it is friday, so welcome to "options action. this morning's surprisingly disappointing jobs report putting macro forces into focus. could the best way to prepare be with a pair trade? carter worth and mike khouw guide you through that one how to construct a mechanical advantage. plus we're having a follow-up meeting about our recent zoom trade and taking your tweets it's time to risk less to make more in the board game monopoly, you usually buy real estate and sell utilities. but in real life, carter worth thinks you should do the exact opposite

so, carter, what are you looking at >> right so we're going to look at two fairly defensive areas of the market yield-based areas, utilities and reits. but in this instance, the spread of reits over utilities on a 6 and 12-month basis getting too wide, and the thought is to play utilities for a breakout they've still not gotten above their pre-pandemic high, and fating reits two stables to start the first table on the screen is the six-month performance. that's the ishares u.s. real estate etf, iyr, up 28% versus the xlu, the spdr utilities select fund. look at the next table you're talking about almost a double over the trailing 12 months, past year. reits up some 34% versus utilities up 17% in fact, reits have paced the s&p, and it just seems a little

too hot. now a few comparative charts the first, six months, two lines, very simple the top line, reits. the lagging line if you will, utilities. next chart, same exact thing a comparative chart. two lines, very straightforward. the iyr on top, up again about 34%. and utilities xlu lagging, up only 17% so now let's look at the absolute charts. if you think back to what was just done at the top of the hour on "fast," breakouts are very important. we looked at the breakout in nvidia or adobe or the prospective one in netflix look at the iyr. the iyr returned to its pre-pandemic level and broke out. now look at the final chart, xlu. xlu is toying with the prospects of finally exceeding its high, right? its high before the pandemic was $71. it was a monday, february 18th, and here we are knocking on the

door more than a year later, finally breaking out we like xlu long, iyr short. >> all right so, mike, how do we trade this pair >> yeah. so first of all, i mean iyr, which i think ended the day pretty much spot-on, all-time highs today. i mean there is some rationale for why people are chasing these things at pretty heavy valuations overall, this is index that's trading at a mid-40s multiple on a trailing basis so pretty expensive. but of course why are they doing that one of the reasons is that if we are imagining that fed policy is going to be a little bit more prolonged, that that could basically put the reflation trade back on the table. you would be a seller of treasuries and you would be a buyer of something that creates yield on an inflation-adjusted basis like real estate but i think it's getting a little bit too expensive i think what you want to do in iyr is actually use a put spread i was looking at usually carter is targeting 60 to 90 days you know, we are looking at

expirations. the october 22nd expiration is one, and then then the deese regular. iyr was trading about 110 1/2 at the time i was looking at the 109.99 put spread i could spend about $2.30 to buy that, spending $3.45 for the higher strike put, selling the other one for $1.15. i would say at the closing price, you could probably do the exact same trade on the deese. that's probably the way i would go on monday if it's trading right where it is right now. for xlu, xlu, the utility etf, is actually not trading at the same kind of high evaluations. higher than average like everything, but still below 20, which i think actually is also a relatively good value. of course we have to look at investments on a relative basis. they too are essentially an inflation-adjusted yield trade here i was just simply looking out to the october 22nd weekly

70 strike calls. when i was looking at those earlier today, you spend a little over a dollar for them. i think this closed at $1.07 i think $1.13 is the price you're going to see on your screen the idea here is that this is a relatively low volatility and low implied volatility set of options. of course we would look to adjust those options either by rolling or spreading depending on the movement of xlu as we go forward. >> tony, there's a lot to unpack here what's your take on the pair trade? what's your take on mike's trades what's your take on either leg of the trade where do you stand >> yeah. like you said, a lot to unpack for viewers who may not be familiar with pairs trading, what we're looking at is two securities that are highly correlated with each other when one starts to outperform the ther, our expectation is that outperformance will converge back to zero. when we look at this pair of iyr and xlu, currently they have a 90-day correlation of about 86%.

these are highly correlated securities carter showed you the outperformance for iyr when you look at this right now, the outperformance of iyr actually peaked in july. we started to see it converge back in august, but we started to see this widen again recently but what's interesting is that the recent widening of the outperformance has not exceeded that july peak so that i do think is the potential for this potentially to revert back to the mean but the timing on this is going to be very tricky because these outperformances can maintain for quite some time. so that's the only concern that i currently have with mike's trade is that he's long premium on both sides. so he's got time to k on the iyr side as well as the xlu side if this does not converge quickly, you're going to see decay on both sides. what i like about mike's trade is that he's long just calls on xlu. so if the market continues to drift higher here and both securities continue to move higher, what you have is xlu is

actually going to be long gamma and actually have a higher delta while on iyr, you're going to have a lower delta so net/net, you're going to have a higher delta if the markets keep moving higher you'll be profitable even if the pair doesn't converge as long as the market continues to move higher >> mike, you want to respond to tony's comments? >> yeah. obviously one of the things you need to concern yourself with is if you're buying premium on one or multiple legs you do have to contend with time decay. if you have a bullish bet on one side, a bearish on the other, that's a little bit of a straddle a bearish bet in this market is a tough one to make. it's the reason i'm using a put spread there, buying the calls outright it's a good observation but i think this is probably the way you want to it it. >> carter, how do interest rates play into all of this? is it your belief that we stay basically where we are, pretty low? >> well, i mean, yeah, that's

just it. the cost of ten-year money is low. ultimately i think we're going to nudge up to 145 i think if you really get down to these securities and their yield, which is what they're about, the key here is that of course the beta in utilities is lower than reits and, two, the utilities are yielding about 3% as a theme, as a sector, whereas reits are only yielding 2.2 that's enough to tip the scales in favor of utilities. >> from real estate and utilities to industrials coming up next, tony zhang has deere in his sights. don't forget for everything "options action," check out our website and sign up for our newsletter newsletter we will be right back. so you don't lose sight of the big picture, even when you're focused on what's happening right now. and thinkorswim trading™ is right there with you.

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welcome back to "options action." tony is eyeing some relative strength in the industrial sector, and that has some setting his sights on deere. tony, why don't you walk us through it. >> yeah, exactly so we're seeing some slow rotation into industrials, and i think deere here could be a leader if we take a look at a chart for john deere for the past year or so, what we see is that the stock has broken out into a range of around 320 and 385 or so since february. but recently just earlier today, we saw it break out above this range. but more importantly, not only is john deere breaking out from an absolute basis, relative the performance to xli, the next chart we're going to take a look at we're starting to see john deere outperform its sector. that's what we like to see going into a breakout or confirming this breakout. when we look at the earnings report from a couple of weeks ago, this is really what's been

extremely strong here. this is a company that has seen over the past two quarters extremely strong revenue and eps growth right now we're looking at about 28%, 29% eps revenue growth for the year compared to two years ago prior to the pandemic, we're looking at about a 90% gain on eps growth versus two years ago. this is a company that's really accelerating and firing on all cylinders. the trade structure i'm going to use reflects the fact that the stock has rallied significantly to get up to this 385 level before it broke out and it is trading near all-time highs. i want to make sure i'm adjusting for that risk profile. so i'm going out to december, and i'm buying the 380/410 call vertical here. i'm paying $27.15 for that december 380 call, and i'm collecting about $13.35 for that december 410 call, and i'm purposely buying in the money call option here to reduce my

time decay on this move. i'm risking only about 3.5% of the total stock value, which is about $13.80 on this debit spread and i'm using an in the money debit spread here because it gives me a higher probability of profit here, about a 43% and it's giving me a closer to 1 to 1 risk/reward ratio but with this particular trade, the stock only has to rally about 1% higher before this debit spread is profitable >> tony had a lot of charts, carter what do you see? >> yeah. well, i mean he annotated quite clearly the prospect of a breakout it is no different in the sense that a stock after a run-up -- and deere was a four-bagger off its low -- that consolidates ultimately sets up to break out. do they all break out? no i think it's the right bet one thing tony talked about a little bit of nascent relative

strength in industrials. one way to look at that is we know that the sectors as constructed by standard & poors are weighted towards a few big names. but if you look at equal weight index, it is really outperforming the actual sector. that's a positive thing. >> mike, are you with tony on this trade >> i am with him you know, so thisis an interesting thing. we obviously have it toying with these all-time highs but just take a look. it's probably going to make something in the neighborhood of $22, $23 a share full year 2022. that puts it trading around 17 1/2 times that's also about 17% year on year eps growth. so we're talking about a peg ratio of one not a lot of places you can find that right now this is one of the oldest companies in america of course they have a very stable business on the ag side they have a much bigger percentage on the ag side than

one of their industrial competitors in the form of caterpillar, for example but they still have potential exposure there too we were talking yesterday about infrastructure trades and of course they do also have exposure to construction and mining so this is, i think, a good company, an excellent company, well-run, trading at a reasonable valuation, very good price earnings to growth ratio, so i like the trade. >> tony, final thoughts on this one. >> yeah. this is really where as carter was talking about, the rotation into industrials that's what i'm really trying to capture here and john deere is clearly a leader in this particular sector it's outperforming its sector, and i'm looking for this breakout higher. i do echo mike's views here on valuations given the eps and revenue growth we've seen here, trading at 17, 18 times earnings not only is it cheap relative to the market, it's also cheap to itself. up next, we're having a follow-up meeting on our zoom trade from last week plus we're taking more of your

twitter questions. we'll be right back.

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thinkorswim trading. from td ameritrade. welcome back to "options action." last week carter and mike brought you the novel idea, a tale of two cloud stocks the best of times for crowdstrike. the worst of times for zoom. boy, did that turn out to be a good read. mike, what do we do now? >> yeah. so those of you who follow us on twitter, and if you don't, you should, you will know that we actually provided a trade update on this one already. so remember that the zoom trade structure was a short call spread when you sell options, of course the most you can make essentially is how much you sold them for when zoom fell sharply this week, essentially we had made the bulk of the profits that we could. so regardless of what one's view is about zoom going forward, the smart thing to do is to close that trade and follow us on twitter. >> carter, what do you see in the charts >> well, when you get a drop in

gap, news-related, in this case earnings, and it is of this size and magnitude, you're talking about a 16% move, right? the day before it had closed at 347, and it closed at 289. and you don't get follow-through, meaning after that initial drop in gap, we held the next day and the next day and the next day we're still sitting there, and you have price discovery now you take the money and run if you were short >> all right it's time to take some tweets now. our first viewer asks, after netflix broke out of that major base over the medium term, i feel like it's right to be long because of the size of the base. that being said, it can chop around for a long period of time what is the best strategy to play for breakout following through in a situation like this we actually talked to carter about this very chart at the top of "fast money" tonight. so, carter, just quickly to recap in case this viewer missed it, you see what in netflix? >> yeah. well, you add to it, meaning -- and the thing is this. it really hasn't broken out yet.

that's the key, right? it's just toying with the prospects of breaking out. so get bigger. that's what i would do >> so, tony, how would you do that >> yeah. so i agree what we've broken out from is the intermediate resistance, around 55 or so, and failed to break out above the all-time highs at 590 from a price action perspective, my view is this is likely going to be range bound between 555 and 590. if you look at the business itself, netflix has had a very consistent 6% quarter over quarter revenue growth we've seen eps tick up by a couple of percentage points over the last quarter, but i don't particularly think that's enough for this to break out substantially. so while it remains range bound between 555 and 590, my view is to potentially sell credit spreads. sell a call credit spread as it reaches the top end of the range. until it breaks out above 590, that's how i would play this once it breaks out, that's when i would look at buying call

options or even call spreads >> mike, how would you approach this trade >> yeah. i mean there's a couple things i like about the way tony's approaching this for one thing, netflix tends to be one of those names that has relatively and probably for good reason high implied volatility so it's very attractive to consider selling options of course you want to use credit spreads rather than just outright naked options sales because you limit your risk that way. one of the things you want to do when you are selling credit spreads is try to identify some of those either key technical levels or key fundamental levels where you're willing to draw a line in the sand and sometimes, of course, if you have a stock that's bouncing around within a range, you actually have to identify the edges of that range and say, okay, when it reaches the upper end, that's when i'm going to start thinking about the upside credit spread sales and when it reaches the bottom end, i'm going tothink about selling those downside credit spread sales. >> our next viewer asks, i believe peloton will gain with the colder months coming and i

want to be long. i was looking to sell the 155 april call, buy the 140 april call for a cost of about two shares mike, what's your take on this >> yeah. so there's a few things i like about this, a few things i like a little bit less. let's start with the things i do like about it. when you say it's going to cost about two shares, so the stock was, you know, just under $100 you're going to spend about $180, $190 in total outlay of premium to buy that call spread. and of course that's because each option represents 100 sharz. so in terms of the total amount of premium that you're uta outlaying, that's fairly low this is one of the common mistakes people will make. they decide they're going to make a directional bet on a stock but they don't give themselves enough time for that trade to play out. using april options, you're clearly giving yourself a lot of time the other thing of course is when we look at vertical

spreads, we like to see attractive payoffs that's essentially the maximum profit that you can make on that debit spread relative to the amount that you're spending. so the most you could make on a $15 wide vertical spread is $13.20 in profits if you're laying out $1.80 that's a payoff of more than 7 to 1 so far, so good. what are some of the things i don't like about it so much? one of them is the lower strike -- this is the strike that you own the 140 strike calls that is well more than 40% out on the money if this is a trade you intend to hold and not just take profits on in between now and expiration, this thing really has to move, and that's a tough, tough bet to make of course because you're targeting actually the all-time highs that the stock had recently seen. if you are going to take it off before expiration, though, vertical spreads don't go to their full value straightaway. so that payoff ratio is actually diminished if you're intending to use this over a shorter period of time and, you know, one of the other

things i would say, this is kind of a lottery ticket trade. but the fact that peloton recently reduced the price of their bikes, that's kind of an acknowledgement that they're a little bit overpriced or might start facing competition from other areas this is still an expensive stock. if you're going to make a bullish bet and you're trying to hit it out of the park and you're looking forward to april, this is a way to do it but this one only has about a 14% probability of profit. >> we have time for one more tweet. this one is for carter john wants to know is taiwan semi ready for a breakout? >> it sure is, at least that's what i see, meaning we know this was a great winner in fact, taiwan semi is some 20% of the entire taiwan stock exchange index a great sell-off and now there's a lot of authority to this sort of 125 level good relative strength day to day, week over week. play for the breakout. >> tony, what's your take on tsm? >> yeah.

so i like the range that it's currently trading in when i look at the business itself, i don't really see a compelling reason for the breakout just yet. if you look at revenue growth, it's very steady eps issi ticking up a little bit last quarter i don't think it's ready to break out just yet but i do think it's prime for a breakout. i would be a little patient because i think this could trade in a range for a little bit longer before you actually see that breakout. >> mike, your thoughts on taiwan semi >> yeah. i like it on the long side we have actually seen a decent amount of bullish activity there in the options market and also in some of those etfs that contain it as a large constituent. one of those things we've seen obviously is that a lot of these names, there are big shortages there's big demand for some of these products the ones that are selling the products that everybody needs and wants -- and i'm going to exclude intel from that list notably. i still think you can stay long in those names >> that does it for us here on

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♪♪ hello, everyone and welcome to a special edition of "fast money. i'm in for jim cramer and "mad money. we have a huge lineup tonight. we'll calling it the fall re-set the five markets that have defined 2021 and how to play them into the end of the year. meme stocks, crypto, spacs and china esg, have the trades had their 15 minutes of fame or are they here to stay. we have questions and answers on each of these ahead this hour. but we'll start with the rise of the retail trader and in the so-calle