it's friday and it's time for "options action", i'm melissa lee, live at the nasdaq marketsite in time square here's what's coming up. >> carter worth completes his offensive/defensive trifecta with one of the lowest data longest established health care names that can be found. then tony zhang takes an opposite, but still complementary tact on a staple name that might be about to lose its defensive fizz finally, earnings season never really ends, there's still

stragglers to set up, mike khouw mikes on micron time to risk less to make more "options action" starts right now. >> let's get right to it, despite the s&p's second weekly win in a row there's a ton of uncertain for the average investor so carter worth is completing his offensive/defensive theme of the month with possibly the healthiest of health care names, carter, what are you looking at tonight? >> that's right this say follow on from lilly pharmaceutical and follow on from united. we'll look at johnson & johnson. the first chart is all data. what we know is the leader on the top, orange versus blue, johnson & johnson versus s&p all dated back to 1977 and johnson & johnson has tripled the s&p, dow jones constituent currently the 11th largest in the s&p now look at the past 10 years.

second chart what we see of course is the s&p has doubled j&j. you have a long-term winner that has crushed the s&p 3x yet in the past ten years is trailing by 50% that's a nice set up if the chart looks good and it does so here and now chart first. this is the past decade, a math mathematically perfect 45 degree angle, just in the middle of the channel, i think we'll approach the top of the channel finally, the here and now chart, stock is toying with the prospects of breaking out former high that was back in august at $180 the stock right now at $177. and i thinkit's going to break out. let's play it. >> all right, mike, what's the trade. >> so johnson & johnson as carter was pointing out this is a low-beta name so if we find our selves in a market condition we're a little bit concerned

about potential pull-backs, men the of reasons why people might be concerned in this environment and we've certainly seen those pull-backs this is a company trading not only below market multiple about 17 time full year earnings but below its own average multiple as well. it's defensive it's low-beta. here's what is interesting, you will typically see low beta low growth companies but 50% from johnson & johnson pharmaceuticals and right now they have a pipeline of cancer drugs and sororsis and arthriti

drugs coming out that will represent more than 20% of the company's revenue by 2025 and a a's sector will represent 70% growth in that period. so there are elements of growth built in -- to understand we are seein.

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starting to see staples below the trend lines and return back to long term under performance relative to the market we look at one name, pepsi, you see a strong trend line off the pandemic lows and recently over the past few weeks we've seen this break below that level. while this performance you're referring to in the past two weeks gets use back to that trend line we're on the wrong side this is where pepsi is heading back to 155 level or so. now, if you look at the options implied volatility for pepsi right now it is quite elevated i want to take advantage of that by going out to the may 6 weekly expiration selling the 165 170 call spread. if you own the stock you could outright sell the calls against the stock you own. if you don't own the stock

you can sell a call spread to collect premium and take a bearish position in pepsi. i'm collecting $4.22 for may 165 at the money call option and paying about $2.14 for the may 170 calls. that limits my risk to the upside, on this case on $5 credit spread i'm collecting over 40% of the vertical width because of the elevated applied volatility that you currently get in pepsi >> mike, your thoughts >> i like this trade for a kupple reasons first of couple reasons. first credited spreads limit your potential risk in case you get the direction of the underlying stock incorrect and collecting 40% distance of strikes helps your profit analytics of profit. profitability. here's what could happen could go higher or side ways or lower, two of those three are good. the probability of profit is also quite good and risk reward

is also good important point, if pepsi is going to break up to say 1 70 or so in the short-term is not going to go to the full value of the vertical spread immediate sloi you would have opportunity to pair the risk/reward relationship to a better relationship than right now. pepsi is trading 24 times earnings so not particularly cheap. it is something that doesn't grow quickly i think there's a lot of reasons to like this trade finally the expiration date. when you are selling options premium because decay accelerates as expiration approaches you want it short-dated. the expiration he chose inside 45 days i like that too. >> carter? >> well the 1fundamentals, thin about this versus j&j forward mult 17 this one 25 they are both low growth mature growth companies and the technical set

up, j&j toying with breaking out, pepsi broke trend and back to the under side of the trend line, i'm a seller not a buyer. >> for everything "options action" check out our website and newsletter here's what's coming up next. >> announcer: still to come, if a tree falls in a forest, you can still make some green on it. mike khouw harvests an out of season earnings play with a chipper intent plus, calling all "options action" fans, reach into your pocket, grab your phone, and tweet us your question at "options action", if it's nice we'll answer it onir wn ahe "options action" returns thinkorswim® by td ameritrade is more than a trading platform. it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading.

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welcome back to "options action." we're gearing up for micron earnings, semis stock down 14% from last month but could be rip left in this chip. carter, what do the charts tell you? >> it's interesting set up, first the here and now chart, so, a three-month decline i have there, made a high of 98.50 and dropped 68.50. 30% january to march now remember that 98.50 number let's look at the next chart, the all-data chart it's so fascinating, when it backed off, where was it it was at its dot com peak, remarkable. you're talking about it went just in january this year to where it was july 14 year 2000, 22 years ago and a perfect set up is to back away from the high and then you

can reapproach it. let's look at the next chart, the same thing but logrhythmic one way to draw the line, call it a massive head and shoulders bottom another way to draw the line, last chart, it is ascending wedge and toying with prospects of breaking out. then bit of fundamentals just for fun. back in july 2000, the company earned 2.63. last year it earned 720. consensus is earned 920 next year it is where it was 22 years ago when it earned 260 and projected 920 in next 12 month ready for a break out. >> mike, what's the trade? >> this is interesting with earnings coming up first of all, the options market is implying a pretty big move here the straddle that expires next week, nine and half percent of the current stock price.

so clearly the options market expecting something big after they report earnings. what's interesting of course, when you have stocks like this that can sometimes be behave based on fundamental, cyclical behaviors like the prices for d-ram and nan pricing which have remained relatively stable is the underlying theme here. what's interesting it is expected to make $9.20 a share, less than 10 times earnings. you don't find stocks that cheap in this market too often now of course it is fair to say sometimes stocks are cheap for a reason right now because the options markets are not really sure why that is, they are not cheap. and so, the situation we're trying to take advantage of here is the stock looks like it's cheap, we have reason to believe it could go higher, by the way, it went more than 15% higher the day after reporting earnings last december. we want to buy calls to do that

but we've got to find a way to offset the high premiums so i was looking out to july, closest i could find at the money call option was 77.5 calls and looking to sell the april 85 calls against it you will notice the distance between the strike, two things, this was $6.50 when looking at it, when we do diagonals we want less distance between strikes, that is true here. something else, i was also factoring in that nearly ten percent implied move off of earnings i wanted to sell a call that was somehow near that implied move if it should do it to the upside so this is a way that you can try to offset that very elevated options premium by selling some of the stuff that's most expensive which is the things that capture that earnings and little else. >> tony, your thoughts here? >> yeah, this is really one where i like the fundamentals far more than i like the charts. the only concern i have from the

charts is really the relative performance of micron two the sector, nvidia and intel look more interesting from that perspective but fundamentals look extremely strong for my chron trading 6.5 next year's earnings, a steep discount from its historical average and its peers and considering historically micron is shifting more to the advanced technology, higher-margin business and they've been doing a good job returning free cash flow to investors i think micron at 6.5 earnings is compelling buy, especially it's trading near the bottom end of the range. and the trade structure, implied volatility he's going out to july buying the options with low implied volatility and selling the april expiration that has very elevated implied volatility, he's ability to take advantage of the skew you're

seeing in the term structure and the only comment i will make to mike's trade here is that you want to pay less than the distance between the two strikes. he is p.a..ing 6.5 for 7.5 wide diagonal i would like to use slightly higher strike price around 7.7 or 78 strike price, collecting 20 cents less -- i like to give myself more room on the first expiration date. >> what do you think of tony's amendments to your trade, mike >> i hear what he's saying two things i would consider when looking at a spread. one is the relationship in the premium i'm collecting versus the premium i'm spending so in this case we're collecting 1.60 or 1.70 versus laying out about $8

it's easy to start chiselling away until finally you're only collecting an eighth or tenth of what you are spending on the longer-dated premium that doesn't really give you quite as much of a rational for doing it that's the first comment i would make the second thing, also, when looking at the amount of premium look at it in relation to the value of the stock also and the context you're dealing with. this stock moved 15% would i want to really sell an option down to a buck? maybe not. i think also we have to consider it might go higher it may gloss lower choosing that slightly lower strike roundabout the implied move is sort of a way to deal with the fact that there is a bit of a coin toss going to any catalyst in earnings. >> up next we will look back at a prior health care trade of few weeks ago. more "options action" after this

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welcome back to "options action." a few weeks back carter and mike laid out a way to play united for some games >> check this out, the next is comparative chart, united health care versus google and apple in the last ten years, it's paced some of the greatest names in the market. >> looking at june 500 april 520 call diagonal, buying june, selling april, net net would cost about $19.45 a share out lay of the value of four shares of stock >> there's some time left on the try but unh has climbed 5% since then what happens to the sold cost on the 15th if it is above 520? won't it be exercised a naked

call so mike how do you manage this. >> this is a great question and a good reminder if you don't already follow us on twitter because we did actually respond to this question it brought up points i thought are important enough to discuss. first thing's first, if you're in a situation you're short an option going into is expiration and through the strike price, in this case above 520 strike of the call, it will be in fact a sign you won't be naked, why? because i own the longer dated call i would be called out of the stock, short stock but also long a call. what i would recommend before expiration if it's in the money cover that short call. another thing you can do is also roll the entire structure up and out if you choose to and you would be taking profits on the table. couple different ways you can manage that. ideally if you have options, if you're in the money, you probably want to close them on daat expiration y. >> all right up next, your tweets an the final call

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welcome back to "options action", time for tweet fan asks thoughts on buy now pay later space in higher interest rate environment assuming the fed raises rates 4 to 6 more times before the end of the year tony >> higher interest rates not only impacts the valuations you assign to these companies but also the economics of the business itself. buy now, pay later, there's nothing proprietary about the products these companies have. it's really a customer acquisition battle in a relatively low-margin business i think you will see quite a bit of consolidation in next few years, similar to food delivery two years ago. >> all right time for the final call, carter what do you say? [ inaudible >> tony? >> pepsi

fizzing out. selling a call vertical spread. >> is mike khouw. >> three ways to use call spreads i like what tony is doing with pepsi and buying verticals in j&j dgolsiana. >> does it for . my mission is simple to make you money. i'm here to level the playing field for all investors. there is always a bull market somewhere and i promise to help you find it. mat mon mad money starts now! hey, i'm cramer. welcome to mat money welcome to cramerica my job is not just to entertain but to teach call me at 1-800-743-cnbc. traders ran the register on big tech all morning