aw with this. -- captions by vitac -- welcome to "options action". oil is up. we'll divest the divergence. why peloton is back in the race with us tonight carter worth mike coe and tony zhang. let's get to it, associated energy names have not quite followed suit. the chart master is drilling down on what that means. carter >> that's right. obviously a great move in th commodity, all commodities, and yet copper has given back a lot.

all the grains have. oils continued higher, and yet the energy shares are not progressing. i think there is a message there and the message is energy is not a great place to be. it doesn't mean they have to crash or m come apart in a big way, but it's a time to look at another period, rather than the consensus on the street. so just look at the one-month performance. you see it here on your screen, oil versus xle what we know, of course, those numbers tell a story the commodity is up 11%, 12%, and the energy shares, xle, dominated by exxon and chevron but many others, only 5.6. look at the three-month performance, next slide. oil, up 20 and xle, the energy stocks only up 10.4. so then, what about if we just start the meter, start the story

from the day of the peak before covid. look at the next slide this is looking at the peak in the s&p before the covid selloff, february 19, 2020 and you're looking at oil, it was at $54 a barrel. and it's at $74 a barrel now that's up 40%. the energy complex the energy sector is unchanged so you've got the commodity well above where it was before the pandemic and yet energy is essentially where it was that's not particularly encouraging. and so take a look at a two-panel chart. the top here is xle, and the bottom is relative performance to the s&p what we know is actually relative performance peaked back in march, and here we are basically about to be july 1st and so all in, energy delivered four months of out performance from november to march compared to the s&p and it's been nothing

but a pain or a hurt before that and since. finally an xle chart itself. we had a chance to break out, it did not. and then fell back now i think we're stuck at the level that you see there the betting is that xle and constituent stocks are going nowhere and profit from lack of volatility >> all right, carter so, mike, what's the trade here? >> so carter actually referenced this with respect to xle he was talking exxon, chevron and conoco these integrated oil companies, just those three make up nearly 50% of the xle overall i think we only need to look at one of those companies, the largest, exxon, to get some sense of where the fundamental trouble might lie here with their cash flow, dividends are one possibility, debt repayment is another, and investment, essentially, and depleting reserves is the final choice these companies have to make

unfortunately, even with oil at these levels, they can't actually satisfy all three of these. exxon is trying to maintain their dividend their debt levels are actually above the target ratios that they previously articulated, and they can't really afford to see some increase in their debt expense, and of course they are not replacing all of their reserves which, of course, if you don't do that, what that means is lower production in the future and i think that is one of the overhangs that you're seeing amongst the integrated names in particular as carter pointed out, this represented a relatively larger portion of the xle etf if you're paying for a range-bound thesis, usually what you're trying to do is sell some options. the structure we're going to talk about is in iron condor, specifically selling in iron condor what is an iron condor sounds complicated really what you're doing is you're combining a short put spread with a short call spread.

and the important thing to remember here is that, when do you this, you're going to collect premium on both of these even if you get the trade wrong. of course, the stock can only be lower or it can be higher or in the same place it cannot be some combination of these. so specifically what i was looking at was the august, 48, 53, 57, 62 iron condor. so i'm selling that put spread, which was around $1.10 and also the put spread, which was around $1.10. so looking to collect about $2.79 on a dollar condor you would be above the short call strike. again, the net premium you collected. essentially the break evens are down 8%, up 7%-ish, and of course if the stock simply stays approximately where it is right

now, that's the amount that -- you know, that would obviously be the ideal circumstance. >> tony, what do you make of this trade >> i think this is a really interesting use of an iron condor as mike said, an iron condor is a combination of the put credit spread and the cal credit spread combined with these iron condors, you typically want to collect abou one-third of the vertical width on each side he has a $5 vertical width on each side, but he's collecting $2.20. that's actually 44% of the width. so a higher premium he's collecting on this one than we would normally see and that skews the risk-reward ratio of this iron condor, closer to 1 to 1 more than the 2 to 1 that we typically see for this kind of structure the other thing i want to put out to investors is what you might want to do to manage this type of trade, if the trade starts to collect half the premium or half of the max profit on this, those are good times of potentially taking profits on an iron condor.

but if the stock start it is trade towards the upper side, one of the things that you can actually do is adjust the profitable side of the iron condor and roll it into, effectively, what is an iron butterfly, and as long as you keep the $5 width on the other side, you're able to collect more premium without having to commit more capital. so it's a great way to potentially adjust the trade that's starting to drift one way or the other >> mike, comments on that suggestion >> yeah. i mean, i think that's an important thing we should really point out. and that is when you d credit trades, when you're collecting options premiums, it isn't necessarily to wait all the way until expiration to collect every last penny of the options. the reason is as the remaining premium is diminished, your

risk/reward is dramatically diminished if i pay a dollar and there is a remaining 50%, the risk reward may no longer be attractive. so you should be ready, in trades like this, to either take profits or adjust when things look good. >> let's switch gears here, and this time the pun was intended switching gears to peloton and why the stay at home play might have more mileage to go. tony, take it away >> peloton has definitely had a challenging last six months between the supply chain issues that it's had and the tread recall recently, but i think it's poised potentially for a breakout now that a lot of that is behind it if we look at the chart first of all, what you see is is that the stock had peaked in january at about 170 and traded down all the way to $80 and just last month, it formed a bears trend line which last month started to break out higher now we've confirmed that breakout so this is the first suggestion

that the stock is ready to rally from here. but if you look at the chart or draw the lines a different way, you see an inverted head and shoulder, a completion of this bottom formation from this $80 bottom this has a neckline of around $125 if you break out above that 125, you're really projecting up to about $140 this really reflects the underperformance that we've seen from this supply chain and the tread recall that's behind it and the chart is reflecting what i believe is a better environment going forward. if you look at the business itself, the recent international expansion that it's going through, and the corporate wellness program that it's launching is actually expanding its total market, which when you couple it with profitability that we're expecting from pell ton in 2021, i think that's a fundamental case for the stock to trade higher. so the trade chart i'm using reflects the fact that we have achieved this bottom formation but it hasn't broken out yet the timing on this can be a little tricky.

i'm going out to the august 6 weekly expiration and i'm selling the 120 and 108 put spread here. so that, even if the stock doesn't quite break out for the next couple of weeks i'm still able to collect premium, and when it does break out, that's when i can take profit on this i'm collecting about $8.50 on that august 120 put, while playing only about $3.20 cents on that 8 put. so net i'm collecting about 40% of the vertical width, trying to skew the risk reward in my favor while i wait for this breakout >> carter, do you agree with tony's chart analysis? >> sure, those are great lines, meaning the point of annotating a chart is to show key levels and why those levels are key, do they matter, and do they serve as a reference point for the prospects going forward. you have a stock that drops 50%. interestingly, this circumstance -- and there's

about a 90% correlation with peloton and tesla, with peloton and tesla and solar stocks like the etf 10 great run-ups, good market beaters that allowed great collapses, 50%, 60% in man cases, and they all have massive rebounds and these formulations typically mean higher prices >> so, mike, what did you make of tony's trade? >> i definitely like doing credit spreads, particularly when you can collect as much of the distance between the strikes as he's doing here in fact, he was talking about that on the xle trade. this one sets up a little better, of course, because in this case the put spread that he's selling actually expires sooner when we do put trades, we actually like to mirror data if we can get them. i can't speak to the valuation conversation because to me i always thought peloton could potentially face additional competition and i'm not convinced that their valuation

is one that i would necessarily want to get behind that said, this is obviously a brand that people have bought their products are excited about it that produces higher stocks than you might see in other areas so obviously, if you are a believer in the name, this is a trade insstructure that i like. still it come, skew. professor ko explains why such a small word can affect your portfolio right now. intone -- and don't forget our website and our news letter which you can sign up for. we're back in two.

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♪ welcome back to "options actions" mike thinks it's time to educate you on skew. mike, take it away >> so when we talk about skew, what we are really talking about is the relative price of out of the money calls to out of the money actions to out of the money puts one of the things we will sometimes get in a situation like this sort of some antithetical or contradictory market setups. and i think we're kind of seeing that right now because oftentimes what you'll see is when skew is elevated, it reflects a heightened sense of anxiety by market participants why is that? they'll elevate the side of puts against some kind of anticipated

decline in market prices what's interesting about that, and right now we are seeing skew levels getting up to the kind of heights we were seeing basically at the height of the pandemic draw down. so out of the money puts are actually quite expensive relative to at the money options. this does a couple things. one of them would be if you're trying to buy put spreads, for example, to hedge your portfolio, interestingly, all else equal, the cost of those put spreads might actually go down rather than up. because the at put levels are staying the same but the out of the money puts are staying at the same price if you're thinking of making a bullish bet, let's walk through an example that i saw today that i thought was interesting. i was looking up to september and the september $4.10 puts

were priced at $7.20 so i could sell those and collect the $7.20 and then use the proceeds of those puts to finance the purchase of the out of the money 446 strike calls. those were $2.40 each. notice i could actually buy these of those for every one down side put that i was selling. sow how does this actually play out in the real world if s&p moves up or down i'm short a put that is about 3.9% out of the money. so if the market declines 10%, i would lose about 6.1%. of course, if it stays above that level, i won't lose on those short puts on the 446 calls, those are about 4.5% out of the money. if the market rose 10%, i would make about 16.5% in terms of profits. i have a very a symmetric payoffs. and that dynamic is created by the fact that people are paying

up to get the downside puts and not so much to get those out of the money calls. in a way we find we can get a call like payoff by doing this so this could be an interesting way to substitute a long exposure in the s&p for the equities that we have because we get that nice asymmetry. >> carter, what's your take? >> one thing to consider, it's obviously being discussed. you can see in the media and there is a little bit of a breadth, issue, of late. specifically, overnight indices are not making the high that the s&p is making. i have a table here, maybe you can look at that basically yesterday the s&p 500 is making a new all-time high. yet if you look at the s&p equal weight index, that hasn't made a high since may 10. or if you look at the do you jones -- dow jones

industrial average, since may 10th they haven't made a high. so the issue is, is that the opportunity that the breadth improves, or is there some question as to why is it just the super cap names and others that are keeping it? one step to consider, and i think it's worth it, the percentage of stocks in the s&p 500 that are above their own particular averages, only at 49%. now there are only two instances in the past 15, 20 years where that has happened. you have the s&p making a new high and yet only 50% of the stocks are above their own 50 day one was in december of '99 and the other before june '08, just before the financial dee backle so food forthought

tony, your last word on skew >> so i think this is a fantastic dive into volatility because i see a lot of the investors will use more generalized measures of volatility such as ib rank or ib percentile to measure whether it's cheap or expensive. but volatility is far more nuanced than that. i think mike's example shows you how easy it is for these calls, in this case leveraging th potential upside while limiting his downside for investors who use a volatile rank or percentile, this gives you more data to look into the underlying volatility surface that you're actually trading when you're trading these options. definitely look into that. as far as carter's comments on the charts, that's why i think this strategy is suitable in this market environment. it's something that's been existing for a few weeks now, but that could go on for a few more weeks or even a few months. during that time, as markets continue to melt up, if you will, this type of strategy allows you to take advantage of that while limiting your

downside risk. coming up, one of the most discussed names this week, nike. what to do with last week's trade now that all the opinions are in if you have a question out there, tweet us. you might just get your answer on air be back right after this 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. ♪♪

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aren't just made for traders - they're made by them. thinkorswim trading. from td ameritrade. welcome back to "options action." last week tony made a short run at nike ahead of earnings. >> when we look at the chart itself, the stock has largely been trading sideways in the last eight or nine months or so and they've been breaking prices at $130. nike is already trying to break below some significant support levels here, and that poor relative strength does not bode well going into earnings next week going out to the june 25th weekly, 123, august 30-put diagonal here, spending about $6.25 for the august 130 puts and selling the june 25 weekly options for about $1.24.

net net here um paying about $5. >> on earnings, the stock spiked to a new high. tony, though, you say you can still continue down this path. how? >> yeah. so this is a prime reason why we use options to place these options earnings bets. clearly this is one that did not work out, but one thing you can do is buy back those 123 put and hang onto the august 130 puts and see if there is a significant downdraft in the next two months over the august expiration >> up next we have your tweets and 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 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.

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♪♪ visit tdameritrade.com/learn ♪♪ ♪♪ welcome back to "options action." time to take your tweets our first viewer writes, i believe the dollar will continue to gain, i was looking at uup selling the jan $26 call and buying the jan 21st call for the cost of about a share. mike, what are your thoughts

>> i like the fact that you're looking out fairly far to purchase calls to make a bullish bet that's true whether it's uup or anything else however when you're using spread you might want to date it. i might buy that 25 stoc call and then possibly look for something near dated against it. >> our next viewer asks, i own virgin galactic shares and i'm thinking of writing a covered call any suggestions? current bid $16.22 thanks in advance. tony, take this one. >> i think this is a great time for covered calls. the challenge is finding stock prices that are high enough. the only expiration that i was able to find was going out to july i would go to that 105, even 115 strike to look at covered calls opportunities on a stock like virgin galactic that's this volatile >> carter, what do you make of the chart here after a 38% spike? >> that's just it, a 38% spike,

they don't happen out of nowhere. and how about this, the entire float turned over today. you're talking a volume of 260 million shares i think it goes higher >> all right kw quick final call, tony, what do you say? >> peloton higher. a quit spread. >> mike, quick >> rick reversal - [narrator] the following program is a paid advertisement for nuwave oxypure smart air purifier, sponsored by nuwave llc. featuring deborah norville. an award winning journalist and new york times best-selling author. deborah is here today to share her passion for the nuwave oxypure. - we've been living through strange and unsettling times. never in history has everyone on the planet been confronted by the same thing. and we're still trying to get back to a sense of normalcy. we've discovered how devastating a virus can be and the importance of proper cleaning.