ay-yi! ♪ ♪ ay-yi! happy friday, "options action" fans first, against a broader market backdrop we'll get actual utility out of utilities doing oil exploration to see if he can generate reserves lessons to take away from our recent tesla speculation and why we continue to get a charge out of general motors. i am joined by carter worth, mike khouw, tony zhang utility. the state of being useful, profitable, beneficial carter worth explains how the

epynomous sector can be all that and more. >> let's do something we haven't done in a we'll, something that is maybe an offensive and defensive play rates have had a big move, we backed off a bit thinking that maybe rates are stuck now, utilities which are exhibiting day-to-day relative strength are a place to consider on the long side a couple of charts to get us going. the first is simply talking about the importance of total return this is a 10-year chart, two lines. pretty straightforward the s&p 500 versus the s&p 500 total return you can see the numbers. on the 10-year basis, 194% total return, 263. look at the second chart just to make the importance of yield this is a 30-year chart. s&p up 1,000 total return up 2, double.

over time, looking back at the beginning of markets, the turn of the century, yield is half your total return, very important. so let's drill down on utilities. next chart, xlu, this is the spider select etf that matches or tracks the s&p 500 utility sector and there's a lot of tension here we're working into the apex of a wedge, it's a standoff, if you will and the thinking is we're going to get resolved up i would point out, of course, the yield at 3.42%, versus the s&p at 1.56% 2.2 times out of the market. that's pretty near its historical sort of ratio, if you will but it's handsome in this environment. final chart is a very up close and personal three-month chart i wanted to sort of depict the gradual early stage, but very real bottoming out day-to-day performance, relative

performance, of utilities. we like it, want to be long, symbol xlu. >> thanks for that, carter mike, what's the trade >> yeah, so let's just unpack a couple of the things carter was talking about there. so of course with options, if you buy a stock, you can collect the dividend, that's the type of yield you can get when you purchase stocks. when you trade options, options don't pay dividends but that doesn't mean there aren't very effective ways to collect yields on them. take a peek at xlu first one of the things we want to take a look at, rates have gone up but they remain quite low sales have been better than expected and the utility sector, the s&p utility sector generally, take a look at what the valuation of the sector was prior to the march sell-off, looking at about 18 times, maybe a little more. take a look at the price to earnings on that sector, similarly 18 times or slightly less in fact, it has not completely

recaptured the valuation that it had before the march sell-off. compare that to the s&p more generally, which was trading around 20 times prior to the sell-off, is about 26 times now. one other thing i would point out. like the s&p, this is a space where we are still seeing somewhat elevated options premiums that usually sets up pretty nicely for yield collecting trades in this case we want to do a calendar trade specifically, look at the february-june 63 call calendar you could buy those june 63 calls for about $2.75. when i was looking at that earlier today. and sell the nearer dated ones for about $1.25. net-net, laying out about $1.50 in premiums. remember this is a yield trade assuming the underlying remains relatively steady, close to where it is, because mirror dated options are going to decay more rapidly than the longer dated ones that you own. how much yield in this case? pretty good, you know what

you're going to be looking at in this instance, about $1.20 over the course of about a month or so relative to the $63 strike price of xlu in fact, you're going to be taking considerably less risk. if there was a sell-off in xlu, you'd be laying out 62 bucks and change or so, here spending $1.50 instead. >> tony, i haven't known you for as long as carter and mike but i would guess you don't normally trade xlu at the same time do you like this trade, structure of it? >> i actually don't trade xlu very often it's more of an investment-type sector but for the reasons that mike laid out and carter laid out, i really like this trade not only from a technical but also from a fundamental perspective. if you look at the chart, xlu has been trading within a range are you have support around $60.50 to the downside, resistance around $65, which happens to very well line up with the break-even price of

mike's calendar spread if you look at it fundamentally speaking, 10-year rates at about 110 basis points, that's going to put a bit of upside cap here at xlu the yield carter's referring to, 3.1%, is going to provide that support for this sector and play that defensive side. for those reasons, technically and fundamentally, i like the fact that we're playing a range-bound play traditionally when you're looking at options to do so, you might sell a strad angle to play a range bound. mike has been very creative using a calendar spread. you look at risk profile of that calendar spread, it looks very similar to a short straddle. but a short straddle has unlimited risk and it's not very capital efficient because it requires a high amount of margin to get into that trade, verses this calendar, you have a very similar risk profile, you have limited risk, and you're only in this particular case laying out about 2.5% of the etf's value to play for this neutral play for xlu while still maintaining the

long-term bullish outlook with the june 63 call option. if the februarys expire worthless, effectively owns the june $63 calls for only about 2.5% of the etf value. for those reasons i really like this trade. >> do you have to have a view that rates are capped in order to be a believer in xlu? >> looking at the sequencing, we know rates had that epic low in march of 30 basis points or thereabouts, and we've worked higher ever since just as equities have worked higher. this recent push, very aggressive, to 1.19 and the backing away, you don't quickly regain that 1, 2 level, 1.19, nor give back a lot more having drops from 1, 2 to almost 1.07 so rates on a sort of week over week basis are likely to be range bound, by my work, and utilities therefore have that out of the way. >> there is a current running

through our next few segments so let's follow from utilities to the ev trade general motors pulling back after hitting a fresh all-time high yesterday the stock has been ripping, despite the record run, tony says there's money to be made in this one tony, take it away >> yeah, so i want to talk about gm here as a play for electric vehicles for a lot of investors that are interested in this thematic trade, a lot of the other startups or big companies in this particular space are trading at what i would consider eye-watering valuations. investors may have a tough time at these types of valuations for investors looking for ev exposure in their portfolios, i think gm has a lot more upside here if we look at the chart first, over the past 10 years post the bankruptcy, all-time highs for gm about $46.50. we just broke above that this week this signals the market is shifting in its views for gm and its future, especially when you

couple that breakout here above 46 with the relative strength outperforming the s&p 500, i think that puts a lot more weight behind this breakout here i think you have a lot more upside here for gm what i like about the business here is that most of the other electric vehicle startup companies have single differentiators of their companies for electric vehicles. whether that's battery technology, whether it's autonomous driving, some of them in hydrogen fuel cell. what i like about gm is they're a much larger established player and they've already secured partnerships across all of these technologies and they're looking to launch 30 brand-new electric vehicles by 2025 for those reasons i think gm has the upside potential here for a much larger revaluation in the multiples that it's currently trading in, not at 30, 40, 50 times sales some of these other electric vehicle startups are trading at for those reasons i like this substantially. now i mentioned gm back in early

february -- in early september when it was trading at $30 now that it's trading above $50, i think that there's still upside here. i'm actually going to use the same trade structure that i used in september i'm going out to february, i'm selling the $49 puts here. that will collect about $2.55 here for those puts which allow me to potentially purchase this stock at about a 5% discount if gm trades below $49 at that february expiration. the goal here is to allow me to gain exposure here for gm in the short run, especially the fact that it pulled back 3% today i think that's the opportunity to sell a put here >> carter what do you think of the chart here massive, massive levels to achieve this week. >> sure. i mean, a big, big move, right i think this is why you do have to do it through options to be up 16% typically you will back and fill or back away after a relating, one-week rating such as that the one thing is that a lot is

on the come, so to speak we know it's peak earnings, for what it's worth. in 2017, $6.62 the analyst community says in 2023, we'll earn $6.65 6.62 to 6.65, 2017 to 2023, no change in earnings meaning it's got to deliver on the hope at this point >> yeah. i mean, that's the thing, mike you have to believe, in order for you to believe in this relating, that it's got to have a little bit of the valuation that a tesla or some of the other spacs in the ev space are getting at this point. what do you think of tony's trade? >> yeah, so a very little bit of the valuation that some of these others in the space might have consider the valuation specifically yes, the stock's had a pretty strong run but just take a look at the valuation where it is. if it was going to trade, say, ten times the anticipated $6.62 worth of earnings, that gets you

to 66 bucks a share in change, a pretty good move to the upside from where we are currently. another way you look at the valuation of industrials is the enterprise this is expected to do just under $17 billion, 16.8 by the end of 2021. this is on a $72 billion enterprise value if this was a completely stable business that was only growing with the economy, that would be one thing. the thing is they've demonstrated they actually can build electric vehicles, very good one the chevy bolt, for example, is an excellent electric car. they had other ones before that. they have an investment, as i'm sure you know in kruz, the autonomous driving technology company. they have a lot things going on, they're moving the company in the right direction. they have free cash flow it's trading at an attractive valuation. yes, it has had a good run if you think it's going to pause, that's why tony's trade might actually make sense here why? if the stock pulls back, essentially you'll buy it at a discount we've discussed the valuation

seems reasonable i like the trade. >> all right we've got some news out of berkshire hathaway, taking a 24.9% passive stake in ew scripps according to an s.e.c. filing scripps is popping up 3.5% in after-hours sessions on this news. more car talk. gm is in the books, it's time to talk tesla a big update on that trade that expires today. for everything options action, check out our website. sign up for our newsletter

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♪ welcome back to "options action." let's continue to do something similar with oil as utilities. crude oil since october 30th up almost 45%, and that's been huge for some of the biggest trading vehicles in the energy space check out the oah, oil services etf nearly doubling the xop oil production etf up 70%, the xle broader energy etf up more than 50%. there is one other fund making big moves and mike khouw is about to tell you how to take advantage, "call to action." >> we're looking at uso, united states oil fund. this is the etf designed to track the front month futures in the wti crude oil futures market of course, what a lot of people

are following in the oil market will probably notice is that wti, for example, if we take a look at where it was priced right before the severe sell-off that we saw earlier this year, in fact, those futures close negative for the first time in history in 2020, we'll notice on a per-barrel basis, we're over 50, close to pre-crash lows. uso, the etf designed to track the price of oil, has not recovered to the same extent one of the reasons is that fund is purchasing rolling future contracts on oil when you have big dislocations in the term structure that can impair the price uso hasn't recovered to prior levels but it's still indicative of the increase we've seen in cruit owed prices. kind of like just trading options generally, if you buy a barrel of oil, it doesn't pay you any yield, you don't get any dividend for that. but we are still seeing elevated options premiums if you are one of the people who, seeing those lows in oil in 2020, decided to buy uso, now

we've had this big run, now we're seeing oil back very close to where it was prior to all of this what do you do now one thing you could do is look to sellcovered calls when i was looking at this earlier today, this is when the uso was trading for around 35 bucks or a little bit more i was looking specifically out to the march 37 calls. you collect about $1.20 for those. here's the thing when you sell cover calls, what you're engaging in is not so much a trade as investment strategy hold a stock, repeatedly go out and try to collect yield by selling calls against it that's how you can generate consistent yield carter discussed earlier in the show how that can benefit your returns over time. the other thing this does is improves the probability of profit why? you still have some upside, in this case if it rallies through the $37 strike price, necessary net of $1.20 you collected, 8% upside if you do not, if it stays still, you're collecting over 3%

standstill yield over two months of course this serves as a little bit of buff tore a downside move. if uso drops by 1%, 2%, 3%, that's offset by the premium you collect. improves your probability of profit, a kind of strategy almost anybody who holds stocks can engage in and will generate additional yield for your portfolio. >> carter what do you think of this chart >> so there are a couple of things to consider a little bit like the financials things get ahead of themselves, pricing all the news, whether it's the saudi news or what have you, and it's a classic instance of taking a road less travels, fading something when all are embracing it just consider the fact that crude up 10 of the last 11 weeks. that's only happened a handful of times going back decades. and it's not particularly good in the 12th, 13th week meaning it's a time to fade it

of course, energy stocks, bigwig, best-performing sector, but they too took it on the chin today. this is a perfect instance where options, selling calls, is a strategy that will be likely hugely profitable. >> tony, your thoughts on this trade? >> yeah, i quite like this crude, $53 level currently, is a major resistance level also corresponds with the 200 week symbol moving average there are classic signs of exhaustion, as carter was referring to, as you have higher highs in the crude pricing we're not seeing momentum confirming those new highs for those reasons i think mike's cover call here, specifically using the $37 call option, being a little more tactical, being a little more aggressive, collecting more yield, is suitable normally when i'm selling cover calls we usually like to go further out in terms of strike prices the fact that mike has adjusted

it down to the 37 i think reflects the more neutral or slightly bearish view on oil from my perspective, i do think there is an adjust for cover call investors not only should you look at how much premium are you collecting over the lifetime of the cover call, also how much premium are you collecting per day of that cover call i'll suggest one slight adjust for investors who are perhaps seeking a little bit more yield or a little bit more time decay in a faster fashion is to actually sell the february $37 calls. you're going to collect a little over 70 cents, which is more than half of what mike's trade was collecting and you're limiting yourself to the same $37 strike, but you're only limiting over the next 35 days versus the next 60 days for the march options. so you're giving yourself a little bit more upside for a shorter amount of time and collecting more -- collecting less premium for it. up next, one retailer already seeing some electric gains this year. we'll tell you the name and what it means for one of our traders.

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welcome back to "options action." our most recent tesla tried expirtd today. in december mike speculated it was time to hit the brakes on tesla as it entered the s&p 500. >> given the fact that the short interest has dropped considerably, the stock is trading at all time highs, we've seen the boost that comes from the split, we're already seeing this big boost that came from the entrance into the index, that maybe there isn't as many things lying around to basically continue to propel the stock to new heights. so i was inclined today to take a short bet on tesla the way i did that earlier today -- i should point out the stock closed close to $700, $670 when i did this trade. i decided to sell the january 700, 720 call spread. >> since then, well. that's why it's called speculation. that's the first lesson to take away if you are going to speculate using options, is almost always the safest way to do so.

mike, what is the next lesson here >> yeah, no, i think that's exactly right. here's a situation when you're trying to either lean against continued rallies or even make short bets in highly valued companies like tesla, very hard to draw a firm line in the sand and actually short the stock. your risk would be unlimited take a look at where tesla has gone since, up about $150 since then, by selling at call spread or a close corollary would be buying a put spread, you limit your risk considerably that's the only way you can tactically bet against companies like tesla really this isn't a bet against tesla, really a bet against the stock's price which i thought had become excessive but it's extended since continue to use options and allocate small amounts of capital when you make bets like that one. next, "final call. 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.

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♪♪ ♪♪ ♪♪ time for "final call." carter >> utilities will serve you well

here buy xlu. >> tony? >> sell puts on gm >> mike? >> covered calls in uso. >> thanks for watching have a great long weekend. see you back here next friday for more "options action." - [ang program is a paid advertisement for nuwave oxypure smart air purifier sponsored by nuwave llc, featuring deborah norville on award winning journalist and new york times bestselling author. - we are all living in strange and unsettling times. never in history has everyone on the planet been challenged by the same thing. covid-19 has changed the way we work, the way we interact and we're all still trying to figure out what it means for our future. amidst the uncertainty, all of us are trying to take care of our families as best as possible. i've lost track of how many masks i've made