finding, "oh, my god. here i am." that's what i was always looking for, and here it is. hi there happy friday welcome to "options action." we're helping you to take your options game to the next level responsibly by risking less to make more. tonight, a directional plan. disney rolling the dice on mgm, keeping cool with yeti and lessons learned by amazon. let's get right to it. disney shares on a magical ride in the past year up nearly 28% and our chart master says the house of mouse could be heading to a fresh all-time high when it reports earnings next week let's first go to mike with the

outlook for disney mike >> yeah, so, this is an interesting situation. we've got disney very close to all-time highs right here. if people are taking a look at the historical performance of the company, one of the things you may be asking yourself, we've got free cash flow for the year that's going to be one-sixth of the peak it reached in 2018. net income a fraction of what it was in 2018. the parks are closed what is the bull case here the bull case is a couple of things you have disney plus just shy of 90 million subscribers. the 2024 expectation that puts them soundly in competition with a company like netflix which itself just has over a market capitalization of over $200 billion. this week, we heard california legislators talking about the possibility of reopening parks in the state of california disneyland brings in about $4 billion a year in revenues

of course, you'll hopefully see as we come out of the back end of this pandemic people starting to go back and participate in those areas. right now, they are taking a look, believe it or not, at close to $90 billion in revenues about two years out from now that would be the highest ever despite the fact you have these high levels, that would be one of the reasons people make a bullish case on disney >> let's see what the outlook is technically, carter. what do you see? >> well, it's a good setup let's say it that way and go right to the charts. four in total. the first one, a simple one-year chart of disney. no judgments or annotations by me next chart, one way to draw the lines which is to say you see those two gaps right? takes a lot of buying pressure to move a stock up with a gap. typically news and often earnings so the stock after gapping up has been consolidating, doing nothing as the market's gone higher and higher. call it a wedge, an ascending

triangle they are usually resolved in the direction of the primary move. now a longer-term chart. one of two the third chart. disney broke out on its earnings above well-defined tops at a common level and checks back, final chart, and the check back, the give back reintroduces that ascending wedge or triangle. so a stock that basically returned to its prepandemic high, broke out on news and then is consolidated for the better part of two, three months. in principle, the next directional move is up, not down so we like it here for a good 8%, 10%. >> all right now we have the fundamental case and technical case mike, lay out the trade. >> yeah, let's talk about the options case so typically over the last eight quarters this stock has moved about 3% the options market is implying double that. a move of about 6% after they report what does that tell us options

prices are elevated? when we know options prices are cellivated we try to collect some premium but in a way that doesn't take a great deal of risk i was looking out to march the 180/160 put spread we want to sell that spread. that's a credit spread collecting $8.sfnt or so for the 180 strike put net/net, you'd be collecting a credit of about $6.30 per spread that's $6.30 per share when you put this trade on. we're usually looking to collect somewhere between 30% and 40% of the spread this is toward the lower end of the spread but by buying that downside bet. if you see a disappointing quarter, that's the hedge. we saw that in 2015. this is a different dynamic. this is one of the investment strategies you can enlist if you're going to use options going into catalysts like this one. >> tony, do you like disney?

do you like the trade? >> yeah, i like both the technical and fundamental reasons mike and carter laid out. the pent-up demand with the theme parks, as well as the streaming numbers coming out from disney plus are very strong on the fundamental side. the chart setup looks strong for a potential breakout my only person is after the stock jumped from 150 to 170 on december 11th, the stock has underperformed since then. if we use comcast as a preview, comcast reported strong earnings and the stock didn't jump at all off the back of those earnings my concern is disney doesn't have that big breakout but that's why i like mike's trade two out of three scenarios of disney stock rises on earnings or if it trades sideways, this strategy is profitable only if disney's stock declines significantly do you see any significant losses here on this particular strategy. for those reasons, i like the

trade itself >> comcast is a parent company of this network. carter, what's your response to the point that tony brought up about the trading pattern december for disney? >> sure. that's the point of -- when you rest after a great period of strength, it's usually the pause that refreshes the point is after an exertion like that, a sideways move is more often than not the preview, the setup for the next directional move and, of course, on any given week or month you can have poor relative performance but that's either the opportunity or the problem. in this case, disney not making any progress for two months as the market has gone higher, having trounced the market in the preceding two months, the setup or sequence would call for higher, and that's the bet let's roll the dice on another slice of the reopening trade, mgm the casino stock could been to hit the jackpot. how are you playing this one >> yeah, i'm taking a look at

mgm more so on the online betting side with the super bowl here this weekend. a lot of interest in the bet mgm side of the business that is expected to grow quite a bit here on super bowl weekend here. if we take a look at the chart on mgm, over the past two years, we've had a pretty spectacular drop from $34 high back in january of last year down to just $6. and it clawed all the way back here this week to make a new 52-week high today and i'm looking for a potential breakout above this $34 level that it put in back in january as a potential breakout level up to the next $38 level which is the all-time highs and if we zoom in here to a shorter term chart over the last six months, the stock has been range bound from 30 to 32 over the past couple of months. and has just recently broken out above that range here this week. and especially if you consider the fact it's been coupled with very strong relative strength, relative to its sector that's the type of relative

strength i like to see going into an earnings event here next week if we shift our attention here to earnings, the market is currently implying a fairly sizable move here. 7.9% versus the -- over the past eight quarters of only 5.5%. so the options market are implying a sizable move, yet the implied volatilities here are going out further out in time. it's still relatively muted. for those reasons i'm using a trade structure at allows me to take advantage of the breakout and relatively low implied volatilities i'm going out to april and buying the 35/40 call spread here collecting about $1.39 for the april 40 calls net/net paying about $1.60 for the $5 wide debit spread which is a little under 5% of the stock's price to take this bet and i'm risking -- i have about a roughly 2 to 1 risk/reward

ratio here if mgm does break out higher and revisits its all-time highs around 38. >> mike, what's your take on this trade >> yeah, so i think tony is really hitting on a critical thing to think about we often talk about the fact if options premiums are elevated going into a catalyst and we're not expecting a move as large as the market seems to be implying we want to take advantage of that by being short options. that was the theory we were laying out in disney by going out to april and taking advantage of the fact those options aren't as highly priced, that's really something people should be paying attention to when you're deciding to use a debit spread instead of a credit spread one of the things to think about, if this stock has a disappointing earnings, the value of the spread is unlikely to collapse to zero right away it's still going to have some time so in a way the amount of money that you're laying out if you decide to revisit your thesis at the end of next week or the week after is going to be still that

you have an opportunity to collect some premium if the stock goes in the wrong direction. if you are going to be long options, generally speaking, try to give yourself a little more time if you're going to be short options, usually you want to identify that catalyst where they're overpriced and sell those. >> your thoughts, carter >> we know we have a big news out of wynn today. the s&p 500 casino and gaming stocks index, online stocks were up 6.5%. so you've got the tail wind positive comments about penn national the interesting thing is that we're toying with the prospects of really breaking out consider the following this stock's high before the pandemic hit, in january a year ago, was $34.64. and today, it hit $34.66 literally to the penny back to its -- so many stocks have recouped its losses. but a lot of stocks are beyond and moved above their prepandemic high that would be the inference for mgm. >> all right

coming up -- could it be the peloton of insulated drinkware the very cool story of yeti and how to retain the heat around it with options check out our website, optionsaction.cnbc.com sign up for our newsletter we'll be back in moments

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♪ ♪ ♪ ♪ ♪ welcome back to “options action.” still more earnings to come next week when things get hot, options can keep you cool.

sometimes an amazing stock growth story can be under your nose, literally, as you sip your still warm morning coffee. that's mike khouw's call to action today take it away >> if you go to central texas, one of the things you're going to learn is that the brisket at the worst barbecue in texas on 360, rudy's barbecue at the shell station is better than any barbecue you find outside of the state of texas you can have 90 days in a row where it's over 90 degrees i moved to central texas and lived there for five years i figured out the only way to keep your drinks cool was to buy a yeti you'll notice behind me, i've got a whole pile of these things these are great coolers, and it's a really interesting company, not one that we've talked about very much it's had a spectacular period of growth what's interesting about it is that if you look at full-year earnings, it's trading about 35 times that number. despite the fact you've got

about 15% top line growth, close to 20% eps growth. as we look into earnings in yeti, this stock has moved just under 8% and right now the options market is implying a move of more than 10%. if you bought the march at the money straddle this stock would need to move 16 1/2% either higher or lower before you begin to see any profits when i look at that, to me, this actually speaks to what we were talking about earlier in the show you want to try to take advantage of those situations by selling those overpriced options. i was looking at the march 80 call and march 65 puts. i could sell each of them for $3 and $2.60 respectively i would, doing that trade, collect about $5.60. i could use those proceeds to help finance the purchase of a longer dated may at the money 72 1/2 call. for $9.10. i'm trying to take advantage of

the fact that the longer dated options are not going to decay as quickly this gives me upside to and through that higher strike call, the 80 strike call that i'm short. that's upside of about 10% from here if the stock should rise on the down side if the stock fell, i could have that stock put to me. if i'm short a put, the holder of that put has a right to sell me those shares at the lower strike price i'm still going to own that longer dated call in the midst of all of this try to take advantage of elevated short dated premiums going into a known event a company i really like. great products and a great growth story and on top of that, trying to take advantage of the fact the longer dated options i'm buying are not going to decay as quickly. >> i wonder if rudy watches options actions. i feel like you just insulted rudy at the shell station by calling it the worst in texas. >> rudy's is a chain down there. they have a sign that says the worst barbecue in texas.

>> all right p. it's phenomenal barbecue maybe not as famous as franklin's if you don't have time to go to franklin's -- >> so rudy is really being i ironic got it what are the technicals looking like for this one, carter? >> they're good. before getting to that the analyst community, 16 people covering it, you have the perfect setup. they don't believe it in 12-month forward price target is where the price is trending now. they believe there's no up side. three charts yeti, the principles are the same regardless of the business. a steady, orderly uptrend. i've annotated the trend line. second chart, it's also a channel. putting a second line, north by northeast, steadily higher never gets too hot when it does, it pulls back. this stock lost 19% in the past two weeks before this week's bounce the third and final chart, another way to look at it. the channel with the midpoint north by northeast steady as she goes higher and never too steep and

hysterical when it does get a little steep, it pulls back and that's the set up for the next advance. >> tony, what do you make of the trade? >> first, i will say that i can't sit down in the mornings without my yeti mug with a cup full of coffee so their brand recognition here is certainly unparalleled in this particular space. mike referred to 15% to 20% top and bottom line growth i think that's fairly average. but what i think is really impressive is the fact on a billion dollars in revenue they've generated $273 million in free cash flow and over the past couple of quarters, they've been able to grow their profit margins from under 5% over 17% that's really where i think -- why the stock is trading -- has such strong performance here this year compared to its sector consumer discretionary now as far as mike's trade goes, think of it two different ways mike talked about it in terms of selling a strangle to finance buying a longer term call. for some investors who are

watching the show who may be a little confused about that strategy, another way to think about this is selling a put. he's selling a march 65 put, which i think from a tactical perspective is really important because that 65 level is the last swing low which corresponds with a channel carter is referring to and using those proceeds to finance a call -- a diagonal here. trading the march/may diagonal here if you just traded the diagonal itself, he would have been risking about -- a little over 8% of the underlying stock price to trade that diagonal by selling the put you've reduced the risk of the overall trade down to just under 5%. reduction and risk here is really key you add a little risk if the stock declines significantly, but looking at the fundamentals, i think the probability of that is relatively low. up next, you can do all the fin fundamental research and then

the boss quits lessons to be learned from a grey swan at amazon and how it can keep your feathers from getting too weathered. tweet us @optionsaction. we'll be back right after this turn on my tv and boom, it's got all my favorite shows right 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 to look back at an open trade. last week khouw and carter teamed up to make a bet. >> we're working into the apex whether you call it a wedge or a triangle, it doesn't matter. it typically happens, equilibrium. buyers and sellers are matched off before something occurs. it's going to break out through the bottom that's not my bet. i think it's going to break out to the upside. >> a single share of stock would cost you more than $3200 right now. one lot would be 123,000 one thing we could do is look to buy a call option on a like amount of shares instead and then look to sell some of the elevated options premium in the more dated options i was looking at the june 3300 calls, you could pay about $274 a share on those

remember, every call option represents a hundred shares, so you multiply that by a hundred and then sell the february 2550 calls against it for 37 and a half dollars >> all right so you know what happened. amazon posted strong results but then announced that jeff bezos will step away from his role as ceo. carter, what's your take at this point? >> right so the breakout for earnings, for a resolution of the standoff five month sideways has been deferred, not canceled the operating business, the premise for the breakout in hand and delivered and yet, of course, when the founder of enterprise such as this steps down, people rethink it. at least on a short term basis so stay long and roll your calls but mike will have a play for you. >> all right mike, what is it >> yeah, so it's interesting

this was looking great right after earnings and then, of course, jeff lowered the boom on us but what's interesting, of course, with this trade is because of the decay in the near dated options and the stock has held up relatively well after having a setback after the announcement, we can stay long those longer dated calls and essentially turn this into a super calendar that's a situation where we cover those short calls that have essentially decayed to nothing and then we sell another set, maybe another month out we own those june calls. so we've got less capital allocated than we would have had we owned the stock we're seeing mild profits, maybe not as good as we hoped after earnings, and we can essentially continue to make this play through time i still like the trade in the long side. >> all right up next, your tweets and the final call stay tuned 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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action." our first viewer asks is now a good time for a covered call on at&t, looking at march 26th mike, what do you say? >> i think this person's paying close attention. this is a smart expiration for two reasons. they reported earnings in january and don't again until april. this stock pays a big dividend and it goes x dividend early in april. there's no assignment risk by selling this near-dated expiration i think this is a smart expiration to cover. >> our next viewer asks, is there any way to know if a giant on the money call buy is someone buying insurance against a giant short stock position tony, take that one. >> the reality is that it's difficult to ever know the true intentions of any call buyer and what their position that they actually have in addition to the call that they've purchased. but i will say it's generally, i would say, uncommon for a firm to use out of the money call options to hedge a short stock position

>> time for the final call carter >> disney long into earnings >> tony? >> betting on mgm. long a call spread >> mike? >> i'm rooting for you, tom brady. take it home >> have a great weekend. "mad money" starts right now do you make frequent trips to the bathroom... suffer from urgency... hesitancy? do you get up more than once a night? can you even sit through a movie? or, worse, have a diminished sex drive? if so, chances are you have an enlarged prostate. fact -- 30 million men now suer from an enlarge prostate. fact -- every other man now