and happily, we've been able to step in and give a large portion of what they lost back to them. bernie madoff's violent crime was not the last chapter. 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 worth thinks tesla stoc 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 and there's a ton of other corporate actions that can impact any other company's stock.

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. it's time to risk less and make more "options action" starts right now. yeah, risk less, make more sounds pretty good let's get right to it. 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. carter worth, take it away >> you bet obviously it's a phenom. it's epic. but there are also sequencing patterns in any ascent or descent.

that's what we're going to try to look at right now 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 you can see that there 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 for 2011, 2012

then essentially tesla goes on a tear, essentially. 25 to 250 a share, 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, let's say, 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 almost a three bagger, 239. 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 exactly expecting a really dormant period. the implied volatility on tesla in the options market is about 80%. so if we think about it, that means the options market is implying the stock could be higher or lower by 20% in a month. a little over 30% in a quarter and, you know, somewhere in the neighborhood, over 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. one of the this hinges -- one of the things this does, 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 re relatively small. selling that call spread would collect about $13.50 in premium. the most that spread could be worth would be $50 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 while interesting, haven't really proven to have a big impact on the share price 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 what's 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 the 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 actually see the exact same pattern. during june, tesla traded sideways 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, it is the -- from my perspective, 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. that's about $200 out of the money, because 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 2150 credit spread, which is about 50 points wide that will collect 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. really 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. in fact, 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 etf up nearly 20% this year big housing just reported results this week. if you miss out, fear not tony has a way to build a winning trade out of it. take it away, tony >> 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, if we look at 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. if we look at the fundamentals the fundamental backdrop is extremely strong housing starts that just reported this week, month over month looking at an 18% increase over june. year over year 9%. 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% so we've seen a 9% -- a 9x 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 couple that with mortgage rates prior to covid, we were

looking at 3.7 and now we're looking at 3.1%. this translates into a seismic shift in terms of how consumers spend specifically in this 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 $5.90 for this $15 wide 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 depoet at around $271, which from my perspective is a reasonable valuation to own home depot at if home depot falls apart, i'm

only risking 3% of the underlying stock price to take this bet. >> seems like a lot of upside, 39%. 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. i think that's a plus. 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 here obviously the math works nicely, collecting 40% of the distance of the strikes or there abouts 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 '05. we just cleared a big peak and home depot is a big part of that stay long, be long for everything "options action" check out our website optionsaction.cnbc.com while you're there, sign up for the newsletter in the meantime, 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. if it's nice we'll answer it on air when "options action" returns.

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♪ ♪ welcome back to "options action". in case you have not heard tesla is headed for splitsville. that's right, come next monday, a five for one stock split kicks under way. 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 tesla is going to be splitting

five for one at the end of the month, august 31st what that means is 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? actually, 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 so what does this mean, though, if you owned options something similar happens there. if you owned one 2,000 strike call 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. one other thing to think of, 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. so you will see more contracts in your contact or you will see more shares in your account, but other than that, you really don't need to do very much 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. love that. tony, your thoughts? >> yeah, so in theory a stock split is a nonevent here but what we have seen over the past 30 years or so, when a stock announces a stock split, there's usually about a 3 to 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. so substantially more expensive now to buy 100 shares of the stock. 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. but, you know, as mike said -- 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 call represents 100 shares. so those are some of the changes for retail but the biggest think i think on this story is apple. 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, let's go around the world. 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 traded warren buffett never split his stock for that very reason since new york stock exchange began, average price of a stock is about $40, once it runs to about 120 a triple, they split it, three for one, two for one the average price wanting to be around $50, that is why stocks are split. >> really good lesson there on stock splits and how they pertain to options up next, one chip stock ripping higher this week on its earnings we're going to tell you why that may be great news for one of your traders tonight plus, we're taking your tweets send us your questions at options action on the twitter. we're going to answer some of them on the air. we are back right after this i have an idea for a trade. oh yeah, you going to place it? not until i'm sure.

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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 brian, back over to you. >> another loss for the president there. thank you very much. we'll be right back on "options action" right after this t there. 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. ♪

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welcome back to "options action". time now to take a look back at a couple of our open trades last week, tony expressed some cautious 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 so 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 and paying about $10.60 on those september 415 puts net-net here i'm collecting about a $12 credit >> well, that delivered. so, tony, what are you doing now? >> nvidia did report stronger than expected earnings

especially from the cloud computing space, but the stock did open up substantially higher on monday than when we reported this on friday so if you didn't collect the $12, 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 think there is a way we can play this. i was taking a look out to september and specifically i was looking at the 235-260-285 call spread risk reversal so what's going on here?

we're buying the september 260 calls, selling the 285 calls and then selling the 235 puts. >> so baba did jump on the back of strong results. mike, how are you playing this one now? >> putting this trade on we collected about $1 i would actually close the 235 puts and i would 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 and i will still own the 270-280 stock spread so if we continue as we've been seeing, i still have an opportunity to profit even further. >> final call. 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. >> good stuff, guys. really educational and informative with some profitable trades that does it for us on "options action". we'll back next friday at 5:30 eastern. - [man] the following program is a paid presentation for the oxypure air purifier brought to you by nuwave, llc. asthma and allergies are at an all time high, and it seems to get worse every year. it's not your imagination. allergy season continues to get longer and more intense as temperatures rise, and airborne viruses are becoming an epidemic problem worldwide, with the changing environment, and unseen dangerous air pollution surrounding all of us. you need clean air more than ever. if you suffer from mold, dust, pet dander, smoke, odors, or sleeping problems. discover the nuwave oxypure air purifier.