now let's go make some money. cheers! cheers. ♪ ♪ hey there, "options action" fans i'm mellissa lee we are live at the nasdaq market site overlooking times square. we have a big show on tap. here's what's coming up. trading the china crackdown. beijing putting big tech in its crosshairs, as ali baba gears up for earnings mike khouw lays out a way to limit your down side risk if baba fails to deliver. plus, is there a doctor in the house? chart master carter wirth says this healthcare stock is looking a little sick heading into earnings how you can protect yourself from catching a cold

and later tony zhang says it's not hip to be square where he is betting on a breakdown for the payment stock when they report results next week it's time to risk less and make more "options action" starts right now. let's get right to it. monday kicks off the second-biggest week of earnings with names like general motors, uber, marriott, eli lilly all set to report. the chart masters eyeing one name in the health care space in need of medicine in the health care space carter, kick it off. >> well, that's right. i mean a big week and a big weak for healthcare, moderna, and amgen, amgen the old time technical definition doesn't act well let's look at a few tables and charts the first table, one week performance. we know healthcare you see here beats the market on the week and amgen, a big healthcare name well below both the market and the sector look at the next table one month performance. again, leading the way is the

healthcare sector, above the s&p. there is amgen bringing up the rear next table, three month, same picture. you've got the healthcare sector up over the past three months, 8% the market is up amgen down over the past 12 months amgen is down the sector some 24, 25 percent. one or two charts, that is it. the first is a two panel on top, amgen, on the bottom, relative performance to the xlv to the sector. we are now breaking down to new three and four-year relative lows and then finally, the amgen chart, itself. we are hovering, ominously, if you will, and now having just undercut the uptrend line that's in effect since the march low. the presumption here is that this weakness foreshadows something not right with the earnings announcement. we want to be under weight or short going into the report. >> wow mike, what's the trade here?

>> amgen is an interesting case, of course, obviously carter was pointing out that the health care sector overall has been outperforming it quite significantly. we look at the past six quarters, it's interesting if you had simply shorted amgen and gone long xbi, which is th biotech etf of which it is a constituent by the way for that one day, so six trades only for one day each, you actually would have garnered about a 12.4% return that's how much it has underperformed the biotechs just on the closed before they reported to the closed following. so not very good performance you know, we take a look at the fundamentals here, they might have a relatively high hurdle going into earnings. the company already announced that they were hinderedby the pandemic in the first quarter. right now the consensus revenue estimate by analysts of about $6.5 billion is toward the company's own guidance, similarly if we look

at op op op ex the consensus view i company is in the mid-teens. they will have to deliver some pretty good numbers for them to basically outperform what the consensus view of it is. take a look at the options right now. we are looking another an implied move of about $9 or so that's the straddle next week is implying, 3.7% of the stock price. i was thinking considering the stock is trading at a forward pe of about 14 right now, it's a little risky to try to consider shorting a stock at that valuation, such a discount t the market as it is i was looking at october the 240/220 put spread that $20 put-spread could cost $6.35. less than the amount the options market is actually implying that the stock could move next week and indeed about as much as the stock has moved from its high of last week until the close today. this is a way to risk a relatively small stock price

give yourself some time until that october expiration to make bearish bet without taking unlimited rick to the upside shorting a stock trading 14 times forward earnings would, obviously indicate you are doing. i think that's the way you want to play it going into earnings if you are agreed to agree to carter and take a bearish look here >> tommy, what itself your trade? >> if you look at the technical chart here, amgen is trading into an apex on multiple time frames so you are looking for this stock to break out one way or another. but the important chart that carter showed you was that relative strength chart to its sector you're seeing that underperformance that's likely to point to some more down side going into earnings i think the important thing is really the fundamentals. you've seen three quarters of eps and revenue decline. i think you're likely going to see another weak quarter going into earnings. mike did say that 13, 14 times next year's earnings that's the one thing going for this particular stock i think expectations here are relatively low, here, for this

stock and i think that's your potential for the surprise to the upside, but that's why i like mike's trade, because the debit put spread that he's using is one of the most capital efficient ways to take a bearish bet going into earnings risk 2.5% of the stock's value at risk on this particular trade. i like the short strike that he's using, the 220 short strike because that reflects the support level for amgen that's likely going to get a target to the down side if they do miss on earnings. >> all right let's stick with health care here we have an update on a moderna trade we laid out earlier this month, you can check it out on our twitter feed @optionsaction. we're taking a look ahead to a big earnings report in the payment space, square is on deck and tony is expecting a tough take tony, take it away >>.yeah, so i want to take a look at square here which is currently trading at 123 times next year's earnings

i simply think the expectations here are a little too high going in so let's take a look at some charts if you look at the chart over the last six months or so pretty much since november the stock has been trading between 200 and 270. recently just bounced off the top end of that range and i simply think that it's heading back towards the bottom of the range towards that $200 level, especially when you consider the fact that relative to its sector the technology sector it's starting to underperform the sector since that february high. so when you look at that this all suggests further down side going into earnings and then if you look at the business itself, right now at 123 times earnings i think this stock really needs to continue to sustain 30 to 40 percent revenue growth over the next three to four years while at the same time aggressively showing some margin expansion, which it has not done so far so that's why for those reasons i think the stock is headed back towards that $200 level. if you look at the earnings itself it's currently implying

about a 7% move while the average last eight quarters has been about an 8% move. i actually think that the options market perhaps might be underpricing some potential down side here. the trade structure that i want to use is similar to mike's trade structure. i'm going out to september and buying the 240/210 put spread, spending about $12.40 for that september 240 put and collecting about $3.80 for that september 210 put. i'm collecting almost 30% of the premium of the long leg by selling that 210 put against it which reduces my overall risk on that particular trade to just $8.60 for the debit spread which is about 3.5% of the stock's value trying to limit my losses if this stock does happen to break out higher because it is a very strong stock at the moment. >> yeah, we had a little bit of a taste of what square could report, mike, when we got paypal last night which was not a good report what's your take on the stock?

what's your take on the trade here >> yeah, i mean, obviously we want to take a look at comps to get some sense of the kind of numbers that we're going to anticipate seeing. one of the reasons we look at earnings, i think it's a question you sometimes get, why do we even care, you know, we don't necessarily know what's going to happen a year out earnings tend to move stocks i think we should take a look at this earnings season and consider how they've moved stocks when we've gotten good numbers we haven't seen stocks take off. when we've gotten disappointing numbers, maybe amazon would be an example there, we've seen real punishment. that gives us a sense of what the sentiment in the market s are they looking up or looking down we have some sense by looking at the comps that the numbers may not be that great and we have some sense by looking at other stocks and how they behaved around earnings that you have a very high bar to get over to see big upside move. even a minor disappointment could lead to a shellacking. i rather like the trade structure and i understand why he's setting it up this way going into earnings. >> carter, your thoughts >> well, what we do know, of

course, is in terms of run ups this is one of the most epic moves off of the pandemic low. it was 32 bucks, that's a 9 bagger so this sideways grinding action that tony is talking about often fore shadows either more of that, it's sideways, or some sort of further give back. but what we want to do is eliminate the third scenario and i think you can, up seems to be out. >> for everything "options action" check out our website optionsaction.cnbc.com and sign up for our newsletter. here is what's coming up next. >> announcer: up next, trading the china crack down, beijing putting big tech in its cross hairs and one of the biggest tech titans gets ready to report how you can play alibaba heading into next week's earnings. plus calling all "options action" fans, reach into your pocket, grab your phone and tweet us your que question @optionsaction. if it's nice we will answer it on air when "options action" returns.

show me the olympics. [ "bugler's dream" playing ] ♪ ♪ ♪ ♪ ♪ ♪

♪ ♪ ♪ ♪ ♪ welcome back to "options action." we are following the latest developments out of china as beijing continues its crackdown on big tech. the k web etf crumbling again today after posting its best day ever just yesterday. carter, you called this week's china bounce in a note to clients on tuesday how are you taking a look at the space now? what do you make of this action

that we saw? >> sure. i mean, i just have one chart and we can look at it, it's a two panel, talk about why that call was made. sometimes you can just make a one-day call it didn't articulate that, but let's look at it so the top panel is the internet -- chinese internet etf and the bottom panel is looking at how far above or below the etf is trading in relation to its 120 day moving average at the peak we were 139% above the 150 day and on the low we were sitting around $45, we were 39% below. the thought was we get a bounce. we got 11%, 12% bounce, have given back some today. my hunch is there's follow through. certainly if one has profits you can take some and let the rest ride. >> thanks, carter. so the question i guess here is if you have some china exposure you're looking to manage, how do you do that. mike khouw has a way to use a major upcoming catalyst to make

some cash. mike, show us. >> yeah, so we're taking a look at alibaba here. obviously what has been pressuring this company all of the chinese companies really is probably familiar to most viewers but we should probably go over it one more time just to be sure. we're talking about china's security and regulatory scrutiny on a lot of these companies basically forbidding them from taking on new users, the painful pockets of antitrust penalties is something that has been basically brought into the horizon and we have a lot of potential further restriction that is we could see in addition to those financial penalties and in the case of baba, you know, they have actually been investing in trying to grow their user base and one of the potential down sides of that is that you could actually see ebitda or eps decline year over year those are m soft risks when we look at alibaba this is a company with 40% margins, that's obviously tremendous, we have high anticipated revenue and eps growth of 29%-ish year

on year on the top line, more on the bottom line and of course on a relative valuation basis and certainly for a company that's growing as quickly as this one is it's remarkably cheap the thing is trading around 22 times forward earnings with double digit eps and top line growth all of those things would obviously suggest this is a company that you do want to own. right now the options market is implying it's going to move a little over 5% between now and the end of next week that is slightly more than the company has averaged over similar periods of time over the last eight quarters, slightly less than 4% understanding that those risks could of course emerge at any time or grow worse and wanting to be long the trade i was looking at was buying essentially an at the money somewhat longer dated call the october 195s and selling some of the elevated premium we have going into earnings, the august 205s, net-net that would cost me $10, it's a $10 widespread but the option that we're selling

will expire well before the one that we're owning. the idea here is to own some longer dated upside exposure on a limited risk basis rather than just going out and buying the stock because i'm not prepared to necessarily call the bottom but earnings could provide a needed catalyst for this company and arguably for the space >> tony, what do you think of this trade >> yeah, so alibaba is one of those stocks that we have stayed away from but i do think now is the time where things are so bad that it might look quite good. i do think that there are three things going for this stock, one is the statistical side that carter brought out, the how far away it is from that 150-day moving average if you look at the technicals, we have a pretty good looking weekly candle in terms of that dogi that looks like it could be forming that bottom but more importantly as it continues to make lower lows in price we have no longer seen momentum confirm those new lows

we are starting to see positive diversion. technicals look extremely strong if you look at the fundamentals it's back to where it was trading in 2018 but we've seen eps and revenues double since 2018 including the revenue growth we are expecting for this particular stock i think from a valuation perspective you also have a very constructive opportunity here. so i really like -- i think the trickiest part of this trade is the timing, whether or not this is the actual bottom and it starts to rally from here. but that's why i like mike's trade, he's using this diagonal spread where even if alibaba simply stays where it is and he's able to collect premium to offset the cost of those long calls and is able to do so after the august calls expire, that's really the compelling part where he continues to lower his costs of buying upside premium over the next couple of months or so as alibaba bottoms and starts to rally over the next few months. >> carter, does baba look different from k web or is it such a big component that it's

effectively the same chart. >> exactly what you just said. so that you will get the same bounce, you have the same candle or sort of reversal day, key reversal day in the etf as you do baba. as baba so will the etf and vice versa. up next, pain management last week one of our traders laid out to way to play pinterest to pop into earnings, that trade went south. pinterest down more than 18% today after reporting results. a big update on what to do next when "options action"s returns it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. returnswnloaded the td ameritre 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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and kim. she wanted to execute a pre-set trade strategy in seconds. so we gave 'em thinkorswim web. 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 some of our open trades last week tony said pinterest was set to pop on its earnings. >> the stock rallied from about $10 pandemic lows to about $90 here in feb. that is roughly also 800% return what i'm expecting is going into earnings next week pinterest will see a similar follow through as we saw for snapchat i'm going to sell the 7666 put credit spread collecting $6.50 for that $76 put and paying $2.40 for that $66 put net-net i'm collecting $4.10 on

this $10 wide credit spread. >> you probably know what happened next, pinterest tanked on the back of its results the stock falling more than 18% today. tony, what do you do now >> yeah, so trading earnings is volatile and that's specifically why we use options to play these earnings plays because what we want to do is we want to protect ourselves and control the amount of risk that we take if the trade does not go the direction that we expect it to as you said, it's down 18% we only lost about 8% of the stock's value by using this put spread when you have a trade like this the best thing to do is buy back the put spread, remove the potential risk of early assignment, take the loss and move on to the next trade. >> carter, was any damage done to this pinterest chart? >> well, yeah. and it's just as much damage is done in our short moderna meaning when something gaps down or gaps up in the direction that's exactly the opposite of how you're positioned, just what tony said, you take your loss

and move on. >> we've also got a trade update on coca-cola two weeks ago mike laid out a strategy on how to play coke for a pop. >> what i was doing was taking a look at long dated calls, january 57.5 calls when i was looking at that earlier today those were about $2.14 and then i was looking at selling the august 57.5 calls against that to help finance that those i could collect about 70 cents for. 70 cents on a stock that's closing on $60 may not seem like a lot of premium to collect in one month. think about it in the context, though, of the $2.14 you're spending, that's about a third of the premium so there is about almost 190 days until the long dated calls expire, only about 35 until the shorter dated august options expire. the idea here is that we can continue to own those longer dated calls and sell premium against them continuously. >> well, the stock is up about 1% since that trade, so, mike, how are you managing this one? >> yeah, so coke is not a really

fast moving trade -- stock and that's one of the reasons we like a trade structure like this one, it's migrating right to that 57.5 strike as we see it right now, the stock was outperformed the broad market over the course of the last month. i think we stay with it. if we start to see the short dated calls decline in value, down to a kquarter, cover those and look to roll out. our first viewer asks the amazon broken wing butterfly is not going well i'm thinking of recovering some of my losses by closing the 3650 call and opening a 3950 call i would be essentially converting this to two credit spreads with the goal to allow everything to expire worthless mike, what's your thoughts >> first of all, the amazon broken wing fly we were looking for a rally in the stock, we got it, the stock did get close to our price objectives, some people may have covered the trade and taken profits. if you were looking through earnings and decided to hold it

through that time that has not gone well at all my suggestion would normally be simply cover the trade and move on, however, you know, moving your strikes around a little bit so that you can convert trades into a credit spread is a structure or a trading strategy that some more sophisticated participants will use sometimes to get to break even on trades that aren't working out. i would suggest that's deep end of the pool stuff, so i'm comfortable with that trade if you are. >> all right our next viewer asks with snap forming a power earnings gap up how does an 80/85 call spread for august 20th look? tony, take this one. >> so i like snap, it's building a base above # 75, it has strong relative strength but i do think august 80/85 is too short term and high in terms of strike prices i would go out to september or october and look at 75/80s as a strike price that i would use for that bullish view. >> all right tony, mike, carter, good to see

you. that does it for us on "options action." we will be back next friday 5:30 p.m. eastern time. do not go anywhere a "fast money" special is coming up right after this quick break 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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