will change the world. that's the great thing about the future. you can predict all you want, but nobody really knows. thanks, you guys! [cheers and applause] thank you, thank you, thank you. it is friday. that can only mean one thing it's time for "options action. i'm brian sullivan in for melissa lee. here's what's ahead. >> burning season begins next week with venerable institutions that could foretell the fate of our economy but they aren't the banks you may be thinking of carter worth explains. with the summer travel season officially under way but a covid variant gaining steam, tony is assessing the best of the airline industry plus, hold your hedges

professor ko explains why you should keep your hedges on, but perhaps more importantly, how not to get caught up in an overleveraged thorn bush it's time to risk less and make more "options action" starts right now. >> good friday evening or good 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 while we love to focus on all 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. chart master carter ward explains carter. >> so, let's get right to it it's actually a huge name, almost $40 billion in market cap. it has a broad and wide reach,

3500 outlets or stores, if you will, and it does business to construction and to both retail, automotive, adhesive it goes on and on. and the street hates it. of the 16 analysts that cover it, only three have it as buys the 16 analysts that covered it, their price target is lower, looking out 12 340s than where the stock is trading that's called not liking and yet i think it's going to do well into earnings. the first, just to put this in context, is fastenal versus microsoft going back to the summer of 1997 here we are the summer of 2021 you can see this company has kept up with one of the greatest commercial enterprises in 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. here we are going back quite some time, back to the 1980s, a steady up-trend. look at the second chart

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

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

about 25% of their revenues last year with safety equipment so a lot of that saw an uptick, whether you're talking gloves, facial masks, things like that you think does that potential tailwind during a period of economic weakness potentially turn into a headwind actually, the answer is no the reason is because as industrial production picks up, they're more conventional products, probably 30% more, actually the fasteners business has a higher margin. let's assume 30% of their business and that has about a 5% better margin. that translates to 15 to 20 cents worth of eps multiply that by their 30 times -- 34 times multiple, and you can see that that alone is going to add maybe 4.50, 5 bucks to the share price how do we trade this going into earnings, taking advantage of the fact that options tend to be slightly elevated going into a catalyst such as earnings. we look to sell those options.

i was looking at the august 55 calls. those were about $1. using that to help finance the purchase of a much longer dated november 52.50 call, that was about $3.50, so you're spending $2.50. you'll observe that is exactly the difference between these two strikes. the idea here is if you're targeting a longer term appreciation in the share price, we can sell that call. after that expires in a little over 40 days, we can look to sell another call. basically make our bullish bet that way also, of course, bear in mind that the stock was well over 53 bucks when it closed today so that 52.50 strike, some of that is intrinsic value that's not all exrinse ittic premium you're laying out there. i think this is a way you can make a slightly more hedged bet going into earnings. try to take advantage of the slightly elevated premium. bear in mind that 34 times earnings might seem expensive, but of course there are a lot of

companies trading these kind of multiples. they have seen good and consistent top growth, good and consistent bottom line, and that could enhance their margins. >> yeah, kind of an under the radar name janitorial supplies, fasteners, catalogs, stuff for the office it doesn't get a lot of love, but maybe it should. speaking of love, 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. and 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 exactly right, brian i want to look at southwest airlines ticker luv, because this is an airline that actually has not been performing particularly well here over the past couple of months. and i think that is actually our opportunity here if we first take a look at the

chart of luv relative to the global airlines etf, you see it's been underperforming pretty much since april if we zoom out a little further, we see it's just touching its major bullish trend line here. this is the opportunity that i see for potential bounce on southwest airlines to start outperforming the airline industry 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 about $58 or so and pulled back now to the $50 level to the penny yesterday and bounced off. this is really where the risk/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 that's adding capacity in the second half versus the other three legacy carriers are slashing capacity because of labor constraints. for those reasons this is a stocky like a lot going into earnings and they report in about two weeks.

the trade structure i want to use reflects the fact that because earnings is 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 two -- so, i'm going out to the july 30th weekly options, september, 52.50, 56 call diagonal here, where i'm spending about $3 to purchase the september 52.50 calls. and i'm selling the june -- or the july 30th 56 calls against that for about 60 cents. net/net i'm paying $2.40 for this call diagonal i'm risking here about 4.5% of the underlying stocks 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 that trade there, you know, you look at some of the profit/loss skews. is this a trade you would advise

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

this airline over others they also have arguably the strongest balance sheet in the industry when you combine all of those factors, despite this, and it's not trading at all time highs, it has rebounded but not all-time highs taking a look at it, ten times earnings, i like southwest amongst the other players. >> some of the airlines have come off the peak of a couple months ago very similar to the fastenal trade. >> well, that's right. and in terms of the sell-off itself, and tony highlighted this, it's where -- and you can see the line drawn in this chart. it's where today's pivot, a hard pivot occurred also i would point out, it's high of 65 down to yesterday's low of 50. 50 is the day and the high when it gapped up on vaccine day. if you think back to november 9th when airlines had the biggest one-day move in many, many years, because obviously 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. >> good call on luv and fast for everything "options action" check out our website, optionsaction.cnbc.com sign up for the newsletter don't do it right now. wait till the show's over. we've got 20 minutes left. here's what's coming up next coming up, keeping your hedges manicured without getting pricked by overleveraged thorns. come for a walk through the meditation labyrinth with professor. calling all "options action" fans, tweet us @optionsaction. if it's nice, we'll 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 downside 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 reasons for that to use those things as trading instruments. some people don't actually trade options and by using levered etfs you can sometimes get a form of optionality. take a look at sqqq that is a levered inverse etf on the qqqs. what you'll see is over reasons years we've seen a huge upsurge in options volumes compare that to obviously we've seen big options volumes in conventional etfs as well but not the same kind of growth over that same period of time so one of the important things i would point out is that when

people start using the levered etfs, using the leverage, and thinking i can add even more by trading options. the fact is that options on levered etfs are considerably more expensive and, in fact, there's no free lunch. there's 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. the sqqq is an inverse levered short. those were costing about 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 do think based on the volatility we saw this week and some of the things we pointed out last week is 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 taking 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 understand that you get questions on this stuff all the time how do you answer? >> that is exactly right we see a lot of interest in these leveraged 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 exposure you're receiving is only meant to give you that type of exposure over a sing 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.

you're going to start to see a drift over a period of time. if you hold these for a period of time don't expect to see the 3x leverage that you do with the underlying leverage. the second thing you have to remember is these etfs trade a substantially smaller amount of volume than the qqqs or the sbys when you're trading options on them, theed by/ask 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 the netflix well one more time on the long side and if so, carter, what's the trade, please? good manners >> sure, that's exactly right. meaning if you have a certain setup, one can try to say this one will or this won't won't work or play the setup and we know it'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 netflix presumptively 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 for $2.13 >> 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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♪♪ visit tdameritrade.com/learn ♪♪ ♪♪ 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 (upbeat music) - [announcer] the following is a paid presentation for piyo, created by chalene johnson. she's a new york times best-selling author, a top-ranking podcaster, lifestyle entrepreneur with millions of online followers and has sold millions of best-selling fitness dvds. and today, she's got special free offer especially for you. - hey, is all of the change that you're experiencing, starting to weigh you down? like maybe you're worried about finances, your routine has changed, there's so much pressure on everyone right now. and all that stress makes us gain weight. and to lose the weight, you gotta exercise,