. happy friday, "options action" fans, we've got an exciting show lined up for you all. here's what's on tap. >> you've heard him say it consistently, rates to 0, precious metal to infinity carter werth has more directional data to put his money where his mouth is. >> exactly, how clever. >> and tall is a size at starbucks, short is tony zang's call >> finally, speaking of. >> i think this is an interesting setup. >> as al pacino said in the movie "any given sunday,"

football is a game of inches well, options trading is very similar in terms of measurements, coach ko gives us the hard knox pep talk it's time to risk less and make more "options action" starts right now. let's get right to it, rates getting racked today with a three and five-year yield hitting all time lows as investors turn to the bond market amid stock volatility and uncertainty around the coronavirus pandemic the bond yield breakdown is only just getting started so carter, what are you looking at >> yeah, it's a big old mess i maean every year, or year afte year the consensus is rates will go higher and it doesn't seem to happen we started the year 2% on the ten-year, and here we are. anyway, a couple of charts take a look at the yield chart this is ten-year yields, of course, and what we know is we started about 1.95 and here we

are at 64 basis points yes, the march low is at 31.3 basis points, but here we are and i think we're breaking down and you can see the annotations there. we are moving below the lower side of the wedge, and everything would indicate a lower yields from here the price itself, chart two, this is the bond traded in chicago, right the actual ten-year treasury, and it is of course the reciprocal we are breaking out to the upside of this formation, and there's every indication that there's more to come buy bonds, yields go lower chart three of four, this is the tlt, the etf it's the 20 plus year treasury bond etf, simple tlt, and you can see it's an identical formation, two, the treasury bond in chicago. and here too breaking out to the upside of the well-defined pennant, flag, wedge, whatever you want to call it, higher. i've taken that chart tlt, the

fourth chart and pulled it back a bit, and you can see the pennant formation in the context of the past four or five years so basically a period of equilibrium, a consolidation, and now a reassertion of strength in the direction of the primary trend. >> all right, thanks for that, carter sorry, go ahead. mike, what's the trade here? >> no, no, that's it >> yeah, so this is an interesting situation, right, because as carter was just mentioning there has long been this sense that the bull market and bonds was going to come to an end, that eventually excessive borrowing was going to lead to heyigher rates. all of that presumes there isn't an incremental buyer for fixed income we now know that's not the case. a big portion of treasury issuance, for example, is being picked up and put on the fed's balance sheet. so essentially the longer rates can be controlled for as long as that remains true. besides all of that, of course

we have an economic backdrop that is otherwise going to be deflationa deflationary this is a circumstance where we wouldn't expect to see longer term rates go a whole lot higher anyway so while i probably have been among those that thought that rates were going to go higher if you took -- you know, look back about 24 months, i think this situation is quite different now. i think the way to play this is to make a bullish bet on tlt i was looking out to august, the 166, 172 call spread, you could spend $3.65 to buy those calls and sell the 172s against it net net you're going to spend about a dollar 90. we usually are looking to spend about 25%. this is slightly over 30 this is a circumstance also where there is probably at least some level, right around that $1.75 level. there is going to be at least some level where you can expect to see rates go lower, but i

don't anticipate negative. that essentially is what creates that ceiling on where the tlt could go i think this is a way to play it we've seen a little volatility in tlt since march, but this is a way you can risk relatively little of the cost of tlt to make a bullish bet. >> what do you think of this trade, tony, and what are your thoughts in general on making this directional bet on bonds? this is effectively a call on the markets as well. >> absolutely. it's very hard to fight the fed and very hard to argue against rates going to zero. especially with equity markets being skittish if you look at the vix, the vix has been elevated above 30 for two weeks now telling us there's a lot of fear in the equity markets. i think that is part of why we're seeing this rally here in tlt. what i like about mike's trade is he's risking only 1% of the etf's value to take this bullish bet and my targets here on tlt at the upside are around 168, 170. i think those line up well with

the strikes on his call vertical. >> earlier this week you published on gold, you came to fast money and you walked us through that trade and why you're so bullish on gold. forced to choose, would you rather, gold or bond which one are you more convicted on >> well, if you really get into the crazy stuff, no one can manipulate gold, not even the federal reserve. so i will go with gold if would you rather is the question, gold. >> mike, last word >> yeah, i wouldn't say would you rather because i'm actually long silver. i'm long gold, and i would be short rates. i mean, i think this is a trade that you want to play as many ways as you can. >> meantime, let's check on shares of starbucks. they cooled off this week in a major way as a surge in coronavirus cases in some states quickly turned reopening hopes into reclosing fears this could be the start of a venti sized breakdown in the stocks tony, over to you, what do you see? >> yeah, i think starbucks has a

pretty challenging environment ahead. if we first take a look at the chart here, the stock managed to break out above its $72 level here in april and has just completed a head and shoulders formation, and just today broke down below that $72 neckline and if you couple that with a recent relative strength as is underperforming these consumer discretionary sec totor, those o things do not bode well as it breaks below the $72 level i'm targeting starbucks to go down to about 65 and extended targets to the downside. the company did provide guidance a couple of weeks ago, and there's a couple of things in that guidance that concerns me first of all, 95% of stores are now reopen, so the cost of operating those stores are going to be substantially higher given the current environment that we're in to keep their customers and their employees safe and i think it's going to be met with fairly tepid demand for their products if you think about it we now

have 30 million unemployed, and for those of us lucky enough to be gainfully employed, we're mostly working from home they generate most of their sales from the morning commute, and most of us are not commuting. you couple that with the fact they are also providing guidance that they expect in q4 they're going to start seeing positive eps, i think that's fairly opt misic and i'm concerned that's going to be revised lower in the coming months. the fundamental backdrop and the fact that you have a technical chart that looks fairly weak, i'm looking for starbucks to move substantially lower here. the trade that i'm looking to use is to go out to august, and i'm looking to buy the 72.5, 62.5 put vertical here i'm spending about $4.80 for that 72.5 put collecting about $1.58 for the 70, 62.5 foot, spending about $3.27 risking about 4.5% of the underlying stock price to take this bearish

bet. >> mike, your thoughts on tony's thesis and the trade >> yeah, i'm completely on board with his thesis. let's also bear in mind, we're just thinking about this in a u.s. context, but you know, one of the things that we obviously should be taking a look at too is what's going on internationally, maybe in china. this is another area we're beginning to see things slow down it's not the most material portion of their revenues yet, but that was an area of significant growth so that's obviously troubling. the other thing is that the structure is one that makes sense. why is that? the stock has already been relatively hard hit, implied volatility is higher we want to mitigate some that, and we do still have some downside you wouldn't want to short the stock here today is a good example of the kind of volatility the market is still exhibiting i think the structure is right, i think the trade is right. >> the levels, tony is aiming for, carter, does that line up with your chart work >> sure, i mean, he discussed

the chart and it's exactly right. i mean, this is one of the worst patterns in the market i think that the real problem here, of course we know the equity market peaked on february 19th starbucks peaked last summer in july on the low in march it was down 50%, meaning it's not a safe haven. it's not like, oh, people buy their coffee it's exactly the opposite. and finally the marquee stocks that drive the consumer discretionary sector, the amazons, the home depots, the other big idiosyncratic peers, it's the worst one. >> last word, tony. >> china's a big part of their strategy to grow, but china right now is only accounting for less than 20% of their revenue, and they've had to delay a lot of their store openings that they have planned over the next couple of years as a result of the coronavirus. for all of these reasons, i'm not bullish here on starbucks. >> for everything "options action" check out our website. while you're there, you can sign

up for our newsl letter. here's what's coming up next. >> coming up, your shoes, your pants, your options strategies, the right size fits. the wrong size can cause you to trip and fall. professor ko helps you measure up plus, calling all "options action" fans, reach into your pocket, grab your phone, and tweet us your questio question @optionsaction. if it's nice, we'll answer it on air when "options action" returns. "options action" is sponsored by think or swim by td ameritrade ♪ ♪

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that, it concerns me it concerns me that people do not know the risks they're taking these are sophisticated products that have risks that may not be apparent, and you should be quite cautious in trading with leverage >> welcome back to "options action". that was s.e.c. chairman jay clayton testifying before the house yesterday on the risks inexperienced investors may be unknowingly taking by trading derivatives like options you may be asking yourself why should i trade options and when and how, and luckily professor mike khouw has got some answers. he's here with his call to action take it away. >> one of the things we often talk about on this is that options can be used to risk less or make more, and i think sometimes there's a perception that people don't really understand how it is that you might risk less. there's a couple ways that you can. here's one of them for one thing, you can invest less capital to make a

directiondirectio directional investment if you're trying to be a long a stock or short a stock, you can put less capital at risk if you want to do that. there's another thing you can do, and that is depending on the trade structure, you can improve the probability that the trade will be profitable you can make it so that you have more than a 50/50 chance the one thing that's really important, though, for investors when they start to do this is just make sure that you sized your trade appropriately so i was going to compare three different ways to play an investment thesis in microsoft that compares two different options structures to actually going out and buying the stock microsoft is going to be reporting earnings on july 17th. that's about 21 days from today, and august expiration is about five weeks after that. so what are a couple of different ways someone could play a bullish thesis? one thing you could do obviously is buy 100 shares of microsoft stock. when i was looking at that, it was about $198 a share, you would be putting $19,800 to work to make that bullish thesis investment

the other thing you could do is you could sell a july 195-put for $10. each put represents 100 shares, you would be collecting a thousand dollars now, the risk here, of course, is that the stock declines and you'd be forced to buy it at 195, but net of the premium you're collecting you're actually only risks $18,500 so less than buying the stock what else could you do you could buy an august 195/210-call spread. that would cost about $500 to buy one contract you're risking 500 to make 1,000. it's really interesting if you take a look at these three strategies and go back more than a decade's worth of earnings and assuming you had used trades like these every time you're going to do it it turns out that if you had bought the stocks three weeks prior to earnings every earnings for the last 11 years and sold it five weeks later you would have averaged about 3.7% but you would have had a worst case loss

of 11% in one instance your best profit would have been close to 21. sell the put you would only have lost 4.7% in the worst case, you would have won 84% of the time significantly better than the 68% of the time you would have won if you had done the stock side now, i use the call spread, the returns would be lower still, you would have averaged 1.8% of the current stock price. you would have won 64% of the time, but your worst case loss would have only 2.5% of the current stock price. a bullish bet going into earnings, but the options trades are risking less than the stock does the tradeoff that you're making is you don't have quite as much upside that's basically the flexibility that options offer you can risk less. you can improve your probability of profit. you're just going to squeeze the balloon of risk and reward a little bit, and you're going to sometimes give up some upside in

order to improve your odds and reduce your risk >> tony, your thoughts >> yeah, melissa, i really think of options action as a platform for us to educate and advocate for the responsible use of options, and mike laid out some great examples of how you can utilize options to reduce risk and not add any risk to your portfolio. for those of you that watch this show week after week, you might notice that mike and i, we generally only refer to the risk of every single trade. we never really talk about how much money we can make because we can't control the markets we can't control how much money we can make. we can control how much risk we take, and option ss a fantastic tool that we utilize for our trading to control that risk i just to want create a bit of a counter point to mike's example here these are strategies that mike and i may trade in our accounts, but every investor has a different risk tolerance, and if you look at options it runs a wide spectrum of different risk, reward and probabilities of

profits you can take it's important to understand where you sit or where you prefer to sit on that spectrum mike created a few examples but perhaps other investors want to take on high amounts of risks. the one thing to remember is that when you're trading options, there's always a tradeoff between risk reward and probability of profit. when you have something with a very high risk, reward, it's naturally going to have a very low probability of profit. an extreme example of this is like buying a lottery ticket a lottery ticket has very high risk, reward, but very, very low probability of profit. but there's nothing wrong with going out there and buying a lottery ticket, you want to position your position correctly. whenever you're cruising an options strategy, think about that, both sides of the equation, not just risk reward, not just probability but how well-balanced are they, and if you're on one endof the extreme, make sure you size appropriately for that. >> we're spending so much time on this, carter, obviously because of the rise of the retail trader during this

pandemic we talk about it on cnbc all the time, the activity on robin hood, and on these sorts of platforms you can also get involved with options. do you have any advice for the new people out there >> well, my activity in that world is almost always selling naked calls and puts as strangl strangles. it's the highest risk thing you can do do not take advice from me, but i like it that way >> okay. all right. all good words of advice, guys, coming up next, the financial fallout, why a breakdown in the banks of good news for one of our traders. we're taking your tweets, send us your question questions @optionsaction we'll take some of them on air we'll be back right after this "options action" is sponsored by think or swim by td ameritrade 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.

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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. it's got all my favorite shows turn oright there.boom, i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in.

now this is what i'm talking about. yeah, it'll free up more time for your... uh, true crime shows? british baking competitions. hm. didn't peg you for a crumpet guy. focus on what matters to you with thinkorswim. ♪ welcome back to "options action". just last week tony said walmart might be the best way to play the consumer trade to the upside >> recently broke below that 120 support level, which is a major level for me when i started taking a look at the fundamentals, i actually think the current weakness that we see here is actually an attractive long opportunity here from a risk reward perspective the strategy i'm looking at here is to go out to july, i'm looking at the july 31st, 118 puts by selling that earlier today, i can collect at $2.83 >> walmart hung in very well despite this week's swings tony, what are you doing now

>> yeah, so i sold the put because i want to own the stock, so i'm hanging onto this particular trade i'm hoping that this trade actually guets put to me and i own the stock 115, 17 which is the cost basis mike said the stress test might put the financials under some stress. >> 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 i was looking at xlf's specifically, the 24, 20 put spread, you would spend about $1.15 to buy that put spread i would point out that xlf was below that it's slightly in the money >> well, the xlf fell more than 3% today, mike your trade slipped into the green, so what are you doing? >> yeah, i think the answer here

is to take the august 24 puts that we own and roll them down to the 21s when i was looking at this just close to the close, by doing that trade, you could take in $1.25 in premium, and of course that's going to be a modest profit on the dollar 15 we took. we're still going to be along the 20 put spread. we have taken all the initial capital we put to work off the table. we've also booked a small profit, and we still have a bearish position that can profit further. >> carter what do you see in the charts for financials? >> i mean, it's a disaster, and frankly, the correlation between financials and royal caribbean, royal crib cran aaribbean and a airlines and exon. these are weak areas of the market that had impressive but short lived rebounds and most of the rebounds failed. >> we'll take some of your tweets out there, sometimes the

brainiacs will suggest altering a position by rolling it up or down, can you explain that, please mike you actually just talked about that, what do you mean brainiac >> yeah, that's a great question so what are we talking about when we talk about rolling a position, we're talking about how we adjust a position we already have in place to take advantage of or to account for a recent market move here we had the put spread on an xlf. it moved lower the put we were long is well in the money. we are selling the one we owned and buying one that is now out of the money, the 21 strike put. by doing that, we're able to reduce the risk of the existing position while still maintaining some of the basically bearish direction that we like rolling is adjusting your position >> all right, our next viewer asks, with the uncertainty of states reopening, covid-19 cases rising and the market at its current levels, would an spy 280 august put spread be good protection for my portfolio? tony, why don't you take that. >> yeah, so i took a look at this earlier right at the close. the august 280 puts were trading

at about a 28 delta, which means if you buy these puts, you're getting about a quarter of the edge to the downside so that's my concern i would use a slightly higher put like 295. >> all right, final call time, carter worth, what do you say? >> buy bonds, buy gold >> tony. >> i don't think consumers are going to continue to buy $5 lattes, short starbucks by buying a put vertical. >> mike. >> long tlt, rates are going lower. >> that does it for us next friday the markets are closed we'll be back in two weeks at 5:30 a.m. eastern time in the meantime, a special edition of "fast money" begins right after this break "options action" is sponsored by think or swim by td ameritrade 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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