happy friday, everybody. it's time now for "options action." i'm brian sullivan we have a great show lined up for you on this friday here is what's on deck don't let this fry your charge controller. carter worthy thinks tesla stock is about to shift into neutral then everybody's also getting amped up about tesla's stock

split. it's not the first company to do so, nor the last professor khouw has a lesson on how the options market takes those in stride. plus, hold onto your hammers home depot already reported earnings but that's not stopping tony zhang from building a trade right now. "options action" starts right now. it has been an electric year for tesla and its investors. bears have been, well, shocked the stock rallying again today it's up nearly 400% in 2020, pandemic be darned tesla's market cap now more than walmart. but the chart master says it may be time to pump the brakes on this red hot auto maker. >> it's a phenom it's epic.

but there are also sequencing patterns in any ascent or desce descent. the first chart, this is just an all data chart since the ipo back in 2010, it was exactly a decade ago, june, the summer of 2010 no judgments, annotations by me. take a look at the second chart. what i've tried to show here is the sequencing basically after the ipo in 2010 you have a dormant period where the stock between 2011 and 2012 doesn't do anything. then basically it goes on a 10 x move then sideways again and another 10 x move. take a look at the third chart now you can see where i've put those numbers in basically ipo at $17 on the stock split will be down to 3.5 at the end of this month with the split, five for one.

essentially after the ipo a very quiescent period then tesla goes on a tear, a ten bagger then it's dormant again from 2015 to 2019 a lot of volatility but making no net progress. then here in the past year, similar to the one year ten bagger in 2013, we see again a ten bagger, in this case 210 to today's high 2100. the issue is any given time the stock has the prospect of going up, down or sideways, like in good test taking you want to try to eliminate the scenarios you think are unlikely i think meaningfully higher on an intermediate basis is unlikely that leaves us with sideways or down i've written in there dormant with a question mark are we now entering the next phase where it has to catch up with its valuation

two more slides. this is a slide incredibly if one had put $10,000 into tesla at its ipo, a whopping 1.2 million. that's nifty just to put that in comparison, the final slide, look here if one had put 10,000 since tesla's ipo in other marquee names netflix would have returned your 10,000 you'd be at 293. amazon you'd have 280,000. and apple 130. not bad 10,000 to 130, but no tesla. in any event, the thinking here is it's a bit hot, dormancy, sideways >> amazing first off, 10 grand into 1.2 something million. unbelievable your dormant chart made me think about charge time versus run

time maybe the stock will be the same way. mike khouw, what's the trade now on tesla >> it's interesting the technical setup carter is talking about. if you take a look at how options are currently priced, they're not expecting a really dominant period. the implied voluatility on tesla in the options market is about 80%. that means the options market is implying the stock could be higher or lower by 20% in a month. somewhere in the neighborhood of a 12-month period that it could swing 50-60% or so the options market is expecting some pretty big moves after all of this while the technical setup might be suggesting some of this run is over. when options premiums get this expensive, it is a nice opportunity to try to sell some premium. we're talking about pretty

chunky options prices here i was looking at the 2300 call spread for a stock that is over $2,000 as of today's closing prices, a spread that's only $50 wide is still relatively small selling that call spread would collect about 13.50 there are in premium. the idea here is that we're trying to take advantage of the fact that options premiums are elevated we're assuming the stock is going to bump into a little bit of resistance here the fundamentals of tesla haven't really proven to have a big impact on the share place historically it's trading at 250 times earnings people are concerned about the emissions credits they get i don't think those fundamental stories right now are really driving the stock price. but if you are inclined to

basically hit the pause button, that call spread is a way to collect a little bit of premium. >> tony, what's your thought there on tesla, how to make the money in the mike trade? >> i really like this particular trade. first of all, i really like carter's chart setup his chart pattern with the continuation pattern projecting up 10 times on that long time chart. if you apply that pattern to a three month chart, you'll see the exact same pattern it rallied another $700 to the current level we're currently trading at so i really like this as a highlight of how technical analysis is a tool that investors can use when there's no price history on a stock like tesla to know exactly when it's going to pause its current rally. if you look at mike's trade, from my perspective it is the

perfect trade for this type of trade setup from a technical analysis perspective where you're expecting the stock to trade sideways, perhaps a little higher, perhaps a little lower because i feel so strongly about the technical levels here, i would actually get a little bit more aggressive on the strike prices i know why mike chose a 50-point credit spread. it's really difficult to bet against tesla continuing its rise having that type of buffer makes a lot of sense because i feel so strongly about the technical levels i would get a little bit more aggressive i would be looking at the 2100 credit spread. that will correct about $19, 40% of the width it has a significantly better risk/reward ratio of 1.5-1 versus almost 3-1 on mike's credit spread. >> there you go. good in-depth discussion on

tesla. why don't we switch gears now. the housing market is going through the roof existing home sales jumping nearly 25% in july if that sounds like a big number, it is. it's not only a big number it's the biggest monthly gain ever on record it is the latest bullish sign for the builders, the xhb home builder up nearly 20% this year. >> i want to explore this fundamental shift in consumer spending away from travel and entertainment into home improvement and furniture. i specifically want to take a look at the extremely strong housing numbers and how that translates into what i think is a very strong q-2 into what could potentially be even stronger q-3 and second half for

names like home depot. if we look at the chart itself, home depot, it's a very strong bullish chart. what i particularly like about this current trade is the fact that earnings knocked the stock down a little bit towards its 20-day moving average which is a much better entry point for home depot. the fundamental backdrop is extremely strong housing stocks with an 18% increase over june housing one of the only economic bright spots we currently see. if we look at bank of america's recent survey on working from home, prior to covid-19 only 5% of respondents worked from home predominantly. currently that sits at 45% we've seen a 9 x increase in terms of the number of people working from home. that has huge ramifications for home improvement spending, furniture spending

home depot sits in this category if we look at mortgage rates o3% this translates into a seismic s category home depot is a net beneficiary of this. so the trade i'm looking to make here is going out to the october 2nd weekly options i'm selling the 277.5-262.5 put vertical here, collecting about $9 for this credit spread. i'm collecting about 9.25 on that 277.5 i'm collecting almost 39% of the width here if home depot stays where it is and starts to move a little higher, i'll collect 2% of the underlying stock price over the next 45 days if it ends up between the two

strikes i'll end up owning home depot for 271. if home depot falls apart, i'm only risking 3 .% of the underlying stock price to take this bet. >> mike, your take >> first of all, i love home depot as a company obviously we have greater transparency now that they've already report earnings. the trade structure he's talking about makes a lot of sense when you consider that right now options premiums are about 50% higher than where they were at the beginning of the year. of course we would expect that given everything we've seen. but the interesting back story here is that home depot shares actually are not as volatile as the options market is implying that suggests that they're slightly overpriced. that's when you want to do things like sell credit spreads like he's doing

because that catalyst has already come and gone, we're not really expecting something that could move the stock sharply against you in this case. >> carter? >> home builders this year for the first time got above their housing bubble peak in 2005. stay long, be long for everything "options action" check out our website optionsaction.cnbc.com while you're there, sign up for the newsletter here's what's coming up next >> coming up, tesla splits, apple splits, banana splits. mm no matter the name or type, the options market can help you dig in without belly aching. professor khouw explains plus, calling all "options action" fans reach into your pocket, grab

your phone and tweet us your question @optionsaction. r enn s nice we'll answer it o aiwh "options action" returns. 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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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. ♪ in case you have not heard, tesla is headed for splitsville. that's right, come next month a five for one stock split kicks underway smart viewer, you know what that means for the stock. but what exactly happens to your options when a stock splits? it's a great question. professor mike khouw knows >> so obviously $2,000 per share

oftentimes when you see share prices get as high as what we have right now, you see stock splits tell tesla is going to be splitting at the end of the month. what do you have to do nothing. this is going to happen automatically. for every one share that you own when the split takes place, you will then own five shares. is that going to result in a windfall profit? no because when that happens the share price is also going to get divided by five. if you owned one share for $2,000, now you're going to own five shares valued at $400 if you owned one 2,000 strike all option, now you're going to own five $400 strike call options. basically instead of one call on 100 shares, five calls on 100 shares each or 500 shares.

if you owned a 2100 strike call that cost about $170 now, post split you're going to own five of the 420 strike calls valued at about $34 in both cases you would need the stock price to rise 8% before you would see profits. it will be a good thing for investors too because the high share price can sometimes be a barrier to entry both for options and for stock and that's going to come down >> learning something every day. tony, your thoughts? >> in theory a stock split is a nonevent here, but what we have seen over the past 30 years or so is that when a stock announces a stock split, there's usually about a 3-5% move over a one-week period on a stock split. there is some movement here. because of the invent of

fractional shares and etf investing, stocks have really stopped splitting over the last decade or so the average s&p stock has gone from $50 a share to $147 a share. because you have so few stock splits here, the few that we have seen like apple and tesla have seen significant outperformance, 10% for apple, 35% for tesla. as mike laid out, those are the changes for a retail investor. the other thing is if you had 25 shares of apple or 20 shares of tesla, you now will have 100 shares after the stock split which means now you can sell a covered call on those names that you couldn't do before because each of those calls represents 100 shares apple is the number one name in the dow. you're going to see some rebalancing flows here to sell apple for portfolio managers

trying to rebalance to the index. >> it's like virtual learning and i'm the one doing the learning carter worth, top it off. >> the history of stock splits is because the sell side wants to be able to share more shares. commissions are based on number of shares

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that ongoing court fight the appeals court now denying that stay request. what this sets up is arguments for a stay pending appeal on september 1st. briefs will be filed in this next week. so the fight goes on but this is a defeat for the president's side in trying to keep those tax returns private and out of the hands of the manhattan d.a back over to you. >> another loss for the president there. we'll be rhtacig b ♪ ♪ ♪ ♪ ♪ ♪ ♪

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time now to take a look back at a couple of our open trades la tony expressed some caution optimism heading into nvidia's earnings. >> there's no hiding behind the fact that nvidia trades at a very rich valuation, a very large premium to its peers at about 56 times next year's earnings as optimistic as i might be on this particular stock, i do think it's fairly valued and i think there's somewhat limited upside the trade structure i'm looking to use here reflects that. i'm going out to september and i'm selling the 450-415 put spread collecting about $22 selling the september 450s net-net here i'm collecting about a $12 credit

>> tony, what are you doing now? >> nvidia did report stronger than expected earnings but the stock did open substantially higher on monday than when we reported this on friday you probably collected closer to about $10.50 but you could have closed this out today at about $3.60. you're looking at about a 65% gain if you closed it out today. about two weeks back mike laid out a way to play alibaba into earnings. >> this is a stock where the street is overwhelmingly bullish. of course this is one of those reasons why if you happen to own the stock you might be thinking going into earnings am i really well positioned here is there another way i could play it that might have at least a little bit less downside if earnings are disappointing and still give me the upside i was taking a look out to

september and specifically i was looking at the 235-260-285 call spread risk reversal we're buying the september 260 calls, selling the 285 calls and the 235 puts >> so baba did jump on the back of strong results. mike, how are you playing this now? >> putting this trade on we collected about $1 i would close the 235 puts and roll the 260 calls up to 270 net-net i'm going to collect about another $8 which means i'm going to have collected about a total of $9 on this trade andly still own the 270-280 stock spread i still have an opportunity to profit even further. >> carter? >> tesla touched 2100 today. take measures. >> tony? >> i see a seismic shift in

consumer spending habits toward home improvement sell the put credit spread here on home depot. >> mike? >> sell credit spreads in tesla. >> really educational and informative with ♪ ♪ good evening i'm frank holland. don't worry, jim cramer and "mad money" are back on monday. invest your time and it will pay off. i want to start with the pandemic that changed every corner of the american economy that includes investoriinvestink market traders pouring in and they have lots of choices and a lot of information at the tip of their fingers. this is not your