps could be in for a big surprise and how it all comes down to financials plus "jeopardy" style, the answer, what is moving higher, tony helps to make your final wager. and speaking of calls, the professor mike khouw has another teaching moment on why now could be the best time to go back to the most basic tool in your kit. it is time to risk less to make more another wild month

all three major indice closing out may in the green with the s&p 500 now up more than 38% from its march lows but take a look at the small caps. despite seeing a boost the group is still lagging the market, down 16% carter says there's more trouble brewing for this beaten down sector carter, what are the charts telling you? >> i mean the issue here, of course, small caps have lagged for such a long time and they are very heavily weighted to financials but let's look at one of four slides the first shows you iwm and well defined lows from which the iwm, the russell 2000 broke sharply see that level, it's sort of the 145 level and plunge to 95 then we ricocheted all the way back to that level and that's the issue. we're up 51% off the low more than the s&p. but that's the problem with going down so much meaning it's so damaged, take a look at the next slide so here, again, i've drawn the

arrow. basically it's a classic example of a rally back to a difficult level where a lot of commitments were made. money was lost and now that money has been restored and in principle it's where sellers act. third, take a look at the long-term chart and this is the defect and this is the chart since the '07 peak and there were very distinct characters. one, you can see the russell 2000 put in a perfect double top and it could never make a high this year. i mean, think of the stock market the market has made big, new highs and the russell 2000 went back to the 2018 high and you have a 2018, 2020 double top, a crash basically down 40%, 45% and this ricocheted right back to the underbelly of that line not a great setup. finally, and this issue as well, look at this final chart it's a two-panel chart and it's the iwm on top and look at the relative performance to the s&p and the bottom panel

i mean it just is lower and lower and lower and its relative appearance peaked in 2014. we also know this, that they add up to 2.4 trillion and that's less than apple and microsoft. you're taking a lot of chances with an index that's heavily weighted in financials >> wow that really puts it in perspective. mike, what's the trade out of this >> yeah. so this is an interesting thing. i think carter was actually touching on a part of this the russell 2000, amongst the publicly traded companies at least, you're looking at basically the economy's smaller publicly traded companies. the russell 1000 which is the biggest ones have essentially gained back to where they were at the beginning of november of last year. that's a remarkable thing when you consider where we are as an economy and we went from the lowest unemployment that the countries had in its history to the highest unemployment that we've seen in several generations in just the course of three months. we don't know when we'll get

back to some sense of normal and we are temporarily hitting the pause button in terms of the economic impact because of the massive fiscal and monetary response that we've seen and these companies are going to have lower credit qualities generally and we'll have a situation where we will see an even bigger bifurcation in my view with the mega-cap economy winners and a lot of the stocks that are in this space, and the interesting thing is when we've seen this "v" bottom and the big sharp bounce off of it, we've seen a decline in implied volatility and i think what i want to do here in my case, i'll look out to august for a couple of reasons and one is that some of the fiscal response is going to have run out by then. we're also going to capture the next cycle of earnings and i was looking at the 130, 110 put spread and you can spend $6.35 and sell the 110s against it net/net, you will spend $2.30

against the strikes and the idea that i'm capturing those two catalysts as i see it, sort of a runoff of government assistance and another earnings cycle and just trying to capture the fact that we've seen a sharp rebound, but i don't think that all of the bad economic news for these companies in particular has been appropriately priced in. >> tony, what do you make of mike's trade >> so, first of all, i think i'm going to take a bit of a contrarian view on iwm you know, i kind of find this chart quite constructive, at least for the short run. you have the 135 triple top that the etf broke out above and you have some significant relative strength over the past five or six weeks where the small caps have outperformed s&p. so i actually like this more to the upside rather than downside, however, i do like mike's trade from the perspective as a hedge against a downside correction especially as he said he's targeting the next earnings cycle and that's something that's very important and the fact that he's using an out of the money call spread here and he's risking only 3% of the underlying etf's value i think

that's a really smart way to hedge your risk to the down side >> we got a taste of rotat into value looks like and it was very strong, carter, and i'm just wondering if you think those little doses, those are not going to pan out here because that would be key to believing that iwm would be -- would continue to be underperforming. >> you know, there's a phrase for this kind of thing, of course, and it's not mine, and we all know it, it's called a value trap sometimes things appear to be cheap, but typically that's for a reason, and so we've had a cyclical bounce. think energy energy is up 75% off of its low, double the market. the kre, the regional banks are up 40 -- more than the market, but the things that plunged the most, ricocheted the most and it is so damaged and so dependent on an economic recovery and not a bet that i want to make.

>> let's move on here and check out shares of the quintessential stay at home stock zooming higher today just like that, just like they've been all year and zoom is up 150% heading into next week's earnings report and tony says there's no end in sight for the stay-at-home sweetheart's rally. tony >> so i covered zoom here last earnings season. in early march well before we had the lockdowns, when we thought work from home was going to be a short-term trend now we know that not only is work from home going to be significantly longer than we had originally expected but actually more of a permanent for many workers. so if we look at the chart here, what i love about the zoom chart is it's been in a clear uptrend but every time it touches the 50-day moving average, it bounces off of it. that's what we've seen this week we have this double top that it's about to break out from and earnings next week is what the stock needs in order to break out above that 180 level if we look at the stock itself, currently options are implying a

12.6% move on earnings and this stock can rocket higher if they beat earnings and i'm expecting them to beat earnings by roughly $20 million in terms of revenue to the upside, but the options market is currently only pricing over the last four quarters, it's only moved about 10.8%. so the options market implying a larger move on a stock that we've seen move quite a bit. so the trade structure that i want to use here to continue to play for upside in a breakout is using a call vertical similar to the trade that i used last week where i'm going out to june and i'm buying the 175, 210 call vertical here. i'm spending about $13.60 for the june 175 call, and i'm collecting about $3.20 to sell that june $2.10 call something pretty far out of the money. and i'm looking for a boost here on earnings and for this to break out higher my break even price is around 185, a little over 185 and i'm

looking to break out another $5 higher beyond where we are currently trading as of today's close. >> mike, your thoughts on the trade? >> yeah. i mean, i like the trade structure if you're going to make a bullish bet i mean, we're looking forward to earnings i mean we should actually then think about multiples. this is a company that on a run rate basis even if they're doing 250 million a quarter, right now the street is looking for 200 million in revenues for the quarter that just ended. this is a $20 billion market cap so this thing is trading at, you know, best case about 20 times revenues and that's not a cheap stock. the good news is from a fundamental standpoint that the company has made some announcements that basically they suggest they'll become an entrepreneurial platform that they'll be trying to deal with this work from home dynamic that we're now dealing with just think that on a valuation basis if you're inclined to make a bullish bet, you would have to use options to do it and i do like tony's trade structure and it's the valuation that's

troublesome for me and it's trading on technicals in any case >> tony laid out a solid technical case, it seemed, carter what did you think of the chart work >> well, sure. it can only be technicals when you're trading at 70 times sales. it's anything but fundamentals it's just the future here is a classic breakout candidate. what we do know is it did very well on the march 3rd print. i think it came in double the expectation in terms of earnings and yet after flaring up, the stock faltered and so this is an instance that in the event of a news-related pop, i think it's a quick harvest and something to get out of. >> is that what you would do, tony >> exactly so i'm looking for - i'm only going out to june so i'm expecting this trade to be lasting a very short amount of time. i'm looking for a pop higher and i'm looking to get out at either at a profit or a loss. >> all right there is a time for complexity and now is not that time professor khouw gives you a

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♪ ♪ welcome back to "options action." in a case study of busts and booms through the lens of apple, check out just how far apple has rocketed off the march 23rd lows which is nearly 50% in two months but now an apple investor might be faced with the quandary there's only one way to explain. ♪ >> time for a good old-fashioned tag team starring mike and carter so,

carter, you're up first. >> sure. so take a look at one of two charts on apple and very clearly defined peak in february 326 and a plunge to 212 and back to 324 and very symmetrical and you drop 35% and you have to go back 52 and it's right back to a former high. second chart when you return to a former high, you've returned to a level of overhead supply in principle, there are people who bought in february who then endured a 35% sell-off and didn't sell and now seeing their money returned to them, they want to grab it. they're interested sellers get me out, and that's only half the supply then as opposed to people that are breaking even, there are people that brought the low. dumb luck or brilliance, down at 212, 220, and once you flip the cards over and show them a 40%, 50% gain, they want to book those gains. what a trade get me out, and so we are at that juncture and it is not

random and we can see in the chart that apple has stopped precisely at its former peak i'm going to turn it over to the professor from here. >> so this is an interesting situation, of course many of you probably hold apple. it's one of the most broadly held stocks and for many people it's probably a core holding what are core holdings those are stocks that you hold and that you don't sell and if you're among those people looking at these potential levels of resistance, and you're not inclined to sell those shares, are there things you will do to enhance your return and take advantage of the fact that there will be some sort of a ceiling on the stock in the near-term and the answer is to sell covered calls and this is a situation where sometimes people think that the best idea is to just try to sell calls when implied volatility is high really this is kind of a decision you want to make when you're making some sort of assessment of how the stock is behaving i think this is an attractive exit point if you were to be called out from the stock you want to sell above the current stock price.

the idea is you're trying to choose an attractive exit point and you're looking for an area of resistance and we also want to take a look ahead at any potential catalyst such as earnings they do report in july but it will be after july expirations so july expiration is the one that i'll be being looking at. specifically, i was looking at the july 330 calls and you collect $7.60 when i was looking at that earlier today. now, consider that is above the all-time high in the stock if you did end up selling that stock at the 330 level, you're collecting that's $337.60 per share that you'd effectively be collecting if you just decided to allow that stock to be called away from you i think it's probably not that likely we get there before earnings as a potential catalyst to take us there and this is also a trade that will be giving you more than 2% of the current stock price in terms of yield and that's one of the things i try to look for trying to get at least 1% incremental yield in the stock position in terms of income so, you know, when we're looking for option strategies, this is

the most basic and the one that many people begin with it's an investment strategy. many of you are invested in apple and this is one of those places where we can identify a good, covered call situation >> tony, your thoughts >> first of all, i think selling the covered calls in this market environment is the right strategy that we should be utilizing. i like that they used technicals and some levels to get a sense of strike price. normally in a stock like this going out to july i would sell much further out of money and usually around the 345, or 350 around a 10 or 15 delta, but here because they've identified a pretty strong technical level where they exit the trade at 330 and they're receiving 2% of the underlying stock price to get this, that's exactly the type of covered call that makes a lot of sense here i do think that for those of you that believe that apple will make an all-time high and will continue to move higher for those investors that they might want to adjust the strike prices

a little higher into that 340, 345 range. >> china and china tensions have been a real topic, and this could afford investors some peace of mind if they believe that apple could be in the crosshairs and that that rally could be threatened or at least hit some speed bumps along the way. >> yeah. that's a great point because of course, that also presents some potential headwinds to seeing all-time highs in the stock. one thing i will say in response to what tony was suggesting is that, of course, implied volatility is a little bit higher you take better advantage of that when you sell strikes that are closer to the money. you are giving yourself a minor amount insulation to the downside if the stock just trades sideways essentially you will collect the premium and even if it declines a little bit, you'd be better off if you hadn't sold them because you are collecting a little more than 2% of the stock price. those are the things you want to look like. exactly what you're talking about here, technical resistance and levels of valuation that might be high and other forms of headwinds such as what we're dealing with with china right now.

>> speaking of china, we do have breaking news. china's global times responding to president trump's announcement this afternoon saying that trump's plan to eliminate policy exemptions providing hong kong with special privileges is, quote, a recklessly, arbitrary move and we are all looking very closely for any reaction out of china, and this is perhaps the first that we'll get to the president's announcement this afternoon. coming up next, a marvelous chip trade we are breaking down why the semi surge just paid off for one of our traders. plus, we're taking your tweets and send us your questions and we'll answer some of them on air. we're back after this. >> announcer: "options action" is sponsored by think or swim by td ameritrade. and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. 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 except now, you're binge learning.

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ah, they're getting so smart. choose the app that fits your investing style. ♪ welcome back to "options action." time to take a look back at a couple of our open trades. just last week carter said one chip stock was looking simply marvelous. >> well-defined tops at a common level, note the authority of the 28 level and this stock is just breaking out $30.13 on the close. very constructive, but the break in principle has more to go. >> given the fact that we're looking at making a bullish bet in a stock that's already had such a strong move, i think the way we want to play this is with a call spread and i think it is reasonably price i was looking at the june 30, 34 spread and that would cost $1.20 to put that trade on by doing that, we had upside exposure up to 34. >> the stock had a marvelous day to close out the week putting this trade in the green. so, mike, what are you doing

now? >> so i think this is a situation where we can actually book profits and press a bullish bet. both what i would do is roll the 30s up to the 33s. you could collect $2 that's more than the $1.20 we spent to put the trade on to begin with, so booking an 80% profit you would own the 33 and 34 call spread and you can profit further if the stock continues to go higher >> carter, does the chart support mike's move? >> it's a textbook breakout and a big week up 8% and in general, i would say we want to stick with this kind of momentum and when you break out in such a big way and it's time to take profits and that is not the case here >> meantime, tony shared some insight as to why one health care name could be prime for big gains. >> if you see that 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 it's prime now for a potential breakout and i'm buying the july 110 calls for $5.50, and i'm selling the july 115 calls against that for 90 cents. net/net, i'm paying $4.60. >> insight had a nice rally and lost most of that steam heading into the weekend tony, what are you doing now >> so the chart here still looks very constructive to me. it's still staying above the $100 resistance level and it's bounced off the 20-day moving average, and this is prime still for that breakout and it's moved still in our favor and this trade is small and has a small profit at the moment and i still have almost 50 days left on this particular trade and i'm still hanging on to it and looking for further gains to the upside. >> carter, your thoughts >> up on the week and what's not to like? just the opportunity has been deferred stay long. >> mike, would you stick with this >> yeah. i mean, this is a technical

trade so you'll have to listen to the two guys that were just speaking before me i don't have that much insight as i said last week on insight, so i would defer to them >> coming up next, we have your tweets and the final call. >> announcer: "options action" is sponsored by think or swim by td ameritrade. ♪ ♪ ♪ ♪ ♪ ♪

♪ ♪ ♪ ♪ ♪ welcome back to "options action." time to take your tweets our first viewer asks, what is your assessment on buying the gld august 190 calls

tony >> so with respect to buying far out of the money calls and these are really far out of the money, august 190 calls are trading at about 10 delta which means for every dollar gold goes up, this option only goes by ten cents. even though these options are really cheap, normally when you buy far out of the money options, you do it on the stock that will have a big catalyst event and gold is simply not that type of trade it's not a stock that has an earnings event coming up or a product launch where you would expect a binary move and i would use something lower like a 165 call option. >> our next viewer asks a bit of a transcendent question. singer/songwriter ed hale writes, i don't usually ask you guys questions, but here's one isn't the s.p.y. overbought right now?

the top five names are now 23% and you have a lot of beaten down names that are languishing. yes, overbought and risky. >> all right our next viewer writes tesla looks poised for a breakout and needs clearance above 826 and 834. how would you play this? mike, take this one. >> well, it is above 826 already. it's actually above 834 where it closed today, and what i would do right now and it looks like its progress is slowing to my eye, and i would use call calendars if you're playing this one on the long side. >> all right it is time now for the final call carter braxton worth, what do you say? >> if you have a nice profit in small cap stocks, iwm, take them if not, new position, be short >> professor michael khouw >> so if you're in the marvel trade, i think one of the things you want to do is roll up to the 33 strike and basically book your profits and also let some money run, and the other thing, of course, is if you have apple now is a good time at selling covered calls. >> tony? >> zoom, the ultimate work from

home stock is going to keep zooming higher on earnings, buy a call spread. >> that does it for us on "options action. we'll be back next friday. "mad money" starts right now have a great weekend - [woman] the following is a paid advertisement for the hoover smartwash pet automatic carpet cleaner. (upbeat music) real life is crazy messy especially on your carpets. whether it's kids, pets, or just plain heavy use your carpets get dirty, but cleaning them can be such a hassle, even painful. down on your hands and knees to spray and scrub or struggling with one of those bulky rental machines, up the stairs and all around your house. and did you ever wonder if the last person to use it even cleaned it up afterwards? what did they clean off their floors