ofit, if anything. but what i'm most proud of is how robin was able to transform into a better leader, how jenn was able to transform into a better salesperson, and how the company was able to transform to the next level and still exist almost eight years later. happy friday, it's time for "options action. here's what we've got lined up for you. >> writing it home the interest rate ripple spread all the way to your regional bank carter worth charts the course. then it seems everything always comes pack to apple in some way, too, now doesn't it? tony zhang sees the orchard through the trees. coming or going? professor mike khouw tests the doppler effect around target it's time to risk less and make

more "options action" starts right now. rates rocking wall street this week as the 10-year yield jumped to its highest level in over a year. our chart master says the bond breakdown could have investors targeting one key area. >> the great irony is yields collapsed today, the long bond up 2 points. basically a great spike in rates. a lot of people saw opportunity there buying bonds the question is, though, are regional banks and banks in general, broker dealers, ahead of themselves? that's the premise let's look at four charts. the first one is the kre, this is an etf that matches the standard & poor's regional bank index, symbol kre. what you have here is going back to the prefinancial crisis, 2006, then i've used the 150-day moving average to show just how far above trend we are you have a v bottom, and you're right back to an all-time high

to consider that fed funds are basically zero now, very important for regional banks, when they are 225 basis points higher last time we were here. second chart, same chart, i've drawn a line along that high we to that level and failed dramatically, spiking to the former high and backing away aggressively this week third chart, it's the same thing but brought in tighter just over the last three years you can see quite precisely an attempted breakout, but in principle, before you can really exceed a former high you contend with it. you back and fill or back away, and that is what happened today. finally, really up close and personal the one-year chart you can see the channel that kre has been in. it's very well defined and after basically breaking out of the hive above the upper band, which is a move of excess, you're likely to check back to the middle or lower range of the band

so that's considerably lower from here, where a keller of kre. final table. perspective, six months, kre is up 70% i mean, small caps are up 40%, s&p is up 10%. it's just priced for perfection. take profits if you're long, sell short if you're interested in selling short. >> i didn't realize the outperformance was that extreme, carter, that's amazing mike, what's the trade >> yeah, i mean, it's interesting. of course we're taking a look at this regional bank index this thing is up close to 24% year to date people watching this show for a while remember financials were one of my favorite sectors going into the new year. there were a number of reasons for that coming out of the pandemic, looking for an economic rebound, that would be run reason lower credit or loan lost provisions for banks, that would be a positive. any expectations for a steepening yield curve all those have propelled the

sector considerably. add to that balance sheets weren't particularly overpriced and even now arguably are not, the average i think tangible book is one times for regional index. that said, a move this sharp and pronounced over this period of time, combined with the fact that the market itself has been on fire for a little bit, then we hit roadblocks, it might be a time to at least hit the pause button so this trade on kre is more a pause than an outright bear trade. i was looking to april selling the 65-70 call spread, you could collect $1.90, close to the 40% we like to get for an upside credit spread if we're sell. kre pays a dividend. we're expecting to get that. when you think about it, even if you continued to hold the etf, you have this in your portfolio and you don't want to sell it, you might consider selling this call spread as a way to enhance your yield a total of $2.30 would yield you

about 3.6% or just under in about two months i think this is a trade that you could do if you want to fade the space, if you think it's going to hit the pause button, even if you're just long either this etf or some of the constituents of it, this is a way you could look to try to take advantage of the fact that options premiums are about double now what they were before the pandemic hit about 20% implied volatility before all that, 40% now, there's a number of reasons why you might want to take a look at a trade like this. >> tony, where do you stand? >> i completely agree with mike here in terms of my views on kre are far more neutral rather than bearish. carter's charts are compelling $66 all-time high when it was rejected at that level i think that puts a cap on kre also yields getting rejected at 150 basis points that resistance level in my opinion puts more of a neutral view on kre, especially because of the economic recovery if yield stabilized and the

economic recovery continues, i think you have some potential upside for kre for those reasons, i do like mike's trade he's using a credit spread where we're typically trying to collect about one-third of the width. in his case he's collecting 38% of the width that means he's collecting more income, he has less risk on this trade. for those reasons i like the fact that even if kre breaks above its all-time high, his break-even pry is just shy of $67. even if it was a little bit higher, you can still be profitable on this trade. >> let's move on from bankses to big tech it has been a rough week for the tech sector. tony zhang says there's light at the end of the tunnel for one big titan in this group. tony, what are you looking at? >> yeah, i want to take a look at apple i want to take a longer-term view here on an bell, especially after what has been a record quarter on earnings, both on top and bottom line. i want to take advantage of the multiple contraction that we

have seen here over the past few weeks as the long opportunity here for the stock if we look at the chart, on an absolute basis, the stock is trading just near what i would consider a fairly major support level at 120 and it's currently also oversold here in the short run. on an absolute basis, the stock hasn't performed very well against the technology sector and is actually trading near a multi-month support level here for those reasons i think the risk/reward ratio favor the long side and if we look at the business, i don't think apple's business has ever been stronger here. the services side of the business continues to grow at a pretty fast pace, which now account for 31% of their revenue. the macbook pros have been moved off the intel chips which makes their ability to sell services across the entire ecosystem of hardware i think is extremely strong i think the stock currently trading at 27 times next year's earnings is fairly reasonable for a stock that's currently

growing at the pace that they are, despite the size. so the trade structure that i want to use is to take a longer-term view on the stock itself by utilizing options to help me aspire this stock at a discount by using a cash-securitied put the trade i'm using here is the april 120 puts selling the april 120 puts and earlier today i can collect just a little over $5, $5.05 on this trade, taking advantage of the relatively elevated implied volatility we've seen in apple as it's sold off here the past couple of weeks. when you sell a put option like this, you're obligating yourself to buy the stock if the stock is below the 120 strike price at expiration, minus the premium that you're collecting so the net cost basis effectively of owning this stock would be just shy of 115 and that translates to about a 4% discount compared to placing a limit order at 120 to buy the stock, or roughly about a 26-time multiple of next year's

earning, a price i feel fairly comfortable owning this stock at. >> carter, how does the chart look given what we've seen from its recent highs, given what we've seen this week >> this is in the category of rested champion. apple was a strong leader, beats the market from the pandemic low all the way to the march spike high that's the day in september where the s&p dropped 10%. why? because apple and adobe and amazon dropped considerably. this stock is the same price it was on september 1st, 2nd. that's what a rested champion is i think it's a great opportunity to get long. >> mike, what do you think of the trade? >> yeah, so i mean, i definitely favor strategies like cash covered put sales as an investment strategy. a way to get into stocks that you want to own, maybe collect a little bit of yield, find an attractive price point where you think it's compelling investment of course, apple because it doesn't carry net debt is one of the places where it's a little bit safer to get involved in a

strategy like this not to mention the fact that apple itself, revenues are going to be 1.5% of u.s. gdp for the full year of 2021? i think their earnings last year were greater than the bottom 80% of the s&p combined. if you own an apple device and you're in their infrastructure, you probably subscribe to their services and you know how sticky it is. chances are your household is not going to switch. you depend on apple cart play. they havetry% gross margins. there's a lot to like with apple. the only thing that makes me nervous about selling puts in this environment what is we saw this week. that is that we can have some material setbacks. i don't know necessarily that this is a one and done situation, but as an investment strategy generally, what tony is doing here makes a lot of sense and people should consider it in this stock and others. >> apple sounds like a heavyweighting in the holly index, mike. >> it is absolutely. i don't see any way i'm ever going to switch to an android device. check out our website, sign

up for our newsletter. here's what's coming up next right on target? or target on its back? professor mike khouw plays with sentence structure plus calling all "options action" fans reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air.

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welcome back to "options action." let's take a look at another huge week of earnings coming up. one big name in focus, target. the retail giant has been on a roller coaster ride to start 2021 and that ride might get a lot bumpier with "call to action." mike, take it away. >> i want to point out that i don't take issue with target fundamentally. i think this is a company making a lot of the right moves right now. we've seen really pronounced sales growth in the digital, online area. i think that is obviously a real strength the other thing i like about target is the fact that they can leverage their bricks and mortar, essentially, to improve their supply chain for those online sales i think that's a great strength. we've seen home depot do things like that. i would say only 20, 21 times earnings for the full year, 180

bucks in change trading 20, 21 times. it's trading cheap to many of its comps. that said it is trading rich to itself sometimes when you start to see stocks run towards the upper end of their own historical valuations, you can run into a little bit of trouble. we've also seen a number of stocks reporting earnings lately provide some really great numbers. but then fail to perform particularly well, just simply because so much good news has already been baked in. taking a look at that, if you happen to own target, you might want to take a look at a way to potentially hedge it or if you think the earnings might lead to a little bit of a setback, one way you might take a look at trying to trade that is by using a put diagonal i was looking at the march 170 april 180 put diagonal buying april 180 puts, selling march 170 puts against it. net-net, i'm going to pay out about $4.85. because we have this upcoming

catalyst in the form of earnings, near dated options premiums are going to be elevated there's going to be a lot of decay in short options and loan the longer data put. this is the reason why using a diagonal you can do this as an outright trade, if target trades sideways this is likely to be profitable if you happen to own the stock and other retail names and are concerned, this is a trade you can consider in case there is a little setback this is an issue where we're wondering whether the stock might hit some resistant here, not that they have big, fundamental flaws with the company, because in general i like that story. >> carter no surprise you've got some charts. what do they show? >> sure. first a table, just to put this in perspective one-year performance while they're all a bit affidavit, they're marquee brands target, walmart, home depot, costco all up 10% and ar target's up 60%? they've started to roll over and one technique in markets is when a group starts to falter, find one that hasn't and go after it.

first chart. target, walmart, home depot, costco the other three have started to roll target's just continued on again, up 60% on a one-year basis. second chart, target itself. we just this week started to break trend. the trend that's been in effect since the march low. final chart. same chart but i've got the 150-day moving average included. i think that's where we're headed that is a good, decent downside sell-off from here >> tony, what do you make of these charts, mike's trade whatever you want. >> i quite agree with mike in terms of fundamentals here target, while relatively rich to itself, is actually not quite expensive compared to walmart and costco i think that's part of why we've seen the stock hold up so well mike said target is currently trading 20, 21 times next year's earnings walmart closer to 35 i think the stock is reasonably priced around these levels

as we've seen the multiple contraction across the sector, i do have some concerns that you'll see that as well on target next year, next week on earnings the key level here from the charts i'm paying attention to is the 180 level for those reasons, i like mike's trade where he's using a diagonal because even if target holds that 180 level next week on earnings, the decay on the short leg of his diagonal is largely going to offset the decay on the long leg he's not going to see substantial losses if target stays around this level. if you get a break below the 180 level, you should probably see a fairly substantial move to the downside quickly like we've seen in walmart and costco. because he's playing less than the width of the spread, he doesn't have a risk to the downside even if target does fall apart, it is profitable to the downside for those reasons, i like the trade setup that mike has using the diagonal. >> mike, last word >> yeah, i mean, what we're seeing in target is actually very similar to what we're seeing in a lot of stocks that are going to be reporting. i think it's a function of two

things, the volatility we got in the market, the volatility we got in rates, the catalyst that presents earnings. a lot of options premiums remain elevated in the short-term if you hold these stocks you can use things like call diagonals to capture a bit of yield or hedge if you're interested in trying to take advantage of what the options market is setting up right now. yeti shares cooling in the past week. we'll tell you what it means for one of our traders. you asked, we're answering send us your burning questions, you might get your answers on air. 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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it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. oh yeah, we gotta take off. you downloaded the td ameritrade mobile app so you can quickly check the markets? yeah, actually i'm taking one last look at my dashboard before we board.

excellent. and you have thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪♪ welcome back to "options action." earlier this month mike said yeti might be a good way to lock in some ice-cold gains >> if you bought the march at the money straddle, this stock would need to move 16.5% either higher or lower before you would begin to see any profits when i take a 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 that situation by selling those overpriced options. i was looking at the march 80 calls and the march 65 puts.

i could sell each of those for $3 and $2.60 respectively. doing that trade i would collect about $5.60. and then i can use those proceeds to help finance the purchase of a longer-dated may at the money 72.5 call for $9.10. >> so is this trade insulated heading into march expiry? mike what do you do? >> yeah, so this is a really interesting situation. because if you do $this trade shortly after we recommended it, the stock actually ran right up to that $80 short call strike. some people who did that may have already taken some profits, because of course your profits would have been capped above that level what do you do if you didn't take profits when you had that chance and the stock has fallen below where it was trading we have an interesting situation here because the options that we're short still have a significant amount of premium. normally in the lower volatility environment, we'd probably look to cover those there's still a decent amount of

premium, more than $4 for that 65 put and 80 strike call. my inclination is to stay with this trade right now here's what could happen if the stock falls below the 65 strike put we're going to end up owning it prus pleme, about $68, exactly where the stock is trading now. it was about 72 when we first started talking about it this is one of the situations where we have a bit of time where we need it to play out we're going to turn off to be better off doing the options trade than if we'd bought the strike there by $4.50 or so. >> carter what do you make of the charts >> it's intact obviously it did come to life post-judgment, to get along. it's fallen back but it's essentially where it was the premise here is this is a stock that will be higher, not lower, looking out three to six months stay long. up next, we've got your tweets and the "final call." i'm searching for info on options trading,

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welcome back to "options action." time to take our tweets. with walmart dipping i was looking at the june 150 call, do you have thought interesting since we just talked about target mike, why don't you take this one. >> so a couple of things i like about your trade number one, i'd rather buy call options than the stock because the stockhas been looking weak i like the fact that you're going to june to capture earnings the only thing that troubles me, $20 out of the money, that's a little too far i would consider buying a longer-gated at the money call option and selling near-dated out of the money call options to lower the cost rather than reaching for that cheap $150 call option. the options market is saying there's a 20% chance that ends up in the money. >> carter, thoughts on walmart >> that's right, so much damage has been done. just to be down here at 129. you've left a lot of people trapped above.

so even if and as the stock were to recover, you have interested sellers -- people who are now underwater looking to recoup losses so it's a long way back to 150 i would do what mike said. >> all right when using deep in the money call options as a stock replacement strategy, is there an optimal percentage to target under the current stock price? tony, why don't you handle that one? >> yes, when you're looking at using a deep in the money option as a stock replacement strategy, it's better to use delta rather than percentage. the delta range that we typically use is about a 60 to 70 delta then you have a little bit of gamma, which gives you that complexity that you want on an option. time for the "final call." carter braxton worth, kick it off. >> great but too great, take profits, sell. >> tony zhang? >> i'm going apple picking i'm selling puts on apple. >> mike khouw? >> put diagonals in target going

into earnings. >> that does it for us on this friday "options action" will be back next friday at 5:00 p.m. eastern time - [announcer] the following 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