her. i just wish we could have talked before all this happened. she could have come to me. but that wasn't god's plan, was it? but that wasn't god's plan, was hello, and welcome to the first "options action" of 2021 while 2020 could be called a year of extremes, this new years only pushing the envelope even further. and are four traders this is when options shine even brighter with me tonight is carter worth, mike khouw, and tony zhang it's not just the major indices that are continuing to run headlong into january. commodities are running right along with them. but carter -- carter, what are you looking at >> that's right. this has been an extraordinary period for all things macro,

whether it's the dollar or the big move-in rates, equities in zero we thought we'd zero in on the move in the dollar and the prospective move on the commodities. this is just the u.s. dollar chart. it's in a freefall just to put this in context, not shown here, there are only nine instances in history going back to the 1970s where the u.s. dollar index has not had a counter trend move back toward its 150-day moving average this long basically we're up to nine months it's only happened nine other times. that's a probability of occurrence of 0.08%. now take a look at the next chart. we are now down in the u.s. dollar right to those lows of late 2017, 2018. you can see i annotated the chart there with a circle. at this point based on how rare it is to go this far without some sort of counter trend move,

that's what we're thinking so third chart what we're thinking at a minimum is that the down trend line in effect since the peak that we throw back, we kick back to that down trend line. now, that would be a 3 to 4% move in the dollar up. and so the thinking is that commodities, which have been on a tear, of course, will suffer a bit. next chart this is the continuous commodity futures price index, the old crb. and it has everything in it. but we know copper's up 90% from its march low. corn is up almost 70%. you can see that it's virtually a straight line. but it's the reciprocal of the dollar so the next chart, take a look, i've just done the exact opposite of the dollar i've drawn the trend line off of the march low, in the case of the dollar the march high. and at a minimum i think we check back to trend. now, keep that chart right there

in your mind's eye and look at the final chart. john deere it's identical in fact, it literally is identical. and so john deere having tripled was 100 in march, is basically 300 now. we think that it checks back and so just one or two statistics to end, it's trading 40% above its 150 moving day average, the highest ever recorded going back to the 1970s. and then of the 21 analysts that cover it, their price target is 283. that's lower than where the stock closed we're sellers of commodities gave the move and john deere >> so, mike, what's the trade on deere, then? >> yeah. so, basically it's been a perfect setup for deere. as carter was pointing out, we have higher commodity prices

that's obviously good for the agricultural sector, and obviously deere more than some of the other industrial makers like cat and so on they get most of their business from on. the other thing you have supporting this is we have very low rates. these type of goods often financed this is an attractive time for farmers to invest in equipment so, those things are certainly positive as well one other thing i would say is that while oil has recovered very, very sharply, we're far from the all-time highs there. and the reason these commodities are doing so well, it isn't simply just the inverse of the dollar we also just fundamentally have a good setup the anticipated exports per week, for example, are well above the five-year average. the thing is, though, if we take a look at the price to earnings ratio of deere or if we look at the price value of ebitda, it's approaching basically the all-time highs that you typically get in these stocks.

and these stocks tend to be cyclical does this mean something is wrong with the company it doesn't mean that but any further gains are going to be a lot harder to come by. we do see slightly elevated options prices what i was taking a look at is the diagonal put spread. profits will be various degrees of profits and specifically the trade i was looking at was the march 290, february 280 diagonal put spread so i'd be buying the march 290 put. those were trading for about $15 when i was looking at this earlier today. net, net you'd be laying out about $7.25. the idea is the shorter dated option will decay more rapidly than the longer dated one that is also closer to the money. also notice that because it's a diagonal and the amount we're spending is a distance less

between the strikes, this trade will be profitable no matter how low deere goes what i'm expecting is that the rally is not going to continue >> tony, what do you think of the structure of this trade? >> yeah. i particularly like the structure of the trade because, as mike said, the business is still fairly strong here you have john deere generated almost $7 billion in free cash flow last year, pays a 3% dividend yield and it weathered covid pretty well from an earnings and revenue perspective. but carter is right on the charts by any stretch if you look at this, it's overextended, it's overbought it has classic signs of exhaustion here. if you look at the weekly rsi, it's above 80 now, which is a level that we haven't seen since january of 2018. so for all those reasons i like the fact that -- i like the business, but i do expect that there's a bit of a pullback here and mike's trade structure is more of a neutral play rather

than a bearish play. and i like that because especially if you look at corn and soybean, i don't particularly think that these agricultural commodities are going to pull back here. i think there's some strength that they can continue moving higher here. i like this more neutral play risking only about 2.5% of the stocks price >> carter, i'm curious about the dollar there are so many trades doing well in today's market are predicated on a weaker dollar. how much of a bounce would you anticipate in the dollar index >> well, hard to know. but it's the principles of the behavior of money. think about things that are in great big uptrends they have givebacks, think of bitcoin, things that are in down trends have throwbacks counter trend moves counter to the primary trend are unnatural and a normal part of how money behaves, if you will and so whether it's a 2% pop in the currency remember, currencies don't move

very much. 2%'s a very large move but whether it's 3, the thinking is that it's likely to do something along those lines rather than just continue to sink and, again, to think that it's only happened nine other times going back to 1970, that's extreme. >> another good encapsulation of everything we've just been discussing, airlines, tony zhang notes that glide past can all be different. there's one reason to have heart. tony, what are you looking at? >> well, i love luv southwest airlines, which i think is actually going to be the airline that is going to weather the covid storm out of the major airlines they broke out above a $44 resistance level on the pfizer and vaccine news it's been able to hold that level and it's been outperforming s&ps since august. with earnings coming up in about two weeks, that could be the

catalyst it needs to break out above this base and continue moving higher here if you look at the business itself, what's interesting about southwest compared to the big four is the fact that during covid, southwest which traditionally has been number four in terms of seat miles is now number two that's a big move considering the fact that they are solely focused on domestic leisure travel, which is the only aspect of airline travel which has seen any type of gains since the part of the pandemic. and if we look at the balance sheet for southwest airlines, it's fairly different from any of the other big three it has a negative debt position, which does limit some satisfy its upside potential here. but for me i think investing in this fairly uncertain times for airlines, i think i'd prefer safety over riskier assets like american airlines or united. and if we look at the fact that during covid, southwest airlines is the only airline expanding their network, versus all the

other airlines are trying to pull back. for those reasons i think southwest is going to emerge out of all of this as a stronger airline. if you look at the trade structure here, southwest currently has a relatively low implied volatility i want to take advantage of the fact that there's earnings coming up in two weeks, that's a potential catalyst event for it to move up in march i'm buying the 45, 55 call vertical, spending $4.40, which is a call option that's actually $2 in the money and i'm selling the march $55 calls against it for about 95 cents net net here i'm paying about $3.45. it is expensive, but i'm purposely choosing that in the money call options to reduce the time decay that i'm paying for this >> tony, i have a quick question before we get the traders' take on the trade that is why did you pick earnings on the catalyst when

all the reasons why you like southwest are very long-term arguments for the stock, for the bullish outlook on the stock >> well, i've actually been a put seller of southwest airlines because of the fact that i like the stock. but because of the earnings announcement, i think that that is the catalyst that it needs to break out above the current range that it's currently trading in but i do still have a long-term outlook for the stock. i would look to roll that out higher if southwest airlines does break out higher. and, let's say earnings comes out perfairly poor, i'm using a options strategy rather than buying the stock for a long-term investment >> mike, what do you think of this trade in particular >> i like southwest relative to the other airlines one of the other things that i would think about is pent up demand i think business travel might potentially be slower to recover than leisure travel. that would be bullish i think for southwest airlines, which really caters to individual

travelers. that's obviously a positive. as tony pointed out, they have a very strong balance sheet. net cash on the balance sheet. as of their last reported quarter i think they have $14 billion and change, which is greatly in excess of the cash burn that they are experiencing this year. so very comfortable position there. the other thing i like about his trade is that it's true implied volatility in southwest has fallen considerably since the peak we saw in march, it's still about double where it was a year ago. we're looking at maybe 41, 42% implied volatility verse 21 or so in december of 2019 and that's the reason why using this in the money call spread makes a lot of sense he's basically trying to minimize the amount of extrinsic options premium. that's the amount of decay you're going to have on this i think the trade structure also makes sense. the other thing is when you're using verticals like this one, you want to keep it relatively

short dated, particularly if you have a catalyst like that so that if it does run up to that short strike, you're going to get most of the difference between the strikes in terms of value. >> carter, what do you think of this airline >> sure. remember, this is the quality name it's the largest in terms of market cap it has the best balance sheet. also what we know is that it has done the best in terms of working off of its march low so to think that luv was high, hit a low of 25, and now it is just at its november sort of moderna, pfizer news day spike it's the best of the bunch, and i think tony's got it right. it's going to work higher. >> still to come, we still have open trades to adjust in this new year mike khouw is going to add some cents to the dollar in the figures that are almost beyond comprehension. don't forget to check out our website and sign up for our

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♪ ♪ ♪ ♪ ♪ welcome back to "options action." we just broke down some trades about the dollar's impact on commodities. now let's talk about the dollar's impact on the dollar, the greenback bouncing off its lowest levels in nearly three years today, rallying in a dismal jobs report

or is it beginning to have some legs mike khouw is going to attempt to answer those questions with a call to action mike >> so i think one of the things we have to think about, a lot of people have been struggling to figure out what's going on in these markets. we had some unprecedented things take place in 2020 for example, we went from the lowest recorded unemployment 3.5% at the beginning of the year to the sharpest spike in unemployment as the pandemic and the response to it broke out so you would think that that would obviously be extremely contractionry. and yet here we are risk assets are essentially trading at all-time highs what caused this, and what is the impact on things like the dollar well, some of the things that bolstered risk assets we talk about a lot. but maybe we should throw some numbers on it to give it some sense of perspective we talked about very aggressive monetary policy. the fed balance sheet increased by $3.2 trillion from the beginning of 2020 till the end that is remarkable

long-term rates fell essentially to zero. and in the midst of all of that we had an unprecedented fiscal response as well if you take a look at what the cbo was predicting for the federal budget deficit at the beginning of 2020, it would 1.1 trillion the actual number for the year, that includes both on and off budget items, $4.4 trillion, an increase of 3.2 trillion over the forecast number. put those two things together, and just think about what the net impact is going to be on things like risk assets. that's an increase of 6.4 trillion that's more than 30% of the $20.5 trillion u.s. gdp. so we had a lot of trades that we're trying to play off of that we made bullish trades in things like gold and silver for things that were lucky enough to get on that train, they bought bitcoin or they bought equities. now we also have to remember that there are other countries that are facing similar problems now we might have a situation

where on a relative basis our currency is going to be priced off of theirs as well. so we don't just operate in a vacuum so we put some bearish trades on the dollar in fact, in november we bought the 25 strike puts that expire in march in uup to make that bearish bet, we actually rolled that in december for people who are watching, you'll remember that right now that march put is trading for about 95 cents we paid about 45 cents for it. we are thinking that now is the time to take profits on those type of bearish trades and potentially play for a little bit of a bounce? why? if you have an improving economy, if you have rising rates, that can actually support the local currency and of course other central banks, other governments are doing many of the same things that ours have been doing. on a relative basis, their currencies are going to face those same pressures that ours have now the 24 strike calls, those were trading for about 50 cents

when i was looking at those earlier today. this is a way you can play for a short-term bounce. as carter earlier pointed out, currencies tend not to move that much they are very stable, generally speaking you can buy at the money calls, typically that's what you would want to do, buy very close to or at the money and give yourself a little bit of time for it to play out >> as you mentioned before, carter, there are a plethora of trades that are tied to the dollar weakening and so i'm wondering where you think the most vulnerability may be at this point >> well, that was sort of the hope at the top of the hour to do the commodities trade in the sense that we made a big bet, mike and i, to be short the dollar thinking that it was going to do is collapse. and referring to those statistics again, it has been such a long period of time without a counter trend move we think we take the road less traveled, flip it around and

make a bet for a dollar bounce in principle, a dollar bounce, the most immediate thing would be a giveback in commodities >> we've actually got some breaking news out of washington. let's get straight to kayla tausche. >> we have just getting a statement from house speaker nancy pelosi essentially supporting a move by her members to present articles of impeachment next week. i am going to read the statement from the speaker as it appears in full. it says, today the house democratic caucus had an hours-long conversation that was sad, moving, and patriotic it was a conversation unlike any other because it followed an action unlike any other. it is the hope of members that the president will immediately resign but if he does not, i have instructed the rules committee to be prepared to move forward with congressman jamie raskin's twenty-fifth amendment legislation and a motion for impeachment. accordingly, the house will preserve every option including the twenty-fifth amendment, a motion to impeach, or a

privileged resolution for impeachment, with great respect, our deliberations will continue. so clearly pelosi is backing all options that congress has available to it to remove president trump from office, notably absent from the statement is whether she received the blessing from president-elect joe biden and was going to discuss this very issue. but certainly pelosi had been weighing her own position earlier today, but the fact that she is putting out this statement suggests that she has received a signal to proceed melissa? >> time line is tight, kayla it doesn't seem like they would be able to get it done and yet they proceed so is this simply just a marker to say this is where we stand on this issue with this president >> reporter: um, perhaps it is, melissa. some of the draft articles of impeachment that had been circulated today were very short in nature, citing the events of this week at the capitol and citing the president's phone call with georgia election officials over last weekend.

it is a very tight time line, but so far house democrats are expected to present the articles formally at the beginning of next week. that is what our colleagues at nbc news are reporting and they want to make a statement and put on the record how they feel about the actions of this president, whether they could actually complete these proceedings and whether or not they could actually get a changed outcome in the senate this time around is still unclear, but just this evening, melissa, there is also an explosive issue from republican senator lisa murkowski also calling on president trump to resign so perhaps they are just hoping that these calls would reach a fever pitch and he would make that decision, although knowing how the president responds to things like this, it is unlikely he would do so melissa? >> kayla, thank you. "options action" will be right back stay tuned turn on my tv and boom, it's got all my favorite shows right there. "options action" is sponsored by think or swim by td ameritrade

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final call, carter >> john deere, just too far too fast, sell >> tony? >> luv, buy call spread. >> mike? diagonal put spreads in deere. >> thanks for watching "mad money" with jim cramer starts right now [announcer] the following is a paid commercial program for rotorazer, sponsored by razor tools llc. (upbeat music) - uh-oh. can't find the right saw for the job? you need a handsaw for this, a circular saw for that, a bandsaw, a miter saw, and a jigsaw? and with all the different blades, that job's turned into an expensive jigsaw puzzle. not anymore. (saw buzzing) hi everybody, i'm joe fowler, and this is the rotorazer. over 3000 screaming rpms of workshop muscle,