we're ready for it. [ laughs ] ♪ welcome to friday. "option action." here's what's coming up. i'm sorry. how much carter worth explains why paper towels and other consumer staples are the best way to clean up after any inflation-related mess. then, strike up the band ♪ professor ko is parading right into masy's. he'll explain why. and. ♪ when to fold them ♪ >> tony is a caution play. it's too rich for his blood.

it's time to risk less, make more "option action" starts right now. inflation. it is here and you probably first notice it in the products you buy everyday carter worthies that's also the exact room to look at if you want to slowly and subtly ride price increases higher carter, what are you looking at? >> sure. so in the context of inflation, of course we covered yields on the program many times together. we looked at gold. we looked at oil but of the gic sectors one area to consider is consumer staples. we know that they have the ability to pass on price increases to the consumer. they shrink the box and give you the same amount. they have a lot of tricks, so to speak. they never lower the prices. in any event, let's look at charts and figure it out together five in total. the first is the etf you can use to trade the s&p 500 consumer staple sector.

the xlp. no judgments by me next chart, now, this is what my eyes see the lines we've broken out of, if you will, ever so slightly of this ascending wedge of sorts third chart, and this is where it gets interesting. this is a two panel. top is the exact same one-year chart of the xlp we just looked at twice, but the bottom panel relative performance to the spy. yes, we know staples are going up and there have been a very bad performing relative to the market, but they're starting to base and actually outperform the s&p. and you can see that double bottom that i've annotated there. now, take this same chart, fourth chart back a little further. this is now over the past two years. what you see, of course, during the pandemic plunge, of course, staples sell off, but look at the bottom panel their relative performance is straight up, of course, because they are defensive but if you do the trend line on the bottom panel, we have now

broken above that down trend line in effect since the pandemic peak in relative performance. final chart. same two panel again and this is a five-year chart of consumer staples on top, the sector, and relative performance the spy on the bottom. you can see the severe underperformance in 2016 to 2018 and then when breaking above the down trend staples started to outperform the s&p we have the exact same setup here and i think this is the time to embrace this sector of the market i think get 73, 74 out of it. >> thanks for the charts, carter mike, what's the trade >> yeah, i think the trade we want to take advantage of here is one that also takings advantage in something in the options pricing. right now if we take a look at three-month options or so, the implied volatility, the price of

options, is about the 27th percentile they're relatively cheap the 13, 14% implied volatility range. now, in fairness, of course, last year was a highly volatile year if we look at an earlier period than that, the two years ended february 19th of 2020. that was the pre-pandemic market high what we'll see is that the average applied volatility over that two-year span was about 13.3%. again, that's priced approximately where it is right now. so the price of options is relatively cheap and this is basically a relatively low volatility index that we're looking at here so i'm looking out to september, giving myself a lot of time to expiration i was looking at that 71 strike call when i was looking at that earlier today, you can buy that $2.15. that's approximately 3% of the xlp price at this point. and the nice thing about this, of course, is that because it's a low implied volatility and not expecting implied volatility to come in very much the decay on those options will be very, very

low. and of course, you know, if we are concerned about what the market might do, i think this week has given us evidence we might want to be concerned number one, staples is probably a safer place to be. we're not going to see the same kinds of draw downs and two, options are the better way to make your bullish bets if you're concerned you might see some kind of equity market pullback. >> tony, do you like is this trade? do you like the xlp? >> i do like xlp quite bait. i think the important chart here is the five-year chart that carter was showing you because xlp has underperformed the s&p 500 largely for the past five years. but as the market peaked back here in february, that's when xlp started to outperform here and we have seen that outperformance since i do think that this is potentially a time for xlp to start to shine and you have to consider the fact that staples generally speaking does well in the early stages of the higher -- of a rising interest rate environment which is where we are i like being more defensive

here, using the staples sector look at mike's trade here, it's a really great trade to use when a stock or etf is trading near its all-time highs where you want to take upside exposure, unlimited up size exposure with an outright call option but with the relatively muted implied volatility you're risking only 3% of the etf's value to take this bullish bet i think this is a smart way to play for further upside. >> carter, historically how well have they held up in times of market tumult? >> the ultimate safety trade starters, its yield is almost twice the s&p. there was a phrase when i was coming into this called soap and cereal there were no sort of healthcare stocks going back 150 years. they didn't exist. you bit on the bullet and cut your leg off, right? so the old biscuit companies and soap companies almost 200 years old. this is the ultimate defense

in a rising rate environment but also in an environment where input costs are going up, you think they would get hurt but they pass those con to the consumer i think it's a great area to be in >> mike, obviously staples encompasses a lot of components. i'm wondering if you had your druthers and dug in, which ones do you like best obviously some companies can, in fact, pass on higher prices? and some cannot. they just eat the costs. >> yeah, you're bringing up a great point actually because xlp incorporates a lot of stocks that do a lot of different things we've got procter & gamble in there and kimberly clark and retailers like costco and walmart are in there as well what's also interesting to me is that in addition to getting exposure to some things like that, this is sort of a grab bag in terms of the analyst's view of all the constituent stocks. sometimes it's not great to chase the stocks that everybody on wall street loves but there's a lot of names that the street doesn't love so much

smucker's comes to mind. there's things like that, coloro is another way this is an interesting way to play that sector and mute the risk that you might have if you chose any one of those stocks. obviously i do like costco and really do like walmart but those are also very well-loved stocks and that presents a risk if you're chasing the things that everybody likes so much already. >> very good point. meantime, will higher inflation cause the great travel rebound to come up snake eyes? tony is taking his chips off the table so to speak. tony what you looking at >> yeah. i'm looking at mgm there's been a lot of optimism and strength around casinos and sports betting companies, but i think this is time to start fading some of that strength if we first look at a long-term chart, this is a six-month chart and we have this rising trend line that mgm has been on six months we recently broke that trend line and come to resistance today the risk/reward ratio favors

shorter entry level. zoom into the chart, recently mgm broke out above $32 resistance level mgm continued to outperform the broader markets on this reopening optimism but that has pushed valuations to fairly extreme levels and it made sense when q4 revenues were growing 31, 34%. but as q1 revenues came in and decelerated down to 11% and online gambling stocks have a fair amount of multiple contraction, i think you're potentially at -- due for correction here on stocks like mgm. >> so the trade structure i'm looking to use here is by going out to july, i'm buying an out of the money debit spread. now the stock has rallied quite a bit here today i was looking at the 38, 33 put spread here for investors that are trading this on monday, perhaps you might want to move that strike up $1, but earlier today i can buy this put spread

for $1.50 which is risking less than 4% of the stock's value and i'm targeting about a 33, $32 target here to the downside, which is the prior support here on mgm. >> carter, tony had a chart with a lot of lines on it, and i was wondering what your take was on that >> yeah. excellent lines. i mean, the lines are the lines. when you start to break them, it has to be respected. i think a couple things about mgm, we know it's been such an outperformer over the past 12 months that's part of the issue. up almost 200% things like lvs up 25, wins up 60. then there's this, this in its totality is literally a gambling stock. i mean, the stock itself it was 100 back when the market itself peaked in 2007 before the financial crisis it hit a low of 5 after the pandemic i mean, this has never even come close to recovering its losses associated with the financial

crisis yes. let's sell it. >> mike, what do you think >> yeah. i think the thing that's going on here also is that because the stock has had such a pronounced move, because it's in a very volatile space, the options premiums are elevated. i definitely like the idea of using a debit put spread to make a bearish bet here for one thing, i don't really like selling a whole lot of upside and things that have really been on a tear too much because obviously we have seen how that can turn out. this is a situation where you can make more than you can potentially lose and that's obviously one of the things you want to have if you're going to make a directional bet like this if all you did is simply buy that at the money put, you're laying out quite a lot of premium and of course you're also lowering the break even price of your options trade. this basically mitigates that decay and raises the break even so the stock doesn't need to fall as far before you start to see profits. >> all right we'll take a quick break for everything "option action" check out our website and sign up for your newsletter. meantime, here is what's coming up next.

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welcome back to "options action." the mall is dead the giant helium balloons are popped but could there be a real miracle on 34th street. professor khouw has a look. mike >> yeah, sooim taking a look at macy's one reason is because they happen to be reporting earnings next week. there's a couple things that are interesting here and right now the options market is implying that this is a name that could move more than 10% just next week after they report earnings and there is a real sort of bifurcation in the market about the view on this stock because of course they do have some credit concerns, has a tremendous amount of debt yet the stock has held up pretty well so the street pretty much doesn't like it but yet the price has held up and that indicates in conjunction with a relatively high short interest that basically this whole situation of high debt, high leverage is maybe something to be taken advantage of if you

think you get an upside surprise coming out of earnings so i was taking a look at this one important point, when you have companies like this, equity is relatively volatile, there a lot of debt on the balance sheet, you'll find that options premiums are quite expensive and that is definitely the case here buying an at the money call to make a bullish bet is going to cost you a lot of money and buying that at the money call and then selling it out of the money call to help mitigate the cost doesn't do quite enough so actually to try to offset some of that premium, what i was looking to do was buy an in the money call i was looking at the july 16, 22 call spread today. the stock was trading around $18 and by buying that in the minute call for $16 and selling the 22 strike call, i was going to spend just under $2.10 to put that trade on. and you notice that essentially what is going on here is that the intrinsic premium that you have approximately equivalent to the amount that you're spending for the spread so the stand still rate of decay is relatively low and the reason

for that is in part because you have this high short interest and upcoming catalyst. but this is a situation where i think you could set yourself up where you have an asymmetric payoff if you happen to get it right. street doesn't like this name very much and yet the stock has held up. i'm interesting to see carter's point of view because i think that creates an interesting dynamic here. >> held off. that is putting it mildly. it is up 60% just this year. carter, what are the charts telling but this one >> sure. you know, you heard about the debt and the leverage. before we look at the charts, buft buffett in his 1979 annual report wrote turn arounds seldom turn we know what happened to wool worths or kmart. but this is turning technically but let's look at the chart. one year chart, no judgments or annotations by me. second chart, this is what my eye sees a well defined wedge forming

tension and the implied move is going to be big. it is earnings related look at the next chart this is a two-year chart, same annotation and same drawing and same tension, the pennant or the wedge or whatever you want to call it. i've drawn the arrow, that is what we're thinking. two more charts. now here is the five-year chart. it is the same setup, same wedge. next chart, another way to draw the lines. that is a head and shoulders bottom final chart, bonus chart, sixth chart, and altogether we've broken above the down trend line and we have the head and shoulders an we have the wedge yet it is going to go down instead of up. that is the bet. we're betting up >> betting up and you layer in the short interest on this one tony, 14% short according to fact set so how do you like this trade? >> so this is a really tough

one. because i don't love the fundamentals on this particular stock but with you look at the stock as carter shows you, i think this stock needs to get above the 18 to $20 resistance level on the big move of 14% it couldn't get back above that that is challenging. but if you do see a break out above the $20 level and perhaps earnings next week is the catalyst that drives that, i think you have an upside target of the 26, $27 so the upside is there but i think the probability is low looking at the fundamentals. they do have about 40% of the sales now as digital which is a shift in the right direction but i do feel it is perhaps a little too little too late here so for those reasons, because of assigning a relatively low probability of a breakout but if it does happen i think it will break fairly significantly i think that this is where i would use an out of the money call spread. mike is using an in the money call spread and i understand why he's doing that, so reduce the amount of break even price so it is relatively close to the

current price but i would actually prefer to risk less in the money debit spread i risking almost 11% of the stock's price by buying an out of the money debit spread you could risk 5% to 6% and get a better risk for reward ratio on a low probability bet. >> we want to get to a news alert right now and it has to do with retail. let's get to leslie picker for that >> hey, melissa that is right. this comes from the co 2 hedge fund they're known for investing in tech but had had positions in some significant mall stocks, retail names and interesting during the first quarter despite the economy largely reopening, they dissolved stakes in some of the retail names, gap, tjx, under armour, urban outfitters, deckers, paired back steaks and others it's the opposite of the reopening trade that we've been seeing thought it was noteworthy. wanted to bring that to you.

within the tech world, they increased their stake in amazon but reduced the stake in facebook and reduced position in crowd strike and data dog as well as disney it is worth noting that these positions are as of march 31st and may have changed in the six weeks since, melissa. >> good point there. leslie, thank you. leslie picker. all of this could be completely moot we don't know. but let's trade it as if it is current. mike khouw, what do you think of these moves? >> i think there is a lot going on since march 31st. but i guess it doesn't really surprise me all that much. the one thing i would point out and this is just sort of a general observation and as we look at the week that just passed and some things that make me uncomfortable in the market place is when we hit a all-time high and see volatility increase and because that is something that could be a signal that you'll have a market down draft.

i'm not saying sell and may go away necessarily, but it is some cracks that i think we need to keep an eye on >> all right up next, who would have guesses right after he put in a oil trade that a oil pipeline would get hacked there is a lesson to be learned from that experience we're back in two. ♪ i have an idea for a trade. oh yeah, you going to place it? not until i'm sure. why don't you call td ameritrade for a strategy gut check? what's that? you run it by an expert, you talk about the risk and potential profit and loss. could've used that before i hired my interior decorator. voila! maybe a couple throw pillows would help. get a strategy gut check from our trade desk. ♪♪ the first survivor of alzheimer's disease is out there. and the alzheimer's association is going to make it happen.

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because platforms this innovative, aren't just made for traders—they're made by them. thinkorswim trading. from td ameritrade. welcome back to "options action." time to take a look back at one of our open trades last week we laid out a way to strike big gains in the oil trade. >> we even have goldman sachs coming out with an $80 price target on oil and even 100 strike call options trading might indicate that the upside is where it is at. but everyone is looking up, sometimes you might want to take a pause and wonder whether it is a little bit over exuberant. so i was looking at uso, if you have an equity trading account, that's a way that you ca get your exposure to oil and selling an upside call spread specifically looking at june 45, 48 call spread, $3 call spread, expiring in june and collecting

about 1.05 for that. >> right after that there was a hack but oil prices are right where mike left them so what are you doing now? >> absolutely nothing. that is what you want to do when you have a situation like this my thesis hasn't changed when you're short a credit spread like we are here, time is on your side and we could sit and wait the only tike we look to change this if f is we have a lot of profit or if our thesis changes. >> up next, last 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 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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♪♪ ♪♪ ♪♪ welcome back we have a tweet, are we bullish on the gld gold etf after it is broken through some support and inflation fears and with crypto taking a breather. tony, what do you say? >> i think gld breaking out above that 166 resistance level

is bullish i think you have upside targets of 182, 183. >> time for the final call carter braxton worth. >> feeling bold, macy's, less bold, play the staples, xlp. >> tony? >> put verticals on mgm. >> mike? >> xlp calls and call spreads in macy's. >> "mad money" is up next. ♪ - [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

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