an endless fascination for the public. but this one, it's so unusual, that it's one of the greatest robberies in history. - ♪ - ♪ ♪ >> hey there "options action"s fans, i'm melissa lee coming to yo live from the nasdaq market side in new york. we've got a busy show coming your way here's what's on deck. >> order up. mike khouw is looking his chop as this restaurant gets ready to report earnings, just don't fill up on bread sticks he's laying out a real appetizing trade plus, the chart master says when the chips are down you buy some more why carter worth sees a breakout building for one semi name and later, red alert

tony zhang is flagging some down side in the defense stocks how he's protecting himself from the fallout. it's time to risk less and make more "options action" starts right now. >> let's get right to it the semitrade getting fried. the etf dropping nearly 2% carter says one chip is about to rip. carter, take it away >> what we know is bad week, transports down. industrials down banks down most sectors down. the philadelphia semi-conducting index putting in a green week. let's look at a few charts then look at xilinx xilinx versus the semi-conductor inde and you can see there how much xilinx has lagged. one being up 325 versus 190. take a look at the ten-year chart. it's even more substantial lag you're talking about the stock being up 755%.

xilinx up only 385 but now look at the six-month comparative chart, the colors flip on a six-month basis, xilinx has doubled the performance of the sox index. that brings us to the last two charts the first of the two last ones is a comparative chart on top is xilinx you can see the well-defined formation. we're approaching the high, but on the bottom is relative performance to the index of which its a constituent. a gradual, orderly bottoming out process. it's been outperforming since april. and the final chart is just the textbook set up for a breakout we've returned to the former high the presumption is we exceed the high, we break out buyers of xlnx >> all right carter said it very clearly, mike so what's the trade? >> yeah, so, you know, xlnx is

an interesting cas because it's an acquisition target there was a deal announced last october with amd it's an all stock deal so unlike all cash deals, typically you'll see the stocks trade close to the offer price this one is going to track amd and it did earlier, but that stopped several months ago and i think there were probably some antitrust concerns they have approval from the u.s., but of course they wanted approval from the chinese regulators there have been signs that's going to get resolved. of course that's a real benefit for the share price because the deal is for 1.27 shares and right now, it's trading at a fairly significant discount. so it's going to track amd, but it's trading at a discount to amd shares and assuming the deal closes, which it's scheduled to do, that should be a benefit and the reason they're acquiring the company is also a positive they're tied to the right segments they're tied to the cloud, to communications we've got the 5g rollout all of these are the reasons why the company was attractive to

amd and should probably be attractive to investors as well. all of that said, amd is a reasonably volatile stock. so the xilinx. the deal is expected to close in december i was looking out to december at the december 155 calls those were relatively close to half the money when i was looking at those today, they were trading for a little over $13 then selling the october 22nd weekly 165 calls against it for $3.75 net net, that $10 wide diagonal. i'd be spending $9.50. note, by the way, that that shorted dated call i going to expire the week prior to xilinx announcing earnings, which obviously is going to have an impact on both amd and xilinx as we would expect but the idea is try to reduce the expense. i'm obviously aware that there is a fairly big dis count. i always want to keep an eye on that just in case it means something, but that is also the real potential tail wind once that acquisition goes ahead >> tony, what are your thoughts on this trade? >> yeah.

so this is an interesting one because as mike said, this is not just a play on semis, but also a probability on the deal going through. as mike said, this xilinx currently is trading at a fairly substantial discount to the amd conversion price, which comes out to about $178 as of today's closing price, which is about a 15% discount at the moment so that's pretty significant in terms of a discount now, if we put that aside and if we look at xilinx, the business is quite strong. we're looking at about 20% revenue growth the fact the stock broke out above that level, it's constructive for further upside especially as it's outperforming semis over the past three months quite strongly using a diagonal spread like mike is using i think is smart, especially since he's paying less than the vertical width he's paying $9.50 for a $10 wide vertical spread or vertical width. if we see the chinese regulators approve this, we'd likely see it

jump up to that $178 level or where amd is trading at that point. so this is really one that i think is quite constructive for the upside perhaps we might want to adjust the short strike a little higher for those investors who think that this could jump very quickly and get that approval in the short run, but like mike said, this i designed to be approved in december so i think that he should be safe for that october expiration >> mike, the discount is interesting in terms of offering clues on whether or not this deal closes or whether investors believe so are you seeing activity in the options market that would indicate a bet either way? >> you know, so this is an interesting situation right because there's, it's sort of a bigger dynamic going on. whenever we have chinese approval essentially is kind of the issue, it's a little bit

hairy and think basically a lot of the activity in the share price is indicative of that, you know, nobody that really knows what could come out of china on their decision making. it seems like you know, they're a little bit uncomfortable there from a policy perspective with companies getting too big for their britches perhaps that would be a reason antitrust concerns are an issue. most people are trying to play for that spread to narrow and amd is a stock i'm interested in here as well >> yep moving on, tony says there's some trouble brewing in the defense stocks he's laying out a way to take cover. tony, take it away >> yeah, melissa we've seen some weakness not only from industrials, but also those defense stocks and northrop drummond broke above suppor levels and i think there could be further downside. if we look at a chart of industrials, the sector relative to the market, we've seen industrials have really underperformed the sector since june it's one of the weakest sectors

here at the moment if we zoom into northrop grumman right now it broke into a key support level, around 355 i think we've seen a top and it's headed down to 335 to the downside if we look at the business itself, it's a fairly stable business nothing particularly interesting about it very low single digit revenue growth doesn't trade at a very rich valuation. only 17 times next year's earnings so for those reasons the trade structure that i'm choosing to use here is to sell a call vertical spread. so i'm going out to the october 29th weekly options to find a call spread that's about 45 days to expiration and i'm going to sell the 350, 365 call vertical, collecting about $10.30 for that at the money october 29th 350 call option and i'm buying the

365 calls against it for about $4.20 to offset my risk an reduce my risk on this overall trade. net-net here i'm collecting about $6.10 which comes out to be about 40% of the vertical width. i'm trying to take advantage of the implied volatility to play for a little bit of downside here over the next 45 days >> all right mike, what's your take >> yeah, i mean this isn't a stock i'm overwhelming bearish on, but i think the trade structure is indicative of that. this is a neutral to mildly bearish position he's taking of course the company's going to be reporting earnings on october 22nd and that would be one of the reasons that the options that expire a week after that are going to see slightly elevated implied volatility. it makes sense to take advantage of that. this is not a company that has historically moved a great deal on earnings, so i expect it to be probably a fairly non-event

so for that reason i like the trade structure the stock basically as carte will say, i view it as pair of twos, i guess. >> so carter is it a pair of twos and in line with its peers or is it a standout? >> that's right. it is a bit of a pair of twos and yet at the same time, it has that rollover cast otherwise known as a bullish to bearish reversal that tony referred to. one thing that's very important is again as cited, the relative strength, how poor it is to the industrial sector. but here's the thing its relative strength to its peers which you asked, the aerospace and defense like lockheed and raytheon are even worse. so it's underperforming its sector and underperforming it's industry which is underperforming the sector not a good sign. >> all right for everything options action, check out our website. while you're there, sign up for our newsletter here's what's coming up next >> hungry for some gains

mike khouw is sinking his teeth into one restaurant stock reporting results next week. we're serving up that trade straight ahead plus, calling all options action fans reach into your pocket, grab your phone and tweet us your question @optionsaction. if it's nice, we'll answer it on air. when "options action" returns. trading isn't just a hobby. it's your future. 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. to help you become a smarter investor. with an innovative trading platform full of customizable tools. dedicated trade desk pros and a passionate trader community sharing strategies right on the platform. because we take trading as seriously as you do. thinkorswim trading™ from td ameritrade. (man) eye contact. elbow pump. because we take trading as seriously as you do. very nice, andrew. very nice. good job. next, apparently carvana doesn't have any "bogus" fees.

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action". just about dinner time here on the east coast and if you're hungry for some big gains, why not dig into darden restaurants. the company reports earnings on thursday the stock is up a sizzling 63% in the past year if you think this red hot run is just getting started, you are in luck mike has got the recipe for one tasty trade. take it away can't fit any more metaphors in there, mike. >> yeah, so people familiar with darden are probably most familiar with their largest chain operation, olive garden, casual dining. of course, they also own some fine dining restaurants as well. probably over 1800 restaurants in total this is a category of restaurants that would have struggled notably during the pandemic because they didn't focus a whole lot on things like takeout. that was obviously an area that was able to, you know, better serve the needs essentially of mcdonald's shareholders and the like, but they've really done a very good job operationally. i actually expect to see their margins increase

they've done a good job sort of right-sizing the menu, right-sizing the workforce, streamlining their operations and, in fact, their margins ar outperforming their peers. in may, we might see them report margins better than their pre-pandemic levels. with that, i obviously like the stock. the issue of course that i have with going out and buying the shares here is exactly what you pointed out, which is that the stock has had quite a run already. so i think the way that we play this going into earnings is by buying a call spread i was looking out to november. the 145, 165 call spread, when i was looking at that and that is an in the money call spread because the stock closed just under 150. it was 149 and change or so. the idea is that i'm lowering my break even that 145, 165 call spread was going to cost me about $7 when i was looking at that today. remembering that over $4 of that is in the money already. the decay you would have on this trade is less than 3 bucks from

now to expiration or there abouts so anyway, this is the way i think we can take advantage of the fact that operationally they're doing all of the right things, but also being cognizant of the fact the market's had a run and so has this stock. >> carter, what do the charts say about darden >> sure. what we know is that there's real bifurcation going on among casual diners in restaurants look at the first of two charts. a comparative chart. of course, you see there tha they're all ascending generally at the same rate of change, then starting in spring, march april, they start to diverge. you've got dri, up 63% for the year this is the one-year chart versus look at texas roadhouse, up only 45 and cracker barrel up only 10. they've given back a lot of their gains. that holding in well circumstance for dri is very impressive. the second chart is a chart of dri itself really, as is so often the case,

it could be xilinx this is a stock that toyed with the prospects of breaking out. >> tony, what's your take on the trade? >> yeah, so darden has held up surprisingly well, especially during the delta variant surge that we've seen, especially as other reopening stocks have really suffered during this period but if you look at the chart, it hasn't quite broken out from that 150 level yet and that's really the opportunity for me. if you look at the business, as mike said extremely strong business, about 30% revenue growth this year, mike referenced the improvin margins that we continue to see out of darden and the fact it trades only 20 times next year's earnings, which is a fairly significant discount to its peers i think the really the opportunity and this is a stock that is primed for breakout on earnings i specifically like mike's trade where he's using an in the money debit spread because of the fact we're trading near these highs and it's trading -- near these high and the fact that he's, his debit spread costing about $7, but it's almost $5 on the money. the stock only has to rally

about 2% from here in order for it to break even and he has all the way through november for it to happen. for those reasons, i really like it and especially since the implied volatilities here are so high, using a debit spread like this makes a lot of sense. the upper strike he's selling is collecting almost 25% of the premium he's paying for those 145 calls so he's significantly reducing his risk. than outright buying calls going into this event. >> up next, we are cruising into some magical lookbacks they are hence the two big trade updates we'll bring you when "options action" returns.

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possibility of price appreciation, certainly one of the things you can try to look for is the opportunity to sell covered calls. i was looking out to october the 25 strike calls. those were about 77 cents when i was looking at those earlier today. >> since then, carnival is up about 3.5%, so mike, what are you doing now? >> yeah, the stock's up 3.5% those calls are essentially right where they were. so basically even though the stock's appreciating slightly, decay is taking care of the rest they're going the report earnings on the 8th. i think this is setting up perfectly well if you already own the stock and you sold these calls against it, you're doing fine. if you bought the stock and you sold those calls against it you're actually up about 3.5%. but there's 3% premium and almost 9% of upside in october i think you stick with it. >> meantime, tony took us on a trip to the magic kingdom. >> the stock has really struggled since pretty much march, but has spent the last

four months or so trying to build a base and i actually think now is the time that it' primed for a potential breakout here now that it's been forming this base for the last four months i'm going out to the october january 185/195 call diagona where i'm buying the january 185 calls for about $11.75 and i'm selling the short-term october 195 calls against that for about $2 or so >> disney is pretty much flat since the trade, so tony, what are you doing now? >> yeah, so disney has held up quite well, especially into today's selloff for the broader markets and it's still holding that 180 level the diagonal that i was using it designed to give me bullish exposure through the end of the year and as of right now that is still the base case so i'm holding on to this trade for now. >> carter, what's your take of the longer term trajectory of the stock? >> disney is -- what would be the word

pair of twos stuck in a range o relative performance day-to-day is good. and so the thesis remains. >> yeah. and mike, what's your take on the trade here at this point >> yeah, i mean you can stick with it. disney has a lot of things that are working very well for them as a company i think probably the biggest knock on the stock right here is that you know, the valuations are -- are not particularly cheap, but, of the course, that's true for almost everything in the market right now. >> all right up next, we are taking your tweets so stick around. "options action" is back right after this 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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♪♪ ♪♪ ♪♪ welcome back to "options action". time to take your tweets our first viewer has a question on fedex he writes i believe the stock will bounce back at the beginning of next year with holiday season shipping. i was looking to sell the january 330 call and buy the march 330 call for the cost of about half a share tony, what's your thoughts on the trade? >> yes, so this is inexpensive

at half a share, but also means a low probability of success if you look at those march 330 calls that's about a 10 delta that means there's only about a 10% chance that fedex will be above 330 by expiration. my suggestion is to move those strikes down a little. maybe to the 300 or 310 then sell shorter dated calls against it if you sell the october or november 330s and do it every single month, you'll end up collecting more money doing that than you could selling a longer dated january 330 call >> our next viewer asks the mastercard chart looks weak to say the least. can the traders recommend a trade to make a bearish bet, please maybe selling some premium if they agree with my technicals. of course, carter, why don't you field this one >> sure. well, i will address the technicals you're exactly right this is very weak and in fact the options, stock closed at 343 and the october puts, 340s are

are at 750, a bit rich you would need to do a spread or risk reversal. i'll leave it to the team to pick the precise and best trade. >> all right mike, you get the honor. pick the best and precise trade. >> yeah. i mean, look, the idea is that you want to, if you're getting long premium, try to choose things at the money or close to it maybe even sometimes in the money a little bit and typically i try to go about one standard deviation out on the short side if i'm going to work into a spread or something like that for the short strike >> let's get to our next question on biogen what is going on with it any protection plays you see would be appreciated mike, any suggestions here >> one of the things we've seen is that skew has steepened that means the out of the money puts have gotten more expensive even while the at the money ones haven't got a lot more expensive and a lot of damage has been done so for downside protection, i recommend put spreads and if you're trying to off set that

premium because it's not entirely free still, you could use a put spread collar. that is selling an upside. out of the money call is still maintaining upside exposure. >> all right that does it for us here on "options action. we will be back next friday at 5:30 eastern time. don't go anywhere. "mad money" with jim cramer starts right now - [presenter] the following is a presentation sponsored by trusted luminess. - i have a lot of problem spots, redness, fine lines, dark spots. and now with the breeze, all that's changed. the breeze advanced foundation is amazing. it gives you skincare and makeup all in one. it's like a thin veil, but it has extraordinary coverage. at my age, all the other makeups made me look older. it was uneven, you'd have to layer them yourself. it never quite came out the way i wanted it to. the great thing about the breeze is it does your blending for you. i love the way the luminess smooths out