that he ought to burn in hell for what he's put people through. narrator: conn's been transferred to a federal prison in west virginia. he is scheduled for release in november 2040. ♪ happy friday we've got an exciting show for you today. here's what's coming up. >> like in the musical "oklahoma" home construction stocks should be singing everything's going my way. >> exactly how clever >> that doesn't mean the curtain won't fall at any moment carter worth takes the stage to explain. then gm got quite a shock after teaming up with nikola >> i really like this particular stock. >> but headlines aside, tony zhang thinks this old school auto maker has a better grasp of the future than many give it credit for

he'll show you how to plug in with the right circuit breaker. and in this market, elmer fudd might have said, be very quiet, i'm hunting yield but in either trading or toons there's always a pesky wabbit to beware of. "options action starts right now" >> let's get right to it the home construction trad on fire this year with both the xhb and itb up double digits the rally comes as mortgage rates hit new lows and home bound americans tackle home improvement projects but our chart master carter worth tells us this could be on shaky ground carter, what are the charts telling you? >> well, the question is at some point is a lot or everything priced in. it's been a great area obviously we know the story that's been in the news about

refis and home improvement and we know the earnings have been great. but at some point sometimes an area of the market is full, is rich i think that's the premise here. let's look at a few charts the first is a two-panel all you're looking at is the home construction etf on the top. the bottom is relative performance to all consumer stocks, of course, which home builders are the s&p 500 consumer sector. what you see, of course, is that the home builders broke out to new highs. on a relative basis, they've yet to make it back to the january/february pre-pandemic high compared to the overall sector take a look at the second chart. this is the same two-panel chart, but just taken back a bit further. obviously what you see here is just how poor, frankly, home builders are on a relative basis

bottom panel, to consumer discretion meaning, if one has a choice in a portfolio to buy nike, for instance, or amazon, home builders, as good as they've been, they have underperformed their sector from quite some time now the itb. here's a one-year chart. what we do know is we have a clear break in trend this is what's also going on whether it's in the qqq or the sox or a lot of themes in the market home builders up 23-24% year to date versus the s&p up only 3. yet they're starting to struggle most have reported earnings, we have one more lanar coming out next week, probably after the close. the betting here is that it's time to take profits if you're long or to put on a short if you're interested in acting on this judgment with new money. >> mike, given those charts, what's the trade >> i mean, i think you have to

think about the fundamentals here a little bit. a good friend of mine was telling yesterday, you know, we were taught early don't fight the fed. and i'm not suggesting that we do that. when we look at the home building sector overall, one of the things we can probably take a look at is tha valuations are getting pretty close to full here right now it's trading about 18 times earnings that's maybe only a 10% discount to the peak valuation multiples that we've seen. when we look at it that way, you could say this is a time to take profits. we're not going to go outright short here so we should look also at what's going on in the options market implied volatility has fallen, but it has not fallen quite as much as realized volatility has. when you're selling options premium, you're trying to collect the volatility risk premium. that is what we're trying to capture here i was taking a look at selling the october 48 xhb puts. you could collect about 70 cents for those. and then buying the january 50

puts for about $3.20 net-net, that's a debit of $2.50. one of the questions we often get when you're buying a longer dated option and selling a shorter dated one at a different strike against it, how do we figure out which strike to sell? one thing you can take a look at is, you can say, all right if i'm buying the january option and i'm expecting to hold this for one month, what is that option likely to look like at the expiration of the shorter dated option about one month away so you can look, for example, at the december 50s, and then you can say, which option woul offset the decay i would be likely to experience as it turns out, the 48 strike puts and xhb in october would pretty much do a neat offset there. so you'll see peak profits at october if it drifts down, but probably won't lose anything if it just drifts sideways from here >> before we get to tony on the trade, i want to underscore the fact that the trade is an xhb and carter's charting was an itb.

carter going back to you, do those charts look as dire as itb? >> sure. the distinction here is that itb is dominated some 35% in two home builders. xhb is closer to an equal weight index. that is the difference but the charts are almost the same. >> tony, what do you think of this trade >> as mike said, i think we should look at the fundamentals here i laid out a trade a few weeks ago on home depot. the thesis behind it was how strong the housing market has been in terms of the numbers that we've seen. inventories are at decade lows you couple that with current mortgage rates and that's a strong combination for housing stocks while i agree the momentum has certainly slowed down sb started to shift to the downside, if we look at housing it's providing quite a bit of defense. xhb has only been down about 4% this week, actually up significantly today while the markets were flat. i'm not as bearish here on this particular sector, but i do like mike's trade here because even

if the sector drifts sideways, as mike says, he can actually still be -- remain neutral on the sidelines with this particular trade i like the strike prices too the fact that he bought the $50 strike price, that means he's risking less capital and by selling that october 48 put, le's actually collecting a fair amount of premium, so if this goes on sideways, he's not necessarily taking a loss. >> mike, last word >> those january options capture a lot of things that the october options will not, which is not just the last upcoming earnings we're seeing right now, but of course the ones they're going to be reporting in january and the election, which the options market has priced in a lot of volatility around that owning those january options but finding a way to finance them probably makes so sense. let's switch gears to the autos. this week was a huge one for gm motors and up start nikola

gm announced a $2 billion investment in nikola on monday both stocks floored it before being brought to a halt by hindenburg which claimed that gm was essentially dubbed, alleged fraud by nikola. the company has dismissed the allegations but neither nikola nor gm have shaken it off just yet. tony is opening the hood on gm tony, what's your take, what's your trade >> so as you said, there was a lot of news that drove volatility in both gm and nikola this week. i want to look past the noise here and take a look at gm's focus on their investment for the future and take advantage of this elevated volatility and perhaps harvest some of it using options. we start by looking at the gm chart here the stock itself has reall underperformed the market for multiple years, but it recently broke out above that $30 resistance level on the news of this deal. it recently retreated back on the short seller piece back to

that $30 support level that's actually the attractive that i see for a long opportunity here, the fact that $30 has held whether or not nikola is a sham or not, i'm not here to really -- i don't really have any insights into that but i don't really see that as a negative for gm's long-term business it speaks more to gm's investment into alternative power trains for their vehicles in the long term if we look at gm's portfolio for the next four years, their portfolio for electric vehicles is roughly double what their competitors are about to put out here for the next four years they're really focused on those high margin cars for their business this is one that i really quite like so my view here for gm is for the long term. if nikola turns out to be a success, i think gm is a safer way to play for that particular upside i like the stock in the long run

and i want to utilize options here to take advantage of that elevated implied volatility. the trade structure i'm using here is going out to october i'm selling the $30 put option that's collecting today about $1.55. that actually represents about 5% of the underlying stock price. if gm is below $30 in october, i'm able to purchase these stocks for an effective price of about $28. that's about a 10% discount from the price when the news of the deal was announced. >> mike khouw? >> i think tony's right about one thing. that is that obviously all of the news going on around nikola may have some impact on general motors but it's not the key story for general motors' success. one of the things i also like is that put selling is really a good investment strategy when you take a look at, you know, things that you can do

recurrently to generate some yield to buy stocks that you want to purchase at lower prices so those things all make sense to me. obviously general motors has been trading at a discount for quite a while. one of the things that they're facing is that they have a lot of debt, but they have sufficient cash to cover their needs. the put he's selling expires to the next time they announce earnings, which would obviously be the big and major catalyst that could potentially move the stock sharply. so that makes a lot of sense as well i like the strategy. if i was forced to try to say would you rather nikola or general motors or tesla, general motors is probably the stock i would choose so for those reasons i like what he's doing here. >> i'm excited to get carter's take if you take a look at the ten-year chart, carter, gm stocks have really gone nowhere. gm shares are actually lower than they were ten years ago >> that is the irony

we're coming up on the ten-year anniversary of obviously the equity went to zero. bailed out by the government it was november 17th, 2010, so in a month and a half it will be there. the ipo price was 33 on the news of the nikola partnership, the stock popped to 33 it's been a decade and think about with inflation i think it's a very defensive way to be bullish. if you're really bullish, you buy calls. you put on a risk reversal selling the puts, i get it it's sort of a muted way to get bullish. here's the thing, this is a long-term dud. >> oh, that's it so direct, carter. a long-term dud. okay we're going to leave it there. for more "options action," check out our website optionsaction @cnbc.com. here's what's coming up next >> coming up when hunting for yield, make sure you don't accidentally shoot yourself in the foot professor mike khouw is bringing out the hounds to help you find a better target. plus, calling all options

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♪ ♪ ♪ ♪ welcome back to "options action." in a topsy turvy world where a sell off can strike at any moment, and sure thing stocks are a sure thing, can we at least get some yield for crying out loud unfortunately, the answer is largely no but if you find yourself yearning for that sweet, sweet yield, mike khouw has a trade that could pay dividend. he has called into this with his dial into action mike, take it away. >> this is a tough situation,

obviously, for yield starved investors. they tend to scream for stocks that have high dividends if you've done anything like that, two names probably popped up on your list, at&t and verizon. at&t right enjoy has a dividend yield north of 7% and verizon's yield is north of 4% all of that while a ten-year yie treasury is going to yield you about .66% you might be thinking this is a good opportunity to jump right in when you see high dividends like this and we've talked about this in the energy space, as well as we've talked about it in this one, when you see high dividends, you should try to be a little bit skeptical for one thing, are those dividends supported by the company's cash flow? and the other thing you should be keeping an eye on, is there any land mine that might be lying ahead? at&t specifically had targeted reducing their net debt this year down to about 2.5 times

ebitda obviously with everything that has happened, they haven't been successful in doing that verizon, meanwhile, seems to have basically hit fewer snafus in the midst of all this they have slightly lower debt to ebitda ratios and it does seem like their plan is realistic going forward. another thing that i would point out, they just got their results from the most recent spectrum option, seemed to have picked up a lot. investors could be looking to 5g that's obviously a potential growth area for both of these companies. if you're looking at using options, options obviously don't pay dividends but the price of dividends is incorporated into them so using an investment strategy similar to the one tony was using on gm, i think tha if you're looking at verizon, you could look at selling the october 60 puts. when i was looking at those earlier today, you could collect about $1.80 for those. that is going to capture that dividend period. you're not going to get the dividend, but the idea is instead you're going to be

collecting it in the form of options premium. if you do have the stock put to you, you're going to get to own it at a slight discount. it was trading just under $60. effectively this is like owning the stock and selling the 60 call which is exactly what i would pro pose you do if you have the stock put to you, you can then look to sell upside calls next to it. the reason i'm selling a put rather than buying calls on it is because the stock has already had quite a run. i think dan nathan was referring to that earlier in the week when looking at these companies i think this is a way you can look to collect some yield this is a relatively stable company here this is one of those investment strategies once you have the stock put to you, look to sell additional premium against it >> tony, what do you think of this trade >> so out of the three telecom companies, at&t, verizon and t-mobile, i definitely like t-mobile the best. but as far as verizon goes, the chart itself is actually fairly constructive you have a breakout above that $59 level. it came back to retest that as support. i think this is a good opportunity to potentially get

long if we look at the stock itself, as mike said, debt and the dividend are well covered by cash flows we really have out of these three verizon is by far the highest margin of the three. arguably probably the most boring out of the three, which for this type of investment i think is a good thing. i like mike's trade because he's selling an in the money put option here. unlike my gm trade, which was slightly out of the money put. he has a higher probably of actually owning the stock and he's collecting about 3% of the stock price to sell this put option he's getting about a 3% discount on the potential stock purchase of verizon i like the stock long term and i like the trade itself. >> carter, what do you think about this run for verizon >> sure. obviously you're going to have muted returns in an area like utilities, which is essentially what it is on a total return basis, this has been a tremendous winner versus the s&p long-term the issue for the stock right now on a long-term tentacle basis is it's just returned to

its 1999 peak. in principle, this consolidation is healthy i think ultimately verizon breaks out to new highs, finally eclipsing its dotcom peak. we have a news alert here that we want to get to on merck. the company's covid vaccine candidate has begun testing in humans taking a look at the shares in the afterhour session, we do see a little bit of a pop, i think -- actually, i see it down about a quarter of a percent, but this is something that we're clearly watching as the markets react. here it is, up .5% to every little bit of vaccine news coming up next, shares of apple turning sour amid the tech selloff this week. we'll tell you what that means for one of our traders plus we're taking your tweets, send us your questions and we'll answer them on air we are back right after this i have an idea for a trade. oh yeah, you going to place it?

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tony was actually talking about that in morgan stanley last week the thing is even though there's good valuation story here, and even though i think the momentum is starting to turn in financials' favor, i think it's going to be a bit of a grind i was taking a look at xlf a 28 call spread, buying the october 6th, selling the october 28th. when i was looking at that earlier today, you could spend about a dollar to do that trade. >> the financials held up well compared to some of the other areas of the market this week. mike, what are you doing with this one >> one thing people could do is that the october calls that were short traded down to almost nothing. and you could consider covering those. i think it would cost about 5 cents to do that so i would cover that. the reason we used calls was because we recognized there was some downside risk i'd stay with the november calls. >> tony said it was too early to

give up on big tech just yet >> i believe this selloff is going to be contained here with the volatility we've seen over the past couple days if we look at apple, we're using apple as a proxy for index if we look at this chart, there's no question about the strength of this particular chart relative to the technology sector relative to the market and arguably one of the stronger fundamental outlooks in the tech sector i'm looking to sell the 105 put vertical collecting act $8.60 for that 115 put paying about $4.45 here. net-net here i'm collecting $4.15. >> the trade is hanging in there by the skin of its teeth tony, what are you doing now >> so admittedly i think i was probably a little -- a week early for this particular trade, but my original thesis that the selloff was going to be fairly

contained, that we weren't going to see further acceleration to the downside, i think, still holds, especially with the qs closing above 270 today. the fact that this trade hasn' hit any of my stop loss targets yet, i think it's time to hold onto this. if apple breaks below 110 next week, i think it's time to cut losses. >> apple is down more than 7% this week, carter. so where do you see it going >> i think in this instance there is more downside risk. it's so popular, it was bid up so much. it did have the split that drew in so many more and incremental people i think the risk is still to the downside up next we got your tweets and the final call 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.

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♪ ♪ welcome back to "options action". time for some tweets what spreads would you use in an iron condor for tesla exspiring the friday of battery day? mike >> the immediate options that expire thereafter are the ones that expire on september 25th. this is a volatile stock so you need to choose your strikes fairly carefully when you are selling iron condors, look to sell strikes that are about 30 delta on the call side and the put side that's going to be around 420 or so based on the closing price for the upside maybe 330, 345 for the downside put. then you just get some outside wing options to cover that. final call, carter

>> itb or xhb, short. >> tony? >> look past the noise of nikola into the future. sell puts on gm to potentially acquire the shares at a significant discount >> all right "mad money" starts right now - [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.