it's friday, and that means it is time for "options action." on the big show tonight, when you hear kraft, it likely brings cheese all carter sees is green what he'll explain then, if you need more than just mac & cheese. and finally there's no way to make another food pun out of this pun thank dividends and what is going on there to explain, we have a professor in tonight's dinner theater." it is time to risk less to make

more local economies continue to reopen across the nation, and etf has risen more than 10% off march lows but there may only be a handful of names who have all the ingredients. the secret sauce, carter, have you been crafting something for us >> exactly how clever, crafting and clever and here we go before we look at acouple charts, this has been a disaster of a stock what we know, of course, is 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 considered a buy. and, yet, two people hold almost 50% of the stock warren buffet, 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 the characteristics of a bottoming out formation, a bearish to bullish reversal.

you can see the 150-day moving average starting to flatten and actually rise. the second chart is the same time frame but it's just showing you another way, the trend line meaning kraft peaked back in february 17 at 98 bucks. the third chart, i wanted to zero in on the events two of years ago. what you see here is of course when the stock plunged, it had an sec investigation, took a $15 billion charge there in february of 2019 you can see 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, trade 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 3350, 34 level and the breakout would be clear sailing all the way up to the mid- to low 40s. i think it's a tremendous opportunity. nobody likes it. just going to downgrade by a classic contraire kind of innovator. we think this is good. >> tremendous opportunity, mike. what's the trade here? >> yeah. 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 a rational exuberance. this thing is trading at less than 15 times earning. it's not a growth stock but it isn't pleased like one either. these are the types of buy and hold stocks that people used to look to in the past to try to collect some dividends it's also the kind of stock

where some fairly traditional investment strategies that we like to use and options might've been appropriate with all the volatility we've been seeing lately, some of those investment strategies have been harder to identify. i noticed that the implied volatility has gone up quite a lot. and yet the stock isn't expensive. a putright is a situation where you sell a downside, put on a stock. you collect the premium. if the stock stays here. and the worst case is that the stock drops below the strike that you sold and you end up buying the stock but you end up buying it at a discount you'll buy it at a strike less than the premium collecting. and the amount that you're collecting is also higher. i was looking at the august 32.5 puts you can collect $1.90 for those. i'm looking to collect maybe 1% of the stock price

here we're collecting more than 6% the down side risk is that you would own it at 32.5 or a $1 discount and you're still going to have that $1.90 this is not a stock that you're looking to hit it out of the park and see 15, 20% gains in a short time because it's not that kind of a growth story but it is an unusual situation where we cannot collect substantially more premium than we would have normally been able to if the markets weren't as disruptive as they have been >> we don't often talk about putrights, tony. what do you make of this trade >> 1% is usually when we target on a putright. getting 6%, that's very attractive and i think carter has found a phenomenal setup you have this multi-year bottoming formation that's just about to break out 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 since 2016 i would like to see this break

out even a couple bucks above that 33 $34. there is a lot of upside here up into the low 40s i'd 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 >> that's right. there's two types of technique and waiting for a breakout is much safer sometimes you miss it because the breakout, like a spotify, is so big that it's almost too late it's up 12, 15%. we want to put the trade on here, and then in the i want of a breakout, get even bigger. they've cut the dividend, but they've indicated that they are earning the dividend, paying $1.60, earning about $2.50 it's a yield of 5% you think that also adds to the charm of this crafty and clever pick >> crafty. you've got a pun of your own mike, 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 splitting right down the middle what tony was talking about, what carter is talking about selling a put is the sort of way that you can bide your time. if it does start to break out, then we can look to do something more aggressive on the upside. >> tony's taking a look at a way to play one of the biggest names in the consumer space. tony >> we've been talking about retailers for a while. but i actually think walmart is a good standout here from the retail space, both on the short term and the long term when i looked at this chart earlier today, i actually didn't think the chart looked particularly strong. it recently broke below that 120 support level, which is a major level for me but when i started taking a look at the fundamentals, i actually think the current weakness we see is an attractive long opportunity here from a risk/reward perspective. if we look at the walmart

business, the e-commerce business is one where amazon dominates this entire space. their e-commerce business is almost seven times larger than walmart. but walmart has recently struggled with their e-commerce business but has really come to life here in the last year here. they've grown 39%, 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's trying to catch-up. 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% growth in their growth and especially if you see today

when apple announced that they were shutting down some stores, walmart saw some strength as a result of that so i really like this particular stock in the current weakness that we're seeing. so the strategy that i'm looking to use here is the same strategy that mike used and 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. so the strategy i'm looking here is to go out to july i'm looking at the july 31st, 118 puts i can collect about $2.83. now 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 11517 at about 4 to 5% below the current price of the

stock price. >> mike, i will go to you so you can comment on whether or not you think tony's copying you but i really think this has to do where the markets are and where volatility is right now. >> i think that's right. we have a situation where it's another stable stock, and it's another situation where options, premiums are elevated. it's another situation where the revenue situation for the company is relatively stable those are the kinds of setups we like for putrights and for anybody who thinks he's copying me, he definitely isn't. 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. but i do happen to like the idea >> carter, how about you >> well, tony led with the comment, and he's right, of course, that the chart is poor and 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 .5

versus staples at a .7 and for it to be underperforming like this down 12% from its peak, 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 it just feels like a sort of 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 for this to use walmart 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, theres a dislocation in dividends around some of the stocks and for everything "options action," check out our website while you're there, you can sign up for a newsletter. stay tuned ♪

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♪ welcome back to "options action." fed's stress tests are fast approaching and the banks suddenly find themselves in a precarious position. the bean group made about 7% less profit that it did in 2019. and options traders are saying that could spell bad news for dividends. professor co is here >> this is an interesting situation. 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 we're certainly seeing that in some of the financials take a look at a name like wells fargo. this is a stock that has about a

7.4% dividend yield that might seem appealing, but that usually tells you that there is 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 are going to end up getting if there are some form of dividend cuts, and in some cases that's what they're implying. 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 well, the way we do that is we compare the price of a stock to its synthetic equivalent in the options market what is that well, 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 so 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 principal difference between the synthetic stock that i created with the options and 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 if you start to see dividends go up or implied dividends rise, the price of stock is going to rise compared to a synthetic equivalent so when we take a look at this for a number of stocks including stocks like jp morgan, we can see that there is 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 do but it does mean that some of these dividends will be at risk. if you're looking at this space thinking now is 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 you're a little bit concerned about those troublesome looking dividends. you can hedge out that risk or make a bearish bet the 24/20 put spread you would spend about $1.15 to buy that put spread. actually xlf was below that 24 strike so 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 willing to spend about 25% between the strikes. when you see exceptionally high dividends, they might be tempting don't be fooled into chasing those stocks though. because usually unusually high risks. >> there is going to be an

additional sensitivity analysis layered into the stress test to test for various scenarios in the economy because of the coronavirus pandemic lvw, that's all going to be tested here. so there's another layer of uncertainty in this whole mix. >> 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 firer, don't fight the fed one of them is if it's cheap, it belongs where it is. there is something wrong and i think this is where the hopes are that somehow -- you know, the financial sector really never got above its '07 high the bkx index never got above its '07 high it's below its '09 relative low. the xlf does have insurers in it, berkshire is the biggest holding. but even earlier we were talking about price to book.

that's what a value trap is. tony, your thoughts on mike's strategy >> as far as a hedge i think it's skewed with the stress test i think mike makes a lot of sense as a way to hedge yourself the only thing i would potentially modify is that i might not sell the 20 strike, which is pretty far away that's only 16% move to the down side i'm going to look to move that up to maybe a 21 strike. trade a slightly narrow vertical and one comment on the implied dividends. while i think implied dividends is a way to predict what might happen in the future, one of the things is that the information that's embedded in that option, in my concern is that it's also embedded in the stock price. so i want to make sure investors don't use as a reason to go out and short wells fargo.

when the dividend cut actually takes place, the stock doesn't actually drop very much. >> those are good points, mike >> yeah. i think that's definitely true and i was alluding to that when i was talking about high dividend yields. by themselves they suggest that a lot of bad news has been priced in already. we are making a return trip to two of our open trades, lyft revving higher while ford stalls we'll tell you how they are playing right now. it's a thirteen-hour flight, that's not a weekend trip. fifteen 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. ♪

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this crisis is going to be over know exactly when and we don't know exactly when the stock market will reach its bottom, we've got to be prepared for this to last a long time. if you assume that you're out of work for nine months but you end up only being out of work for three, well that's great. but if you think you're going to be furloughed for three months and it lasts for nine, well that'll be emotionally devastating. so, we've got to prepare ourselves. tangibly and practically, as well as psychologically and emotionally. oh yeah, you going to place it? not until i'm sure. why don't you call td ameritrade for a strategy gut check? what's that? you run it by an expert, you talk about the risk and potential profit and loss. could've used that before i hired my interior decorator. voila! maybe a couple throw pillows would help. get a strategy gut check from our trade desk. ♪

welcome back to "options action." time to take a look back at some of our open trades a lot of car talk on the show recently let's begin with lyft. 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 constructive for the stock to continue moving higher i'm going out to the july 10th weekly options expiration. and i'm selling the 36.5/31.5 put vertical i'm collecting about $3.26 for that 36.5 put. >> well, low and behold, lyft rallying in the last week before falling into the red here. tony, what do you plan to do with this trade now? >> yeah.

so the trade was working beautifully until apple announced today that they were going to shut down some stores, and the stock fell almost 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 till next week, see if we break below 35 if we do i would cut my losses and get out. but i am still looking for a potential bounce off >> from ridesharing to auto stocks, 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 one by two call spread

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

sure but of course june expiration just came and went so i'm assuming you're probably referring to july or august. but if you're looking to make a bullish bet, i'd rather do it with calls >> tony, your thoughts on beyond >> i actually think beyond meat is one of those stocks that's quite underestimated, if you will similar to zoom, i think it's more of an environmental play. it's a more than ethical play in terms of how consumers are going to consume food products, and especially as we see all these documentaries of livestock and how livestock production works, i actually quite like the stock. 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, specifically on a stock like jet blue who said they will be increasing domestic roots

mike, what do you say? >> covered calls is the same thing as selling puts. would i be selling puts in the airlines right now no way >> time now for "the final call." carter, what do you say? >> kraft heinz, i'm a big buyer. >> mike co >> selling puts in kraft heinz i think makes a lot of sense here. >> tony? >> i think walmart is the best of breed for the retailers i'm going to go along by selling cash for puts. >> we'll see you next sunday special edition of "fast money" is up next 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,

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