are limited. >> i tried to get a job at menards, home depot, party city, mcdonald's just for kicks, and they all said, "no, you have a felon." so, what do you want me to do now? make another movie? now? make another movie? i might as well. -- captions by vitac -- happy friday "options action" fans we've got another great show on deck for you first, against the broader markets backdrop we'll get utility out of utilities we'll do oil exploration to see if you can generate reserves and tesla speculation and why we get a charge out of general motors as usual i am joined by carter werth, mike khouw. carter explains how the economist sector can be all of that and much more right now

carter >> sure. well, you know, the thought was let's do something we haven't done in a while and something that is maybe an offensive and defensive play we know rates have had a big move spot 1.9%. they've backed off a bit thinking rates are stuck now, utilities, which are exhibiting day-to-day relative strength are a place to consider on the long side a couple charts to get us going. the first is simply talking about the importance of return this is a 10-year chart, two lines. it's the s&p 500 itself versus the s&p 500 total return you can see the numbers there on a 10-year basis. s&p up 194%, total return 263. look at the second chart for 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 of the total return let's drill down on utilities. next chart, xlu. is of spdr select etf that matches or tracks the s&p 500 utilities sector there's a lot of tension here. we're working into the apex of a wedge, standoff, if you will, and the thinking is we're going to get resolve up. we 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 only a three-month chart i want to depict the gradual early stage but very real bottoming out day-to-day performance, relative

performance of utilities we like it we 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 that carter was just talking about there. so of course with options, you know, if you buy a stock, you can collect a dividend that's the type of yield you can get when you purchase stocks of course, when you trade options, options don't pay dividends. that doesn't mean there aren't very effective ways to collect yields on them let's take a quick peak at xlu first. one of the things we want to take a look at, yes, it's true, rates have gone up they still remain quite low. sales have been better than expected and utilities sector, the s&p utilities sector, take a look at what the valuation of the sector was prior to the marceloff. we were looking at about 18 times, maybe a little bit more take a look at the price to earnings on that sector now. similarly, it's about 18 times

or slightly less it has not recaptured the valuation of the marceloff compare that to the s&p more generally and it was around 20 times, it is about 26 times now. now one other thing i would quickly 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 some yield collecting trades in this case we want to do a calendar trade specifically looking at the february june 63. >> cal: lender you can buy them for $2.75 when i was looking at that earlier. sell the near dated ones for $1.25. net-net laying out $1.50 premium. this is he a yield premium saying it remains relatively stable the near dated options decay more rapidly how much yield pretty good, of course

what you're looking at in this instance is about 1.20 over the course of about a month or so relative to the $63 strike price of xlu in fact, you are going to be taking considerably less risk. if there was a selloff in xlu you would be laying off 62 here you will be spending $1.50. >> i haven't known you for as long as carter and mike. i would guess you wouldn't trade this normally. >> i 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 like this trade, not only from a technical but a fundamental perspective. if you look at the chart, xlu is trading within the range you have support around $60.50 to the down side and 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 with ten-year rates at 110 basis points, that's going to put an up side cap at xlu the yield carter is looking will play the defensive side. technically and fundamentally i like the fact that we're playing a range bound play traditionally when you're looking at options, you might sell a straddle to play a range bound. mike has been very creative using a calendar spread. you look at the risk profile of that calendar spread, it looks similar to a short straddle. a short straddle has unlimited risk and not very capital efficient. it requires a high amount of margin this calendar, very similar risk profile. limited risk and you're only in this particular case laying out about 2.5% of the ets value to play for this neutral play for xlu while still maintaining a

long-term bullish outlook with the june 63 callout. they effectively own the june $63 calls for 2.5% of the ets values for those reasons i like this trade. >> carter, do you have to have a view that rates are capped in order to be a believer in xlu? >> looking at the sequencing, you know rates have that epic low march 30 basis points. we've worked higher just as equities have worked higher. the recent push, very aggressive to one spot 19 and the backing away, you don't regain that one, two level, one one nine, nor do you give back a whole lot more having dropped from one two to almost one.087 utilities, therefore, have that out of the way >> well, there is a currant

running through the trade. 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 wrapping their arms around buying stocks at these types of valuations for investors looking for ev exposure in their portfolios, i think gm has a lot more up side. if we look at the chart itself first, over the past ten years post the bankruptcy, the all-time highs for gm was $46.5. we just broke above that this signals the market is shifting beyond its views and

when you couple the breakout above 46 with the relative strength outperforming the s&p 500, i think that puts a lot more weight behind this breakout here and i think you have a lot more up side 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. they're a much larger established player and they've secured partnerships across all of the technologies and they're looking to launch 30 brand new electric vehicles by 2025. i think gm has the up side potential for a much larger revaluation in the multiples that it's currently trading in, not at 30, 40, 50 times sales that some of these other electric vehicle startups are trading at gm is only trading at halftime sales. for those reasons i like this substantially. i mentioned gm back in early

september when it was trading at $30. now that it's trading above 50 i think there's still up side here i'm going to use the same trade structure that i used back here in september i'm going out to february and i'm selling the $49 puts here. that will sclekt about $2.55 here for those puts which allows me to potentially purchase the stock at about 5% discount if gm trades below $39 the goal is to help me gain exposure for gm in the short run. especially since it pulled back. i think that's the opportunity to sell a put here >> carter, what do you think of the chart here massive, massive levels this week >> sure. i mean, a big, big move, right >> yeah. >> i think this is why you have to do it through options typically you will back away after a re-rating one you're creating such as that.

the one thing is a lot is on the come, so to speak. we know it's peak earnings just for what it's worth in 2017 were $6.62. the analyst community says in 2023 it will earn $6.65. 6.62 to 6.65, 2017 to 2023, no change in earnings it's got to deliver on the hope at this point. >> yeah. i mean, that's -- that's the thing, mike. i mean, you have to believe in order for you to believe in this rerating that it has to have a little bit of the valuation that a tesla or some of the other, you know, 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 i mean, consider the valuation specifically yes, the stocks had a pretty strong run but just take a look at the valuation, where it is. if it was going to trade, say, 10 times the $6.62, that gets you to 66 bucks a share and

change, which is a pretty good move to the up side from where we are currently another way to look at the valuation of industrials is the enterprise value to ebitda this is expected to do ebitda at $17 billion. 16 point upon 8 at the end of 2021 if this was a completely stable base that was only controlling with the economy, they demonstrated they can build electric vehicles. very good ones the chevy volt is excellent. they have an investment, as i'm sure you know, in cruz, so they have a lot of 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's had a good run if you think it's going to pause, that's why tony's price makes sense. you can buy it at a discount

we've already discussed the valuation seems reasonable i like the trade. >> we've got some news out of berkshire hathhathaway they're taking a position from scripps. it's popping up 3.5% on this news. coming up next, we have more car talk gm trade is in the books time to talk tesla big update on that trade that expires today. for everything "options action" check out optionsaction.cnbc.com while you're there, you can sign up for our newsletter. we will be right back.

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♪ welcome back to "options action." before the break we used utilities as a market hedge. let's continue with that theme and do something similar with oil. check out the move in crude oil since october 30th it's now up almost 45 mers permers%. check out the oah, oil services etf nearly doubling there is one other fund making big moves in the oil space mike is here to tell you. >> we're taking a look at uso, united states oil. this is going to track the front month futures in the wti crude oil futures market of course what a lot of people

following the oil market will probably notice is wti, if we look at where it was priced before the severe selloff, the futures closed negative for the first time in history in 2020 will notice that on a per barrel basis up over 50 very close to the pre-crash lows uso the etf that's designed to track the price of oil has not recovered tomorrow same extent one of the reasons is because that fund is purchasing rolling futures and forward contracts on oil. when you have the big dislocations in the term structure of oil prices, that can impair the price uso hasn't recovered as much as the prior levels it's still indicative of the prices we've seen in crude oil prices like trading options generally, if you buy a barrel of oil, it doesn't pay you any yield. you don't get any dividend 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, we're back prior to all of this one thing you could do is look to sell covered call 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 37th calls. about $1.20 for those. when you engage in covered calls, you pull the stock and try to collect yield by selling calls against it that's how you can generate some consistent yield carter discussed earlier in the show how that can benefit your returns over time. the other thing this does is it improves the probability of profit why is that? you still have some up side, in this case if it rallies through the $37 spread price net of the 27, even if you have the uso called away, that's 8% up side if it stays still, you'll be

collecting more than 3% stand still yield over the course of the next two months. this also serves as a little bit of a buffer to a down side move. if uso drops by 1, 2, 3%, that will be offset it improves your probability of profit it's a strategy that almost anybody who holds stocks can engage in and will generate additional yield through your portfolio. >> carter, what do you think of this chart >> so a couple things to consider a little bit like the financials things get ahead of themselves they're pricing all the news, whether it's the saudi news, what have you, and it's a classic instance of taking the road less traveled fading something when all are embracing it just consider the fact that wti crude is up 10 of the last 11 weeks. that's only happened a handful of times going back for decades. and it's not particularly good in the 12th week or 13th week.

energy stocks big week, best performing in the sector, but they, too, have took it on the chin today this is a perfect instance where option selling calls is a strategy that will be likely hugely. >> tony, your thoughts on this trade? >> yeah. i quite like this because if you look at crude, those $53 level that it's currently trading up against is a major resistance level. it 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 not seeing momentum confront those highs. i think mike's covered call specifically using the $37 call option, being a little bit more tactical, being more aggressive collecting yield is suitable we like to go a little further

out in terms of strike prices. the fact that mike has adjusted it down it's neutral or bearish future on oil. i think there is an adjustment for cover call investors not only should you look at how much premium are you collecting over the lifetime of the cover call but also how much premium are you collecting per day of that cover call. so i'll suggest one slight adjustment for investors who are perhaps seeking a little bit more yield or a little bit more time decay in a fashion is to actually sell the february $37 calls. you'll 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. you're giving yourself a little bit more up side 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

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welcome back to "options action." tesla trade expired today. back in december mike speculated tvs time to hit the brakes on tesla as it entered the s&p 500. >> given the fact that the short interest has dropped significantly, the stock is trading at all-time highs, we've seen the boost that comes from the split, we're seeing this big boost that came from the entrance into the index, that maybe there isn't as many things lying around to propel the stock to hikes i was planning to move today the stock closed to 700. it was about 670 when i did this i sold the january 7007.20 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 spec cue late using options 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, you know, 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 then would be unlimited. take a look where tesla has gone since. up about $150 since then by selling a call spread or a close would have been buying a put spread you limit your risk considerably that's the only way you can essentially tactically bet against companies like tesla this isn't a bet against tesla, it was a bet against the stock's price. it's become more extended since. continue to use options and allocate small amounts of capitol when you make bets like that >> up next, 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

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♪♪ ♪♪ ♪♪ back for the final call. carter

>> utilities will serve you well here by xlu. >> tony? >> sell puts on gm. >> mike? >> cover calls in uso. >> thanks for watching have a great long weekend. see you back here next friday for more options "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,