it's -- it's mind numbing. it really is. because it didn't have to be like this. ♪♪ it is friday and that means one thing, i am brian sullivan it's time for "options action. in for melissa lee. here is what's ahead >> earnings season begins next week with venerable institution that is could foretell the fate of our economy, but they're not the banks you may be thinking of carter wirth explains. then, could the summer travel season officially under way, a covid variant gaining steam, we're assessing the best of the airline industry. plus, hold your hedges

professor kho explains why you should keep your hedge on and how not to be caught in an over hedge thorn bush it's time to risk less and make more "options action" starts right now. good friday evening or friday afternoon if you are scorching out west let's get right now to it on "options action" because some expect earnings this quarter to be red hot as well. and while we love to focus on all of the big names here on cnbc, the names you know, carter says there is one under the radar name that may be as good a tell as any and it is not a name you would normally think of. the chart master carter explains >> a huge name, fastenall. almost $40 billion in market cap. the issue is it has a broad and wide reach 3,500 outlets or stores, if you

will, and it does business t construction and to both retail, automotive, adhesive, it goes on and on and the street hates it. of the 16 analysts only three have it as buys. the 16 analysts that cover it before we look at the charts the price target right now is lower, looking out 12 months, to where the stock is trading that's called not liking and yet i think it's going to do well into earnings. let's look at a couple charts. first just to put it in context is fastenall versus microsoft. going back basically to the summer of 1997 here we are, the summer of 2021. you can see that this company has kept up with one of the greatest commercial enterprises in the history of the world, microsoft, leg for leg that's the s&p way down there on the bottom just to put it in context. but to fastenal itself, the first chart, going back quit some time to the 1980s, a steady orderly uptrend. look at the second chart

it's very much in its channel. it's not that hot, it's not as extended as stocks can get the next chart is a two-panel in this is important. the top panel is fastenal, fast, and the bottom is relative performance to xli the etf that tracks the industrial sector. you see that red line and the green arrows every time the relative strength line has come down it has bounced to the penny and the anticipation is here that it will happen again. the final two charts first is just fastenal over the past year, one way to draw the lines, we have broken out of the wedge, if you will. last chart, approaching the former high, does it or does it not break out? we think it does fastenal long into earnings. >> a beautiful looking chart there. so winona, minnesota's own

fastenal mike, how do we trade this do we trade this >> i think we do when we're using options we have ways to play bullish thesis, bearish, neutral, and there are ways to use options going into earnings carter obviously laid out a good case looking at the charts i think it is important if we're going to consider fundamentals which we should touch on very quickly here as he eluded to this is a company with a lot of stores and sell a lot of products i think they have over 10,000 skus a lot of things you might find in your garage are purchased there and things that industrial production uses. as he alluded to, adhesives and fasteners, hose and pipe fittings are the kinds of things that this company sells. and what is interesting is that this is a company that also registered decent, about 6% top line revenue growth in the year 2020 despite all of this one of the reasons for that is because of the diversity of the products that they sell, among the things that they sell about

25% of their revenues last year was safety equipment so a lot of that saw a uptick. whether you're talking about gloves and facial masks and things like that why is this relevant you might think okay, does that potential tail wind in a period of economic weakness potentially turn into a head wind? actually, the answer is no and the reason is because as industrial production picks up there are more conventional products, probably 30% or more, they have a higher margin. let's say assume that is 30% of their business and that is about a 5% better margin that translates to about 15 to 20 cents worth of ets. multiply that by their 30 times, 34 times multiple and you see that alone will add $4.5 to $5 to the share price how do we trade this going into earnings taking advantage of the fact that as we always point out options tend to be slightly elevated going into a catalyst such a earnings, we look to sell those options.

i was looking at the august 55 calls, those were about a dollar and using that to help finance the november cal about $3.50. so you're spending $2.50 you'll observe that is the difference between these two strikes. the idea here is that if you're targeting a longer term appreciation in the share price we can sell that call and once that one expires in a little over 40 days we can look to sell another call and basically make our bullish bet that way and also, of course, bear in mind that the stock was well over 53 bucks when it closed today so that $3.5 you're playing some of that is intrinsic value. that's not all extrinsic premium that you are laying out there. so i think this is a way that you can make a slightly more hedged bet going into earnings try to take advantage of the slightly elevated premium. and bear in mind that you know, 34 times earnings might seem expensive, but there are a lot of companies right now trading these kinds of multiples there is a company seeing good

and consistent top line growth good and consistent bottom line eps growth and, of course, if they see a mor favorable product mix that could enhance their margins. >> kind of an under the radar name janitorial supplies, fasteners, catalogs all kinds of stuff for the office doesn't get a lot of love, but maybe it should. oh, by the way speaking of love, of course the biggest part of the american economy is not janitorial supplies, it is all of you out there. the consumer spending your cash on stuff and food and travel travel is going to be huge this year tony is looking at one related name that rises above the rest it's all about love, is it not, tony >> that's right, brian, i want to look at southwest airlines. ticker luv this is an airline that actually has not been performin particularly well here in the past couple months and i think that is our opportunity here if we first look at the chart of luv relative to the global

airlines etf, you see it is underperforming pretty much since april. if we zoom out further we see it is just touching a major bullish trend line here. so this is the opportunity that i see for potential bounce on southwest airlines to start outperforming the airline industry and if we look at the chart of southwest itself back in february it broke out above the $50 level. traded all the way up to 58 or so and then pulled bac now to the $50 level yesterday and this is really where the risk and reward in my opinion favors to the long side at the moment if you look at the business itself it is the only one of the major airlines right now adding capacity in the second hal versus the other three that are slashing capacity because of labor constraints. so for those reasons this is a stock that i like a lot going into reports and they report in two weeks or so.

so the trade structure that i want to use reflects the fact that because earnings are coming up here in less than two weeks, the implied volatility for these options are a bit on the expensive side so i'm using -- so i'm going out to the july 30th weekly options, september, 52.5 56 call diagonal here, and i'm spending about $3 for the september 52.5 calls, and i'm selling the july 30th 56 calls against that for about 60 cents. so net-net here i'm paying $2.40 for this call diagonal so i'm risking here about 4.5% of the underlying stock's value to place a longer-term bet that southwest airlines will perform well on earnings and well into the second half of this year >> mike, what do you think you look at the trade there, is this a trade that you advise doing on a sector that is

already been really traded out it has been red hot for about nine months. >> first of all in defense of the trade structure, it's not that dissimilar to the one that i'm recommending on fastenal going into earnings. i obviously like this kind of a structure in these types of events but interestingly given the fact that we've talked a lot about the airlines, one ft things that the other major carriers, they have depended very heavily on people in the front of the bus, talking about business travel. luv is far les dependent on that and i actually witnessed that we're getting considerable rebounds in, you know, regular consumers, travel oriented airline travel. what we are not seeing as much of a complete rebound in is business travel and the reasons, of course, are basically changes in the way we do business. there is a reason that southwest would be adding capacity when some of the others are not there is a reason why you might

favor this airline over the others they have the strongest balance sheet in the industry. so when you combine those factors despite this and it's not trading at all-time highs as many things are, it has reminded but it is not at all-time highs. taking a look at it, ten times earnings, i like southwest among the other players. >> some of the airlines came off of that peak from a few months ago. cart -- carter, what do you think there? very similar to the fastenal trade? >> that's right in terms of the selloff, you can see the line drawn in this chart, it is where today's pivot, a hard pivot occurred it is high of 65 down to yesterday's low of 50. 50 is the day and the high when it gapped up on vaccine day. so when you think back to november 9th, the biggest move in many, many years, because vaccine means open up the

airplanes, it stopped right there to the penny that's an important juncture i think you get a good bounce here >> all right, a good call there on luv and fast. >> for everything "options action" check out "options action".cnbc.com if you are there sign up for the newsletter but don't do it right now. wait until the show is over you have 20 minutes left here is what's coming up next. coming up, keeping hedges manicured without getting pricked by overleveraged thorns. come for a walk through the meditation labyrinth >> calling all "options action"s fans, tweet us your t twe @optionsaction if it's nice we will answer it on air when "options action" returns.

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♪ ♪ ♪ ♪ all right welcome back to "options action. hope everybody is having a great friday last week before the big market gyrations we talked about effective hedging methods. how to protect your assets while we had a big day up today, if the volatility especially on the down side is not over like some predict, our traders suggest that you still keep on those or similar hedges on. now we have noticed an increase in the use of options on

leveraged etfs there's a reason why carter and mike khouw kept it simple and you probably should, too let's talk about hedging methods that aren't just going to scramble somebody's brain at this point >> yeah, we've seen a big uptick in interest in these levered etfs and there are good reason for that to use those things as trading instruments. by using leveraged etfs you can sometimes get a form of optionality. take a look at sqqq that is a levered inverse etf on the qqqs. over recent years we've seen a huge upsurge in options volumes, we've seen some big options volumes in conventional etfs but not the same growth over that period of time so one of the important things i would point out is that when people start using the leverage

etfs, and think they maybe i can add even more by trading options, but the fact is that options on levered etfs are considerably more expensive. and in fact there is no free lunch, there is no way essentially to get extra leverage without really paying for it by way of example, i would encourage people to take a look, for example, at, say, the august 9 calls in the sqqq that would be a way to make a bearish bet. it is an inverse leveraged short and those were costing a little over 6%. you could also buy puts on the qqq that are a comparable amount out of the money and they were about one-third the cost so the point that i'm making here is that it often makes sense to try to keep it simple you have direct correlation to the qs because you own the constituent stocks, you are not going to get free leverage by buying options on those inverse

or levered etfs. oftentimes i think it makes sense to keep it simple. we recommended a qqq put spread. i think put spreads makes a lot of sense because the sku is still steep. of course, you could always buy outrights as well. i think based on the volatility we saw this week and some of the things we pointed out last week that it still makes sense to be hedged here. obviously the market has had a tremendous run >> your comments on his strategy there, but also your quick comments on things like inversed levered etfs, should they exist in the first place >> wall street is famous for one thing, providing products, right? so if they're allowed to exist until they're not they do. it's how sort of the game is played but more importantly it was a poor week until the stick save on friday, right in the end the s&p was up only 40 base points without today's monster move that is the point of hedging at one point in the past 48

hours we were down 3% and protection is important. but first let's look at the circumstance that is fairly rare here is a chart of the nasdaq 100. we've now gone up eight consecutive weeks in a row is that a record no, but it is exceedingly rare take a look at this table just to put this in context if you look at the history of the index, going back to 1985, how many rolling eight-week periods are there? well, there are 1,894. how many times have you gone up eight weeks in a row 13 this is the 14th 14 times out of -- so the question is what happens and actually it's fairly muted returns looking out one, two, three weeks. it is a good time to hedge >> i think you just gave me about 18 rbis. how many eight-week periods are

there, tony? 1,894. i hope i don't get that question later on tonight tony, i jaund that you get questions on this stuff all the time how do you answer? >> that is exactly right we see a lot of this in the leverage and inverse etfs. for a trader looking for intraday moves, looking for leverage or short exposure on an underlying instrument without having to utilize options these are great products for that but as mike said these are not free leverage there is two things that investors need to understand when they're trading inverse or leveraged etfs the first one is the fact that the ex poche that you are that you're receiving is only meant to give that you type of exposure over a single trading day. so if you are trading a triple leverage etf if the index is up 1% you will see a 3% return on that etf that single trading day but if you hold it for longer than one trading day the cost of

that leverage will be embedded into the daily naft. if you hold these for a period of time don't expect to see the 3 x leverage that you do with the underlying leverage. these etfs trade a substantially smaller amount of volume than the qqqs or sbys when you're trading options on them the bid as spreads are significantly larger even if you are trading an equivalent put hedge on one of these leverage etfs you're likely going to pay a larger transaction cost to get in and out of those trades. for those reasons that's why you're better off trading the actual etfs themselves, trading three times as many if you want that type of leverage because you're going to see lower transaction costs even if the two trades are equal in nature >> really good real world advice i feel like you guys should charge for this kind of stuff. it's a master class but here it

is free on "options action." great stuff. we are not done yet. up next we are answering some of your tweets after a roller coaster week on wall street. "options action" back in two minutes. 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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welcome back to "options action," everybody it is time to take some of your tweets our first viewer asks a question on netflix reporting results on july 20th and has a similar looking chart to amazon which just broke out a bullish bet did not work, brutal honesty do we go back to netflix one more time on the long side and if so, carter, what's the trade, please? good manners >> that's exactly right. meaning if you have a certain set up, one can try to say this one will or this one won't work. or play the set up and then we know that's not always going to break your way but we know that adobe broke out, nvidia broke out. apple is about to do it. amazon and so netflixpresumptively will break out the implied move is 7%, closed

at 535 you can buy at the money calls for the end of july at 20, the 535s, i would buy those. >> all right, our next viewer question asks this what strategy would you use to short term protect profits made on an apple september 17th, $145 call, mike, bought 2 bucks and 13 cents >> well, one way to do it is obviously spread you can do out of data calls preferably ones that capture earnings, slightly elevated in price, maybe the 150s or the 155s >> all right wrap it up there thanks as always for your tweets and your questions up next your final call of the week 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.

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♪♪ ♪♪ ♪♪ all right, time now for the final call let's do it devo and whip it kick it off, carter. >> buy fastenal.

>> one word, luv >> keep your q put spreads on. >> love it, that was fast, guys. thank you. for making it easy on me. thanks for watching, everybody. "mad money" starts right now have a great weekend - [announcer] the following is a paid presentation for the premium mattress topper by dormeo one of the fastest growing sleep companies in the world. what's captured these people's attention. - wow. - oh my god. it's a topper. - wow. - that's it. - wow. i'm impressed. - i never expected that. - it feels like it's a brand new mattress. - yeah. - [announcer] it's not a new mattress that's creating this reaction, they're lying on the same old mattress they've had for years. it's time for you to discover the premium mattress topper by dormeo. we believe it's the world's most