it's friday and that means it's times for "options action." on the big show tonight, when you hear kraft, it likely brings to mind childhood images of shelf-stable pasta coated in cheese but if you need more than just mac and cheese, tony is running to walmart and finally, there's no way to make another food pun out of this one, so we'll give it to you straight bank dividends, just what is going on there to explain, mike khouw reprises his role of professor in

tonight's dinner theater it's time to risk less to make more local economies continue to reopen across the nation and the consumer staples etf has risen more than 10% off march lows, but there might be only a handful of names within it that have all of the ingredients for a continued run higher the chart master, carter worth, has been in the kitchen. carter, have you been crafting something for us >> how clever. here we go before we look at a couple of stocks, this has been a disaster of a stock it peaked almost four years ago, at basically $98 and bottomed this year at $20 you're talking about a 79% decline. it's not loved only two analysts consider it a buy, and yet two people hold almost 50% of the stock. warren buffett, of course, and 3g global. but anyway, a few charts so here is the first chart and what we see is that it has all of the characteristics of a

bottoming out formation, a bearish to bullish reversal. you can see the $150 moving day average starting to flatten and actually rise. the second chart is the same time frame, but it's just showing you another way. it's the trend line, showing that kraft heinz has broken above the down trend line. in effect, since it peaked back in february of 2017 at 98 bucks. the third chart, i want to zero in on the events of two years ago. and what you see here is of course when the stock plunged, it had an s.e.c. investigation, took a $15 billion charge there in february of 2019. you can see the drop, the stock plunging, 48 to 35 and it's been basing ever since. and then the question is, can we move into that gap to the upside so take a look at chart number 4. this is the same chart, sort of up close and personal. and this is the opportunity. again, the stock drops on 135 million shares, trades 6 million on average, and now two years later, is toying with the

prospects of moving into that gap. and so the final chart, the fifth chart shows you the importance of the current level. the stock continues to bump up against the 33.50, 34 level. and a breakout here would be in principle clear sailing all the way up to the mid-to-low 40s i think it's a tremendous opportunity. nobody likes it. just got a downgrade by moody's today. classic contrarian kind of indicator. we think this is real good >> tremendous opportunity, mike. what's the trade here? >> so this is an interesting situation, because as carter pointed out, there's not a lot of places in the market where we don't see at least some signs of, shall we say, a rational exuberance this thing is trading at less than 15 times earnings and obviously, those are fairly stable earnings, fairly stable revenues this isn't a growth stock, but it isn't priced like one, either what's sbrinteresting to me, the are the type of buy-and-hold

stocks that people used to collect in the past and try to collect some dividends and it's the kind of stock where some fairly aggressive investment strategies, and some of those strategies have been harder to identify but i was taking a look at this today and have noticed that the implied volatility has gone up quite a lot, yet the stock isn't that expensive so this is an interesting situation for a put-right. it's where you sell a downside put on a stock, collect the premium, if the stock stays here, you get to collect the premium, if the stock goes higher, you get to collect the premium. but the worst case is if the stock goes below the price, you sell at a premium. when i was looking at this earlier today, you could collect $1.90 for the august 21st puts normally, i'm looking to collect

maybe 1% of the stock price. here we're collecting close to 6% of the current stock price. the downside risk is you would own it at 32.5, a $1 discount to where it closed today. of course, you're also going to still have that $1.90 you collected. to me, this is not a stock you're looking to hit it out of the park and see 15 to 20% gains in a shattort period of time, b we could collect substantially more premium than we would normally be able to if the markets weren't as disruptive as they have been >> we don't often talk about put-rights, tony what do you make of this trade >> 1% is usually what we target on a put-right getting 6%, that's very attractive and i think carter has phenomenal set-up. you have this multi-year bottoming formation that's just about to break out and there's a lot of potential here. but that's my concern here, is that it's potential here because kraft hasn't seen any revenue growth since 2016. they've been working on this turnaround story since 2018. i would like to see the stock

actually break out, even by a couple of bucks above that $33, $34 major triple top we have here there's a lot of upside here, up into the low 40s even, i would like to be a little patient here, wait for that breakout and perhaps buy some calls here. that would be my preference. >> carter, your response >> well, that's right. so there's two types of technique and waiting for a breakout is much safer sometimes you miss it because the break out, like a spotify is so big, it's almost too late it would take a news catalyst to do that. but we want to put the trade on here and then in the event of a breakout, get even bigger. one thing to note, of course, also, is in their troubles, they've cut the dividend, but they've also indicated that the dividend at a reduced level is good they're earning the dividend, paying a buck 60, paying about $2.50, a yield of almost 5%. you think that also adds to the charm of this krafty and clever pick >> krafty. a pun of your own.

mike, last word. do you have a pun for us >> no puns i'll leave those to you and to carter but i think this is really the idea here, that we're sort of -- we're splitting right down the middle what tony was talking about, what carter was talking about. selling a put is the kind of way that you can bide your time. you're going to get long the stock at a lower level if it does dip and if it does start to break out, we can look to do something more aggressive on the upside >> let's stick with stamoples tony is looking at this. >> we've been talking about retailers for a while, but i think walmart is very well -- a good standout for the retail space in the short-term and the long-term. if we first look at the chart, when i looked at this earlier today, i didn't think the chart looked particularly strong it recently broke below that 1.20 support level, which is a major level for me but when i started taking a look at the fundamentals, i think the current weakness we see here is an attractive long opportunity here from a risk/reward

perspective. if we look at the walmart business, the ecommerce business is the one that we want to focus on this is the one where amazon dominates this entire space. their ecommerce business is almost seven times larger than walmart, but walmart has recently struggled with their ecommerce business, but has really come to life here in the last year. they've been growing about 39% over the last year on they ecommerce business versus only half of that for amazon, about 20%. and if you look at the grocery business, this is really where walmart currently dominates and amazon is trying to play catch-up but as a result of recent covid turnaround, what we've seen is that amazon -- walmart has been investing heavily in their online grocery and their digital strategy for pickup. and this is really where walmart's physical stores outshine amazon, because most americans live within ten miles of a walmart store so they've seen almost a 200% month-over-month growth in their online grocery business. so overall, i really like walmart in the short-term and

the long-term from their ecommerce prospects. and especially what you saw today, apple announced they were shutting down some stores and we saw some sell-off in the markets, walmart saw some strength because of that i really like this particular stock in the current weakness we're seeing the strategy i'm looking to use here is the same strategy that mike used. i'm concerned that people are going to say that i'm copying mike here, but the strategy i'm looking to use is really a strategy i think is very underutilized by many equity investors, which is selling a cash-secured put to acquire a stock that you like at a particular discount. the strategy i'm looking here is to go out to july, i'm looking at the july 31st, 118 puts by selling that earlier today, i can collect about $2.83. as mike said, we usually target about a 1% discount on these cash-secured puts to purchase the stock, but here i'm collecting almost 3% here. and my break-even price here is about 115.17, which gives me the ability to purchase the stock at about 4 to 5% below the current price of the current stock

price. >> mike, i will go to you, so you can comment on whether or not you think tony is copying you, but i think this really has to do with where the markets are, where valuation are, and where volatility is right now. >> i think that's right. i mean, we have a situation where it's another stable stock and another situation where options premiums are evaluated it's another situation where the revenue situation for the company is relatively stable those are the kind of set-ups we like for put rights. for anybody who thinks he's copying me definitely isn't. no chance we were talking during the trading day today. we had a lot of other things to do i was pretty busy. i didn't know what he was going to come up and he didn't know what i was going to come up with i'm finding out now, but i do happen to like the idea. >> carter, how about you >> tony led with the comment and he's right, of course, that the chart is poor. so while sometimes the fundamentals can trump a bad chart, and it's not a horrific chart, what we do know is that

walmart's beta is literally a 0.5 versus staples at a 0.7 versus the market, of course, at 1. and for it to be underperforming like this, down 12% from its peak, i just -- it doesn't feel like it's going lower, i don't think that's the worry, but i don't think it's going higher either it just sort of feels like a dull duck here >> tony, last word >> well, that's why i kind of like selling these puts to acquire the stock for the long-term. i agree with carter in the short run, i have concerns in the short run, but i'm looking at this to usualmart as a long-term investment here against amazon and target >> all right coming up next, with the fed's big bank stress test right around the corner, there's a dislocation in dividends of some of the financial stocks. the professor, mike khouw, will walk us through that and for everyone options action, check out our website, optionsaction.cnbc.com while you're there, you can sign up for our newsletter. stay tuned

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ah, they're getting so smart. choose the app that fits your investing style. ♪ welcome back to "options action." fed stress tests are suddenly approaching. the beaten down group made about 70% less profit in q1 than it did during the same period in 2017 and options traders are betting that could spell bad news for dividends. if you're looking to play the big banks right now, how do you do it? that sounds like the perfect question for professor khouw mike, take it away >> a lot of times in markets like this, people might look to stocks that pay big dividends as maybe safe havens. i think this is a dangerous exercise when you see dividends get very, very large, though, in percentage terms and we're certainly seeing that in some of the financials. take a look at a name like wells fargo, for example

this is a stock that has about a 7.4% dividend yield at the moment now, that might seem appealing, but that usually tells you that there's a good chance that the dividends are at risk. if we take a look at what the options market is implying, we are seeing that, as well we're seeing that in many cases, for the banks in particular, the high dividends that they're paying might actually be a little bit higher than what we're going to end up getting, if there are some form of dividend cuts, and in some cases, that's what they're implying and of course, we have the stress test coming up. when you hear us talking about the implied dividend, we talk about that quite a lot but you might be wondering how we come up with that the way we do that, we compare the price of a stock to its synthetic equivalent in the options market what is that what we can do is we can actually replicate the performance of stock by buying a call and selling the same strike put, same expiration put here's an example. if i went out and bought the

january 100 call, for example, and sold the january 100 put on a stock and i took the net debit or credit of that transaction and added it to the strike, that's the price of my synthetic stock and i can compare it to the actual stock the principle difference between the synthetic stock i created with options and the real thing is that options don't pay dividends, the stock does. so generally, what you're going to end up seeing is that as the implied dividend is falling, you're going to see that the price of stock relative to its synthetic equivalent will drop contrarily, if you start to see dividends go up or implied dividends rise, the price of stock is going to rise compared to its synthetic equivalent. and so when we take a look at this for a number of stocks, including stocks like jpmorgan, we can see that there's maybe a 30% chance or so that at some point within the next year, we're going to see a dividend cut. does that mean it's going to happen no but it does mean that some of these high dividends may be at risk and actually, a lot of people who just buy stocks will tell you the same thing

so if you're looking at this space thinking, now's the time to get long, i would urge a lot of caution and the thing is, if you own a basket of stocks like the s&p 500, you also own some financials and maybe you're a little bit concerned about the fed's stress test, maybe a little bit concerned about those troublesome looking dividends. you can hedge out that risk or make a bearish bet without getting unlimited risk to the upside i was looking at xlf specifically, the 24, 20 put spread when i was looking at that earlier today, you would spend about 1.15 to get that put spread it's slightly in the money and that's one of the reasons that we're willing to pay a little bit more for that than we normally would normally, we're looking to spend about 25% of the distance between the strikes or less. but the important takeaway here is when you see exceptionally high dividends, they might be tempting don't be fooled into chasing those stocks, though because usually unusual high dividends mean unusually high risks. >> the new wrinkle today,

carter, is that the new vice chair of supervision randy quaurl said there will be an additional sensitivity analysis layered into the stress test to test for various scenarios in the economy because of the coronavirus pandemic so "l," "v," "w," that's all going to be tested here. so there's another layer of uncertainty in this whole mix. >> there's -- and at the end of the day, we have these great adages that are popular because often they're right. where there's smoke, there's fire don't fight the fed. one of them is, if it's cheap, it belongs where it is it's not cheap cheap's a four-letter word meaning there's something wrong! and i think this is where the hopes are, that somehow -- you know, the financial sector never really got above its '07 high. the bko index never got above its '07 high the bko index is below its '09 relative high. even earlier, we were talking

about price-to-book. these kind of things, that's what a value trap is >> tony, your thoughts on mike's strategy >> so as far as a hedge because i think the downside risk clearly are skewed to the downside with respect to financials with the stress test. i think mike's trade makes a lot of sense as a way to hedge yourself the only thing that i would potentially modify slightly on his strategy is that i might not sell the 20 strike, which is pretty far away. almost a 16% move to the downside i would look to move that up a little higher, trade a slightly narrower vertical in that particular case and just one comment on the implied dividends. while i think implied dividends is an extremely interesting use case of how you can use dividends to predict what might happen in the future, one of the things is that the information that's embedded in that option and my concern is that it's already embedded in the stock price. i want to make sure that investors don't necessarily use that as a reason to go out and necessarily short wells fargo. and there's a lot of imperial evidence for this, as well, that

shows that when the options are implying a dividend cut, when the dividend cut actually takes place, the stock actually doesn't drop very much >> those are good points, mike >> yeah, you know, i think that's definitely true i was alluding to that when i was talking about high dividend yields high dividend yields by themselves suggest that a lot of bad news has been priced in already. >> coming up next, we're making a return trip to two of our hopn trades how our players are playing those names, right now i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. oh. 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. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn

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welcome back to "options action." time to take a look back at some of our open trades a lot ofcar talk on the show recently, so let's begin with lyft just last week, tony told traders to prepare for lyft-off. >> i think the chart here for lyft is fairly constructive. you have a breakout above $35 resistance it's come back to retest that as support. and i think this is really coupled with a relative strength coupled with the stock to continue moving higher i'm going out to the july 10th weekly options expiration and selling the 36.5/31.5 put vertical and collecting about $3.20 for that $36.5 put and paying about $1.30 for that 31.5 put. >> lyft rallying last week before falling into the red.

so what do you plan to do with this trade now >> the trade was working beautifully until apple announced today they were going to shut down some stores and the stock fell about 6%. it is still trading just at that $35 level that i was referring to last week and the trade itself is actually still flat. so my indication at this point is to hold it until next week, see if we break below 35 if we do, i would cut my losses and get out, but i'm still looking for a potential bounce off that $35 level in the next week from ride sharing to auto stocks, after a rough week for ford, mike put on a trade to help mitigate some losses. >> i think this is maybe one of the most picture-perfect cases i've seen. if you bought the stock earlier this week, perhaps on monday, which was its high for the past month, obviously, you've taken some significant punishment since that time. so what can you do in the options market first of all, you want to look at stock recovery strategies one of the things you can use is

a 1 by 2 call spread you could buy one july 7 call, that would cost about 39 cents and sell two of the eight strike calls against it for about 18 cents each >> well, ford reversed some of those losses, but it was down today. mike, what do you do with this trade? >> phil lebeau was talking about it earlier this week it seems like there is a little bit of a rebound in auto sales and light duty trucks and suvs, in particular, the f-150 being the best-sell vehicle in the u.s. i wasn't advocating people buy the stock, but only trying to come up with a strategy that worked for people who already had. if you put this trade on over the stock you already own and hang on to the stock, i think you hang on to the options trade, as well >> what do you think of hanging on to the stock, carter? what do you see in the charts? >> it's a bad chart. i, myself, wouldn't hang on to it >> okay. time to take some tweets here's what our first viewer asks should we get into beyond meat june calls

mike, why don't you take that one? >> rather than the stock sure but, of course, june expiration just came and went and i assume you're probably referring to july or august but if you're looking to make a bullish bet, i would probably do it with calls. it's a speculative place enough to be in the stock already >> tony, your thoughts on beyond >> i think beyond meat is one of those stocks that's quite underestimated similar to zoom, i think it's more of an environmental play, more of an ethical play in terms of how consumers are going to consume food products. and especially as we see all of these documentaries of livestock and how livestock production works. i actually quite like the stock. i think -- i prefer buying call options going out to july or even august in this particular case, as opposed to june >> all right our next viewer asks, if you own airline stocks, can covered calls alleviate some of the pain while waiting for them to come back, particularly on a stock like jetblue, who recently said

they'll be increasing domestic routes mike, what do you say? >> first of all, covered calls is the same thing as selling puts would by selling puts in the airlines right now no way no way >> pretty direct answer. time now for the final call. carter braxton, what do you say? >> kraft heinz i'm a big buyer. >> mike khouw? >> selling puts in kraft heinz i think makes a lot of sense here. >> tony jiang? >> i think walmart here is best of breed for the retailers i'm going to go long by selling cash-secured puts. >> that does it for us here on "options action. special edition of "fast money" is up next ♪ ♪

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