happy friday, "options action" fans we have an exciting show lined up for you here's what's on tap >> you heard him say it consistently rates to zero, precious metal to infinity carter worth has yet more directal data to put his money where his mouth is >> exactly how clever. >> and tall is a size at starbucks. short is tony zhang's call on the stock. >> there's a lot opotential here >> he'll show you how to order that in options speak. >> finally, speaking of -- >> this is an interesting setup.

>> as al pacino said any given sunday, football is a game of inches options trading is similar we get the hard knocks pep talk. it's time to risk less and make more "options action" starts right now. >> let's get right to it rate getting wrecked today with a three and five-year yield hitting fresh all-time lows as investors turn to the bond market amid uncertainty around recovery from the coronavirus pandemic the bond yield breakdown is only just getting started carter, what are you looking at? >> a big old mess. i mean, every year, year after year, the consensus is that rates will go higher, and it doesn't seem to happen we started the year at 2% on the ten-year, and here we are. anyway, a couple of charts one of four. take a look at the yield chart this is ten-year yields, of course, and what we know is, again, we started at 1.95, and

here we are at 64 basis points the march low is at 31.3 basis points, but here we are, and i think we're breaking down. you can see the annotations there. we're moving below the lower side of the wedge, and everything would indicate lower yields from here the price itself, chart two, this is the bond, trade in chicago. the actual ten-year treasury it's the reciprocal. we're breaking out to the upside of this formation, and there's every indication there's more to come buy bonds, yields go lower chart three of four, this is the tlt, the etf the i-shares 20-plus year treasury bond etf, and you can see it's in identical formation to 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. and then i have taken that

chart, tlt, on the fourth chart and pulled it back a bit you can see the pennant formation, the context of the past four, five years. so basically, a period of equilibrium, a consolidation, and a reassertion of strength. >> thanks for that sorry, go ahead. >> mike, what's the trade here >> that's it >> so this is an interesting situation because as carter was just mentioning, there has long been this sense that the bull market in bonds was going to come to an end, that eventually, excessive borrowing was going to lead ohigher rates of course, all of that presumes there isn't an incremental buyer for fixed income, and of course, 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. essentially, the longer rates can we controlled for as long as that remains true.

besides all that, of course, we have an economic backdrop that is otherwise going to be deflationary this is a circumstance where we wouldn't expect to see longer term rates necessarily 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 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 can sell the 172s against it, net, net, you spend about $1.90. that's a little more than i might otherwise spend on a vertical spread. we're usually looking to spend 25%. this is slightly over 30%, but this is a circumstance also where there's probably at least some level right around the 175 level, carter can probably speak to this, we got up to about 172 in the treasury etf. there is going to be at least some level where you can sort of

expect to see rates go lower, but i don't anticipate negative. that essentially is what creates the ceiling on where the tlt could go i think this is a way to play it we have seen a little volatility in tlt since march, but this is a way to risk relatively little to make a bullish bet. >> what do you think of the trade, tony, and the directional bonds. this is effectively a call on the markets as well? >> yeah, absolutely, because it's very hard to fight the fed and hard to argue against rates going to zero, especially with equity markets being fairly skittish the vix has been elevated above 30 for two weeks now, telling us there's a loft oerfine the equity markets i think that'spert of why we're seeing this rally in tlt what i specifically like about mike's trade is he's risking only 1% of the etf's value to take this bulli isish bet. my targets are 168, 170, and those line up well with the

strikes on his call vart icerti. >> carter, you walked us through why you were so bullish on gold. 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 >> mike, last word >> yeah, i wouldn't say would you rather because i'm actually long silver, long gold, and i would be short rates this is a trade you want to play as many ways as you can. >> meantime, let's check out shares of starbucks. they cooled off as a surge in coronavirus cases in some states turned reopening hopes into recloses fears tony says this could be the size of a venti sized breakdown in the stock. tony, what do you see?

>> 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 back here in april and has just completed a head and shoulders formation and just today broke down below the $72 neckline. if you couple that with the recent relative strength as is underperforming these consumer discretionary sector, those two things do not bode well, especially as itbreaks below the $72 level here so i'm targeting starbucks to go down to about $65 and extended targets to $57 to the downside now, the company did provide guidance here a couple weeks ago. there's a couple things in that guidance that keconcerns me. first, 95% of stores are now reopen the cost of operating those stores are going to be substantially higher given the current environment we're in to keep their customers and employees safe i think it's going to met with fairly tepid demand for their products because if you think about it, we now have 30 million

unemployed for those of us who are lucky 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 that they're also providing guidance that they expect in q4 they're going to start seeing positive eps, i think that's fairly optimistic and i'm concerned that's going to be revised lower in the coming month. for those reasons, the fundamental backdrop and the fact you have a technical chart that looks fairly weak, i'm looking for starbucks to move substantially lower here the trade i'm looking to use is to go out to august, and i'm looking to buy the 72 1/2, 62 1/2 put vertical. spending about $4.8, collecting about $1.58 for the 62.5 put risking about 4.5% of the underlying stock price to take this bearish bet that starbucks could hit roughly 65 or 57 to

the downside by august >> mike, your thoughts on tony's thesis and the trade >> yeah, i'm completely onboard with his thesis. let's also bear in mind, you know, we're just thinking about this in a u.s. context, but one of the things we obviously should take 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 not the most material portion of their revenues just yet, but that was an area of significant growth that's obviously troubling the other thing is the structure is one that makes sense. why is that? the stock has already been relatively hard hit. implied volatility is higher so we want to mitigate some of that and we still have some downside. using a put spread makes sense for a lot of these reasons today was a good example of the kind of volatility the market is still exhibiting i think the structure is right, the trade is right >> the levels, to s tony is aimg

for, does it line up with your chart work >> sure. it's exactly right this is one of the worst patterns in the market i think the real problem here, we know the equity market peaked on february 19th starbucks peaked last summer in july and 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 exactly the opposite and finally, of the marquee stocks that drive the consumer discretionary sector, starbucks relative performance to nike, to mcdonald's, amazon, home depot, other big idiosyncratic peers, it's the worst single one. >> last word, tony >> mike brings up a good point china is a big part of their strategy to grow, but china right now is accounting for less than 25% of their revenue and they had to delay a lot of store openings they have planned over the next couple years as a result of the coronavirus. for all of these reasons, i'm not bullish on starbucks >> for everything "options action," check out our website while you're there, you can sign

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in our markets, and when i see 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 unknowingly be taken like trading derivatives like options. you may be asking why should i trade options and when and how professor mike khouw has answers. mike, take it away >> yeah, so one of the things that we often talk about on this is that options can be used to either 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

directional investment so if you're trying to be 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, that is depending on the trade structure, you can improve the probability that the trade will be profitable you can make it so 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 size your trade appropriately so i was going to compare three different ways to play an investment thesis in microsoft that compares to different options structures to actually going out and buying the stock microsoft is going to be reporting earnings on july 17th. so that's about 21 days from today. and august expiration is about five weeks after that. so what are a couple different ways someone could play a bullish thesis one thing you could do obviously is buy 100 shares of microsoft stock. 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, because each put represents 100 shares, you would be collecting $1,000 the risk here is of course the stock declined and you're forced to buy it at $195, but you're only risking $18,500 so less than buying the stock. what else could you do you could also buy an august 195/210 call spread. that could wast 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 assume you had used trades like these every time you were going to do it it turns out if you bought the stock 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 almost 11% in one instance, your best profit would have been close to 21 selling the put, you actually would only have lost 4.7% in the worst case you would have averaged 3.3% returns, and 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 if you use the call spread, the returns would be lower still you would have averaged about 1.8% of the current stock price in profits you would have won 64% of the time, but your worst case loss would have only been 2.5% of the current stock price. so all of these trades, you know, they're all making the same directional investment bet on microsoft, a bullish bet going into earnings, but the options trades are riskingless than the stock does. the tradeoff you're making is you don't have quite as much upside, but that's basically the flexibility that options offer you can risk less, improve your profitability profit, you're going to squeeze the balloon of risk and reward a little bit and

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 edkate and advocate for responsible options. mike laid out great examples of how you can reduce risk and not add risk to your portfolio for those of you who watch the show week after week, you might notice mike and i 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 options is a fantastic tool that we utilize for our trading to control that risk and i just want to create a bit of a counterpoint to mike's example here, because these are strategies that mike and i might 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 rewards and probabilities of profits you can

take, so it's important to understand where you sit or prefer to sit on that spectrum, so mike created a few examples, but perhaps other investors want to take on high amounts of risk. maybe you like buying those really far out on the money calls and puts the one thing to remember is when you're trading options, there's always a tradeoff between risk/reward and probability of profit. when you have a high risk for reward, it's going to have a low probability of profit. an extreme example of this is like buying a lottery ticket it's a very high risk/reward, but very low probability of profit, but there's nothing wrong with going out and buy aglottery ticket you just want to position your size position correctly, think about both sides of the ekwashz, not just risk/reward, not just probability, but how well balanced are they. if you're on one side, size appropriately for that >> we're spending so much time

because of the rise of the trader during the pandemic, we talk about the activity on robinhood and these sorts of platforms you can also get involved with options. do you have any advice for the new people out there >> well, at my activity in that world is almost always selling naked calls and puts as strangles. it's the highest risk thing you can do, so do not take advice from me, but i like it that way. >> all right all good words of advice, guys >> coming up next, the financial fallout. why a breakdown in the banks is good news for one of our traders. plus, we're taking your tweets we'll take some of them on air we'll be back right after this 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.

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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." time to take a look back at some of our open trades tony said walmart might be the best way to trade the consumer trade to the upside. >> recently broke below the 120 support level, 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. the strategy 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. >> walmart hung in very well despite this week's swing, so tony, what are you doing now

>> yeah, so i sold the put because i want to own the stock. i'm hanging on to this particular trade i'm hoping that this trade actually gets put to me and i own the stock walmart at around $115.17 which is the cost basis on the stock ownership >> also last week, mike said the fed stress test might put the financials under some stress >> we're seeing that in many cases, for the banks in particular, the high dividends they're paying might actually be a little higher than what we're going teend up getting if there are some form of dividend cuts i was looking at xlf specifically, the 24-20 put spread you would spend about $1.15 to get the put spread xlf was below the 24 strike, so 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? >> i think the answer is to take the august 24 puts 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 $1.15 we took. but we're still going to be long the put spread we take the initial capital we have put to work off the table, booked a small profit, and have a bearish position that can profit further if xlf sees further weakness >> 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 caribbean and american airlines, between that and exxon, it's all the same weak areas of the market that had impressive but short-lived rebounds, and most of the rebounds have failed >> all right let's keep the ball rolling here take some of your tweets first viewer asks, sometimes the

brainiacs will suggest altering a position by rolling it off, up, or down. can you explain that mike, you 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 have the put spread on an xlf it moved lower the put we were long is now well in the money so we're 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 the august put spread be good protection for my portfolio. tony, why don't you take that? >> i took a look at this right

at the close, the august 280 puts were trading at about a 28 delta, which means you're getting about a quarter of the hedge to the downside. that's my concern. i would use a slightly higher put like 295 >> all right final call time. carter, 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 meanwhile, special edition of fast money begins right after this break 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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