ig. tell your friends and family that farrell's is back. [ cheers and applause ] it's friday in case you didn't know. that means "options action." welcome, here's what's on tap tonight. maligned, marooned, meaningless? three m words the market thinks of when it thinks of 3m. carter worth thinks very differently. find out why this left for dead industrial could be on the verge of its own revolution. then keeping with the theme, tony zhang is also bringing good things to life find out why he's jumping into ge when others are ejecting.

finally, speaking of ejecting, professor mike khouw is constructing a tech sector parachute, just in case. because he sees more turbulence ahead. it's time to risk less and make more "options action" starts right now. let's get to it. name this stock. it's an old industrial that's seemingly everyone loves to hate it's got businesses in everything from your face mask to your adhesive-backed not notepads 3m carter, this left for dead name could come roaring back to life. carter, what's on your post-it >> that's right, it's really the only true conglomerate left in the united states with health care lines, consumer lines, industrial, adhesive, automotives, it goes on and on, and really the biggest in the world. what we know is it's one of the worst-performing dow

constituents 3m on a tier basis is worst. let's look at a couple of charts the first is a comparative chart of the spider's xli versus 3m. this chart ends at the pandemic low. the sector and 3m knifing lower. if you see the second chart, there's been a big rebound in equities in general, industrials specifically 3m has lagged. and that is either the problem or the opportunity it is the low stock, almost has no buy ratings, if you will. but i think the way it's acting of late is the beginning of an important bottom so three charts that we'll look at the first is lines drawn here. this is what i would characterize as a bearish to bullish reversal the second, you can characterize it as a head and shoulders bottom and the third is really to target the price objective the stock gapped down some two years ago dramatically from the 220 level to essentially where

it is now. and any sort of quick news-related retracement will give you an outsized gain. an opportunity, a laggard, a great old name, we're buyers. >> all right thanks for that, carter. mike, what's the trade off of this >> yeah, i mean, this is an interesting stock, right so we've seen upticks in volatility in a lot of quarters on a market that is obviously in a pretty extended bull market here this is a low beta stock, about .85. another thing i would point out, i think carter's charts have indicated this this is a stock that carried a much higher valuation, the enterprise value $140 billion or so at the tail end of 2017 2018, they made about $10.14 a share. they're forecast to do $10.50 a share in full year 2022, well off of $11 after that. has low beta, has a great

div dividend, still has decent eps growth, i think this is a stock you'd like to own. of course, if you're looking at how it's behaved this year, it is up considerably off the bottom how to participate now committing only a small amount of capital and trying to catch incremental gains above that 190 level if the rally we've seen this year should continue and some of the valuation thesis we've articulated plays out over time i was looking at the july 190/210 spread, buying that for just over $5 you could spend $8.25 for the 190 calls, sell the 210s against it for about 280 normally we're looking at a 3-1 payout on vertical call spreads. it is $5 out of the money. there aren't as many strikes in this stock in the july expiration, as you might otherwise see. it's almost $200 stock, 2.7% out of the money bearing in mind when you deal with these vertical spreads, the out of the money option as a percentage of its value will decay more quickly

that's one of the reasons we're comfortable going a little bit further out than we normally would. this is the way you can get long exposure to an attractive stock that has had already a decent bit of a run and committing little capital to do so. >> tony, what do you think >> i think this is exactly right. both mike and carter hit it on the nail this is one of the few businesses in the s&p 500 that i think we can actually call cheap, trading at 18 times next year's earnings, as mike said. earnings look fairly strong going out the next two years they have seen no revenue decline here in 2020 and margins continue to actually improve here so for those reasons, fundamentally i like this company. as carter pointed out, you have a breakout level since 2016, the $180 level has been a major resistance level for this particular stock. you have a breakout here that's the technical catalyst for getting into this trade right now. then if you look at the trade structure that debit spread that mike is using is, in my opinion, the best way to play this potential breakout

you're risking, as mike said, 2.7% of the underlying stock's value, looking at a 3-1 payout if it rallies to the 210 level he's going out to july, buying him -- buying himself quite a bit of time for this stock to rally up to that level. >> mike, i'm curious from the fundamental perspective what do you like better about this stock in the notion that there's a rebound that's in store in terms of the technical picture? or this whole notion of the reopening of the economy and everything's going to turn hot with industrials benefiting? >> i think it's the industrials benefiting, and i think it's also the fact that it's trading at a relative discount to the market, when you still are seeing some eps growth and you still are seeing some dividend yield. i think that's really a hard thing to identify in this market right now. we have a lot of spaces that have done exceptionally well so far, and it's very difficult to chase some of those stocks on the heels of that. we have to try to look for some value. i think this is a value play on the reopening trade.

>> another industrial that's had more haters than lovers, than certain reality tv stars, tony thinks this name is one to jump into when everyone else is ejecting >> yeah, exactly i want to take a look at ge, because this is a bit of a counterintuitive trade where the news drove this stock down about 15% here this week i think that's actually an opportunity for investors who may have missed out on the recent breakout here to get some long exposure, especially as ge looks a little bit more focused as a result of this deal, being able to focus more on their aviation business, their power business, their industrials business the stock has outperformed the sector over the past five months and it's been hard to chase this particular stock if we look at the long-term chart, ge has been bottoming here since 2018. and that $12 level has been the level that has been able to -- has struggled to get back above that it did break out here about a month ago above that level but it quickly rose beyond that

level. if we zoom to the daily chart, you see that the breakout above that $12 quickly ran to $15. on the news this week, we managed to get all the way back to that $12 level. as carter would say, we tested that level to the penny. it held that level i think the risk/reward looks far more attractive on the long side so the trade structure i want to use is taking advantage of a support level that we've identified, that we believe is going to hold to that $12 level. so i'm going out to april 23rd and the weekly options i'm selling the 12.5, 11.5 put vertical, collecting about 78 cents for that 11.5 put, paying about 38 cents for that -- i'm sorry, 78 cents for the 12.5 put, paying about 38 cents for the 11.5 put net-net i'm collecting 40 cents for a $1 wide credit spread,

about 40% of the width, only risking 60% of the width this type of trade structure allows me to potentially own ge stock at about $12.10 if the stock is below $12.50 at expiration, a much better price to own this at rather than chasing the stock the past few months. >> carter what do you make of tony's technical take? he quoted you. >> just exactly as characterized, meaning to a pivot point. a stock that breaks out then falls back to the level from which it broke out, essentially, is a level of support. and so a 17% decline in the past three sessions from the peak high to the news low and this is an opportunity in fact, ge was up today so weakness to take advantage of versus weakness to stay away from. >> all right, so it's got the cbw stamp of approval. mike, what do you say? >> yeah, i'll let those guys opine on the technicals. i'll speak to the options trade itself one of the things that's nice about picking a credit put

spread is that three things can really happen here the stock can decline, it can go sideways, it can rise. you're going to make money in two of those cases in the downside case you're going to be risking 60 cents a profit of potentially 40 cents. but you're trying to do that on a stock where you like the level that you have. so i think this is a good way to play it. this is one of those situations where we're trying to find places where we can sell options premiums at the elevated levels where we're still seeing them. ge is one of those cases i think the implied volatility for ge right now is about 50%, maybe a little higher. that's pretty high that means that you are collecting 40 cents, which doesn't sound like much, but this is a $12.5 stock. over the course of just a relatively small amount of time, the yield on a standstill basis is still quite good. i like the trade structure if these guys say the technicals are good, i say go for it. >> tony, i'll ask a similar question of you, how much of this is a play on a cyclical

recovery, how much of this is a play on the turnaround that is in place at ge that's ongoing, basically? >> for me it's the cyclical play it's really looking at the aviation business, the power business, especially as they continue to grow their renewable energy business. that's really what i'm focused on when they're able to sell off the aircraft leasing business that allow s them to focus on that, that's the turnaround story and it's finally starting to pay off here. check out the website and sign up for our newsletter here's what's coming up next among professor khouw's notable quotables, you don't buy insurance when your house is already burning down find out how he's putting that policy in play right now. plus calling ought "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.

♪ ♪ ♪ ♪ ♪ welcome back to "options." the tech sector getting hit again today. professor mike khouw says now is the time to formulate a plan for what's a recurring theme, mike

>> we've seen this big uptick in volatility, so i'm taking a look at the nasdaq index which is best represented for most of the viewers by the qqq etf of course this contains all of the biggest technology stocks, essentially, has its biggest constituents thinking about hedging your portfolio if you hold qqq, if you have a portfolio that looks a lot like qqq, and many of you do, you have a portfolio that's essentially where you began at the beginning of the year. qqq right now i think is 55 basis points year to date. you're wondering whether you should remain invested we have a lot of reasons why you might want to remain invested. then we have all of these symptoms of increased volatility which may want you not to be we're taking a look here is hedging. the important thing about hedging that is you should hedge when you can, not when you absolutely have to the other thing is that when you're talking about hedging, this is more about positioning than simply timing

if you knew when the market was going to rise or fall, it wouldn't be necessary to hedge, you would simply sell on highs and buy on lows and everything would be easy and you'd be living on the beach. of course, it isn't as simple as that if you have a portfolio and you want to construct a hedge to protect yourself, you need to consider the cost as well. if all you did was run out and buy puts all the time, the cost of that would add up considerably i was looking at the may 300, 270, 340 put spread collar basically what you're doing is buying a put spread and helping to finance a purchase of that put spread by selling an upside call i chose some fairly specific levels buying the may, $11.10 if you bought that put only to protect your portfolio, that's going to cost well over 3% of the portfolio just between now and may. you can see how that kind of insurance cost would add up over time selling the 270 puts against it for $4.55, selling the 340 calls

for $4.05, net-net you'd be spinning about $2.50 to put this trade on to hedge your portfolio. first of all, that's less than 1% of the value of qqq right here the other thing is, i'm basically trying to capture a put spread that is about 10% when we think about a market correction, we're usually thinking about 10%, bear market maybe 20%. we're trying to get that protection against that kind of a drawback the other thing is selling that 340 straight call, the high in the qqq so far this year was $3.38. presumably if we do recover up to or about that level, we're probably going to run into a bit of resistance because, as carter often says, people who bought at that level, having lost money, now gotten it back, are probably going to be looking for the exit sign this is a way that you can spend less than 1% of the value of qqq, get insurance against some of the volatility we're currently seeing, down to about that 270 level, giving yourself

10% downside protection, while preserving the opportunity to recoup losses if you were one of the unfortunate buyers who paid the year's highs. >> these guys are really quoting you tonight, carter. you've got some charts walk us through. >> i'll go off in a dream for the rest of the weekend. so just before we look at the single chart, it's important to say of course the qqq, 100 stocks meant to mirror the nasdaq 100 the top seven stocks are 50% of the weight, and they're the big names you know microsoft, apple, google, facebook, so forth, nvidia, excuse me. here's the real issue. decisions or judgments about the qqq are essentially decisions or judgments about the market take a look at this table. so in the history of the index, going back to 1985, in any given session, when the ndx is down, qqq, the s&p is down 81% of the time and, in turn, when the s&p 500 tech sector is down, in any given trading session -- that's 9,000 going back to 1985 -- the

s&p is down 80%. so a judgment about the market is a judgment about the ndx and vice versa so here is a chart of the ndx. and what we know is that we have a break in trend so well-gained trend, off the march low, 45-degree angle, definitive break now we're trying to get back above it there's stocks that are better than others. microsoft is a favorite, for instance but hedging in this kind of instance is the right play >> so i'll go back to mike before we get to tony. given the stats that carter laid out in terms of the correlations for the past i don't know how many decades at this point, is it cheaper to protect using the s&p as a hedge, given the volatility in the nasdaq 100 mike sorry. >> that's a great question, yeah so that's a great question, and of course it's going to depend on the structure you use

if all you were going to do was just go out and buy, say, an at the money put that expires in 30 days, 45 days, 60 days, three months, the answer is, yes, it would be cheaper it would be cheaper to buy that put on the dow jones industrial average. it would be cheaper to buy that put on the s&p 500 but of course, we don't limit ourselves to simply buying the at the money put we can buy that more expensive option and we can help finance it by more expensive options on the wings which is what we're doing here really it is about how you structure your position and its cost and the benefits. and here's the thing these are the broadly held stocks so most of the people who are watching, most of the people who are looking at their accounts, almost everybody i talk to who has chosen stocks for themselves, other than, say, their other big, broad market portfolios, these are the stocks they hold. if you're trying to hedge against these stocks, this is probably the best proxy you're going to find. >> okay. still to come, what to do when your bank check bounces we will explain that next.

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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 we've got changes to tell you about concerning the s&p 500

nxp semi, penn national gaming, genrac, and cesars will be entering at the index. on the way out, flowserve, sl green realty, xerox, vontier two gambling names, that is interesting. tony, what do you make of this >> yeah, exactly penn and cesars, both gaming stocks and penn made a new 52-week high i'm guessing that's going to propel this stock even higher especially as it goes head to head against draft kings and xpi. nice secci conductor stock fare those interested in electric vehicles and self-driving auto, strong name in that sector. >> up 5% at this hour. a couple of open trades, mike khouw and carter said regional banks might be headed for a bumpy ride. >> you can see the channel that kre has been in. it's very well defined

and after basically breaking out of the upper band, 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 seller of kre. >> the trade that i was looking at kre is more a pause trade than outrit bearish trade. looking out to april, selling the 65, 70 call spread you could collect about $1.90 for that very close to the 40% or so that we like to get for an upside credit spread if we're selling. >> the kre actually hit a new all-time high today, but there is still time to adjust the trade. mike, what do you do >> yeah, so there's something to think about here first of all, when you sell a credit spread and you've pretty much given back all of the credit that you've received and that amount again, which is where we are now, this is worth about $3.50, maybe a little more time isn't as much on your side. so the risk/reward relationship from here is more favorable. but you are now paying to be in this trade rather than collecting to be in this trade

i think we're going to have to turn it over to carter for his technical view on kre. >> carter, quick on this >> sure. it's extended, now it's more extended in principle, the rate move is helping it but real rates are still negative and way below where they were the last time the kre and regional banks were at all-time highs. up next, we have your tweets up next, we have your tweets and the "final call. i'm search 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 your investing goals and interests. and it learns with you, so as you become smarter, so do its recommendations. so it's like my streaming service. well except now you're binge learning. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn ♪

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visit tdameritrade.com/learn ♪♪ ♪♪ welcome back to "options action." we have time for a tweet do you recommend setting stop loss orders on options, if so, do you have a rule of thumb for setting that level tony, why don't you take it? >> yeah, absolutely. a general rule of thumb that i usually use with either a long call or a put or a debit spread is to set a stop loss at about 50% of the premium that you pay. >> all right it is time for "the final call." carter braxton worth >> 3m closed at 185, we're

looking for 210 or 12% higher, buy it. >> tony zhang? >> bounce on ge, sell at put credit spread. >> mike khouw? >> put spread collars make cost-effective hedges. >> that does it for us on "options action. see you back here on thursday. -g 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 and we've all been wiping down door knobs and surfaces.