come on, amari. lemonis: i'm proud of you guys. want to go out on the boat again and get seasick? gwen: [ laughs ] amari: are they gonna air that? lemonis: huh? amari: are they gonna air that? lemonis: you throwing up? amari: yeah. lemonis: oh, 100%. gwen: they have to. amari: they have to. gwen: that is, guaranteed, on the show. ♪♪ welcome to friday and "options action. i'm melissa lee. coming up tonight, it's been the best-performing financial stock during the the last 15 years and you probably have never heard of it oh, and it's in trouble. and big blues. don't let the recent rallies in ibm fool you the stock could soon be singing a different tune. and it's important even though we covered it in "fast money," we're going to cover it again. how to trade the rates let's get right to it. carter werth, what is the mystery financial name on a 15-year streak, and why could that suddenly be coming to an

end? >> just as you cited, this is the single best performing stock in the past 15 years, market access, it's a multidealer electronic bond platform, so not a traditional lender, if you will but it is also in trouble. let's look at a few charts first the table just to show the facts. there it is. top five performing stocks in the s&p. and you won't see a traditional lend there in there, except, of course, for silicone valley bank, which is largely tied to tech msci, indices, spgi. so nontraditional. but market assets leading the way. now, take a look at a handful of charts the first, just a two-year chart. look at the topping-out formation. one way to draw the lines, a you see the stock hovering ominously and just now breaking that well-defined level that has been so key for the past year. call that a descending wedge

second chart, exact same time frame, call this head and shoulders top. i've drawn the lines, you can see the arrow. keep that head and shoulders top in mind. look at the third chart now. looking at a very long-term chart. you can see the sequencing, head and shoulders annotated here as well that time frame, about ten years, hold that and look at the next chart this is the log chart. log rhythmic instead of arit mat you can you can see we've broken the well-defined trend line in effect so long and the final chart, consider it a channel. it's the same bottom line that we're reaching, but putting in the upper band shows you how clear the ascent has been and how bad the break is i think it gets worse. >> mike, how do you trade this very rare event? >> yes, this is obviously not one of the financial service

naples -- names as carter was eludin eluding to, that a lot o people have heard about and that's because it's largely a player in the institutional space, being as they are basically the platform for electronic trading in the bond markets, which is largely an institutional business it is a business that badly needs the services they provide. it's safe to say the credit markets have lagged behind equity markets in terms of coming into the modern era of electronic trading and things like that. so all of that, of course, is one of the reasons the stock has performed as well as it has over the past 15 years as he was talking about. over the last ten years what we have really been seeing is tremendous margin expansion. this is a company that was probably trading somewhere in the neighborhood of 20, 21 times earnings in 2011 fast forward ten years where are we now about 61 times earnings. that would be really fine if you

had massive growth but recentl we've seen some of the growth slow year on year. we're looking at revenue growth of about 7% year on year, full year for 2021, probably eps decline. in fairness, an investor data company did say that environments that have very narrow credit spread, like we saw previously in 2017, sometimes they see a little falloff. but still the valuation we are seeing seems a little excessive and to me not a reason to long the stock. and, of course, with the technical weakness, i think what we're really talking about is a breakdown. so you can do credit spread trades or debit spread trades in situations like this one, where the implied volatility is significantly higher than the actual realized volatility of the stock. in this case because we're expecting something to happen rather than try to bet against something not happening, which would be an increase i think the trade here is a put spread bear in mind because it is popping in traffic with other companies we see, we don't see a

lot of expirations to choose from i was looking out to november and i was looking, specifically, at the 403.70 put spread that $30 wide put spread would cost about $6.60 just under 1% of the current strzok price when i was looking at this earlier today. of course, that $3.70 strike, just under 160% of the stock price when i was looking earlier today. the strike almost 17% lower. is that where expect the to go the next few months? not necessarily. but if it goes down to that 370, you're looking at a payoff the better than 4/1. >> what do you make of this trade? >> i think this is a great example of technicals merging with fundamentals. if you look at the chart here, the two-day moving average about a month ago, it is really ominous of what we've seen here. we're broken down below the 430 level. and not only broken support on an absolute basis but relative

basis too, not only down in the market but also the industry if you look at the fundamentals as mike was referring to, it is quite expensive. because we've seen revenue growth slowdown substantially here, not only have we seen revenue growth slowdown substantially, we've seen eps growth slow down even more we've seen about 40% year over year eps growth over the past four quarters, but that's slowed down to single digits now. so any time you see that type of slowdown, i think you're due for a correction here. if you look at the trade that mike has set up, he's actually used a put spread that's relatively far out over the money, but i think it makes relative sense here he's only risking 1.6% of the stock's value by using thi relatively far out of the money put spread that has a lower probability of success but a very strong payoff if it does start to drop into that 370 zone with the technicals and fundamentals aligning so well, i

do think this far out of the money put spread does make sense. >> let's switch gears here as sherlock holmes would say, it's elementary, dear watson but tony zhang is the one looking to solve the mystery of watson computer maker ibm. tony, what are you looking at? >> exactly, i'm seeing weakness here in ibm and especially some industries within tech. so i think that this is really an opportunity here. but if we first take a look at the chart of the dow jones computer services index, we've seen a fairly strong run since march. recently it broke below the 50-day moving average and i started to see this is peaked against the market, and i see some particular down sid from this particular industry. and we look at ibm, one of the particular names in this specific sub industry, ibm looked like it was having a turnaround year. the highs that we saw earlier this year, around 152 or so, was the highest the stock has been

in almost ten years or so. but one thing we do have to keep in mind is this stock peaked against the market back in 2011, about ten years ago. so when ibm broke below the 138 support level, which we saw here a few weeks ago and you see relative poor performance relative to the industry, the market, this really confirms what i see as a weak stock in a weak industry right now. so given that, ibm does report earnings here about a month later on october 20th. so the trade structure that i want to use, takes advantage of the higher implied volatility we see because earnings are coming out in less than a month and i'm going out to the november 5th, and selling a call spread selling the 1.38 call. collecting about $4.48 for the 1.38 call and paying about $1.58

and collecting about $2.87, just a little higher than 40% and this strategy will be profitable if ibm stays at this $1.38 resistance level or gets rejected and continues to move lower, which is what i'm expecting. >> mike, your take on this trade? >> contrast this with this other company we were just talking about. here you have a relatively low multiple stock that isn't going anywhere and there's a good reason why it isn't. 2010 is probably -- it saw eps roughly approximately where we're going to see 2022 eps. i think this is a good trade structure for these situations where you have low multiple stock that could create obviously some level of support, but you don't have a good fundamental story, we haven't had a good fundamental story i ibm for some time and it just doesn't look all that healthy from a technical point of view selling upside call spreads is a good way to try to take advantage of the dynamic >> quickly, carter, because i'm dying to hear what zinger you're

going to put on ibm's chart. what do you think of this chart? >> you know, i'm going to default, meaning it's just bah that's why option strategy is the thing to do rather than real direction with the stock. it's so important, we're covering it twice tonight between "fast money" and "options action. the rates trade. in part two we show you how to wing it, so to speak and don't forget you can sign up for our newsletter at optionaction.cnbc.com. 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.

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welcome back to "options action." if you were watching "fast money" before this -- and, of course, you were, right -- the ten-year hit carter with a magical level. but, carter, for those catching up, what is the major importance of this inflection point >> right i have two charts, but before looking at those, the thinking here is that we have had this very important directional move in rates we peaked at $1.77 in march. we hit $1.12 in july a 65 basis point decline in rates that are themselves very low and we moved back to the midpoint at 1.45 this punch higher in yields sell off in funds is a bit overdone, so i think the idea is to buy some ty 1 in chicago or, in this

case, etf the tlt. so look at these two charts. the first is putting in context for the past year and move back to the halfway mark, which is exactly what yield is dealing with the price tlt has done. that level, if you look at the second chart, is sort of a level of congestion. the thinking here is we either stay in that range or indeed that rates do back off and that tlt moves back towards the top of the range so that's the trade, buying tlt or making a bet the tlt is follow, but not playing for higher yields. >> fallow. a typical carter word. mike, you're saying earlier this is a good teaching moment and you're going to propose something a little more complicated in terms of the trade. it's not a trade we talk about too often on the show. >> yeah, we're going to be taking a look at selling an iron condor people who are really familiar with options are probably comfortable with a strategy like this but we often talk about the two

key pieces of an iron condor, a credit call spread and credit put spread so we would be selling an upside call spread and downside put spread when do you want to do something like this? this is a situation where we think the underlying asset will have relatively low volatility i think we can characterize treasuries as an asset that have typically low volatility and where we also happen to have a range-bound view and that's exactly what carter was just talking about and finally this is a type of a trade because it is a credit spread, or two credit spreads actually, we're trying to compare option premiums. collect options premiums so this is a yield strategy that depends on a couple things not happening. basically we're improving our probability of profit but we're looking for modest yield specifically, i was looking out to november, looking at the 138, 143, 151, 156 iron condor. that means we would be selling

the 143, 148 put spread and also selling the 151, 156 call spread in both cases that's a $5 widespread when i was looking earlier today, that we would collect nearly $1.90 or 40% of the distance between the strikes on the two spreads. so that means, essentially, that our break even on this trade is going to be just above 141ish on the down side for tlt and just below 153 or so on the upside. if it lands between that, of course, we collect all of the premium but our break evens will be beyond that another quick, important point, when we sell options premium, generally we like to look at expirations a little nearer dated. because options decay tends to accelerate as expiration approaches but when you're dealing with spreads as we are here, sometimes having a slightly longer time to expiration, as we are dealing with here, is okay

and the reason is, if you do break through your short strikes, spreads are not going to go to their maximum value right away which means you'll have an opportunity to close the trades not taking the maximum loss even if the thesis itself turns out to be an incorrect one >> tony, would you use a similar strategy or take a different approach >> no, i think this is the great strategy for the current environment that we are in it is really a great example of merging a bet on volatility and a bet on the directional view y using the technicals an iron condor is taking advantage of the elevated and implied volatility we currently see on tlt right now the implied volatility is in its 34th percentile. being able to take advantage of that i think as mike said, the right way to think about this on a more complex strategy is to break it into its component f parts. he's selling the put credit spread because he believes tlt will not move significantly

lower. and when you sell a pu spread for $1, if he just sold the put spread, he would be risking $4 or so but by selling that higher cal strike against it, he's collecting another $1 here and collecting a net $2, but he doesn't have to post additional margin because the width of the call spread is the same as the put spread another approach i would take is simply based on my directional views, which agrees with carter's, tlt is trading 146/152 range roughly. so i would just be a little more tactical i would actually move the put strikes a little bit higher because i think tlt is already trading near the bottom end of its range. i would look selling 146/142 put spread and collecting about $1.50 on a $4 wide put spread. because it's a $4 wide put spread, sell the 152/156 by doing so, i do reduce my probability of profit but i'm

being a little bit more tactical and i do reduce my risks, because here i'm collecting about 50% of the width here. but my range, break evens is still 144 to 154, well outside of the range that i think tlt will trade in. but i just want to -- just want to point out that my adjustment is simply to align it with m personal view of the directional view of tlt and not necessarily any disagreement to mike's trade. >> mike, what do you make of tony's tweaks? >> yeah, it is interesting because the strikes i chose were in alignment with my own views and my own views, of course, and they have been wrong for while, admittedly, is that sooner or later we were going to see the fed essentially take some of that longer-dated asset purchases off the table more aggressively and although in the very short term, that doesn't necessarily mean those rates

were going to move significantly higher, i did see that as a possibility before year's end. that hasn't necessarily happened maybe this is all the move we're going to get, but essentially the reason i had those slightly lower credit put spreads is because i do have a feeling that maybe i see rates a little bit higher than the level that tony is seeing between now and november expiration. next, it's been a big trading week and big week for questions about trading. we're answering them next.

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welcome back to "options action." time to take your sweets first viewer asked -- supposedly there's a serious shortage of lunchables, who knew with many stores not expected to get them until next year kraft heinz the company that makes lunchables, appears to be bottoming on the charts. can traders recommend a way to make a bullish bet on this stock, please? tony, why don't you field this one? >> a lot to unpack in that one tweet. one thing i will say is when a company cannot meet demand and fill the shelves, i don't necessarily see that as a positive, as we saw from nike

yesterday as to what happens when they can't fill customer demand i will say i don't think lunchables is a large amount of their revenue so i'm not sure that is necessarily a reason to not like the stock, but i do agree with you on the charts, kraft heinz has pulled back to a major support level around 36 and as far as what option strategy to take, if you look at the implied volatility of kraft heinz, it's relatively low, so i would go out to january and look at buying an at the money call option and maybe sell some short data calls against it. the november 5th expiration has earnings coming up, there's a lot of implied volatility there, and you can possibly collect premium to offset the cost of the january calls. >> our next viewer said apple seems to be running up heading into earnings. they call it the apple slingshot. should i buy 150 calls for november carter, what do you think? >> well, it's quite close to that level, we know apple closed

146.92 and the november 150s went out at 4.25 so you need a 5% move to break even this is the kind of thing it makes it there but the option expire is worthless. i might sell the 155 and put on the credit spread and try to do it that way. >> our next viewer asks, did west texas crude oil hit an intermediate cycle low in august, and if so, how high could this potential breakout hit? this relates to carter's continental resources and cimarex plays a while back mike >> i think that little sell-off we saw in august was probably short-term low right now, crude looks pretty strong to me, and, of course, that's going to play directly into the two names you just mentioned, which are e&p companies. i personally happen to be long the services side in the form of halliburton, a stock i owned for quite a while, buying calls when it was much cheaper an converted the stock and i and this to hold it. that's the way i like to play it but it would not surprise me to

see wti hit $80. >> the next viewer asks if s&p fails to hold above the 50-day average, how do you feel buying the vix 27 call? currently trading at 80 cents and with a leverage factor of 4.01 which is the optimal leverage point for the expiration date. tony, this has your name on it. >> whenever you talk about a pullback in the s&p, i'm not a big fan of buying vix calls because if i think the s&p will pull back 10%, i know where the s&p is going to be and i can buy puts for it, but i don't know exactly where vix will be in a 10% pullback while the options are relatively cheap and maybe you have that optimal leverage, it's hard to gage how far vix will jump on that for those reasons i enjoy buying puts rather than vix calls. still to come -- "the final call." stay tuned 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

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♪♪ ♪♪ ♪♪ "final call" time. tony >> ibm, weak stock in a weak industry, selling call spread.

>> carter? >> market x, great champion on the ropes, sellers >> mike? >> yeah, you can sell market x, using 403 put spread to lift it 1.6% of the stock price. we'll see you back here next friday - [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