he should never get out because i don't care how old he is, he will hurt somebody else. ♪♪ -- captions by vitac -- it's friday and it's time for options action i'm melissa lee live at the market site in times square. >> 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 bid finally earning season never really ends. there are still stragglers to

setup around mike khouw takes on micron options action starts right now. let's get right to it. despite the s&p's second weekly win in a row there's still a ton of uncertainty out there for the average investor carter, what are you looking at tonight? >> that's right. this would be a follow on for lilly. let's look at johnson & johnson the leader there on the top you're looking at orange versus blue, johnson & johnson alli dat back since 1977. flip it around look at the past ten years. second chart what we see, of course, is that the s&p has

doubled. and over the past ten years it's trailing by 50%. that's a nice setup if the chart looks good, and it does. the here and now chart first this is the past decade. this is a mathematically perfect and finally the here and now chart. what do we see a stock toying with prospects of breaking out above a former high that high was back in august at 180. the stock right now at 177 and i think it's going to break out. let's play it. >> all right, mike, let's do it. what's the trade >> so johnson & johnson i mean as carter was just pointing out first of all this is a very low beta name. if we find ourselves iba market condition where we're a little concerned about potential pull

backs this is a company trading not only below a market multiple at about 17 times full year earnings but below its own earnings multiple as well. it's defensive, low beta and here's the interesting thing typically you're going to see very stable companies low growth companies, but about 55% of the revenues of johnson & johnson come from tpharmaceuticals. and right now they have a pipeline of drugs probably going to represent and i'm talking about some cancer drugs and some psoriasis and rather riting drugs coming out going to represent the revenues and there are elements of growth built into johnson & johnson, so i think right now given the fact the company is such a low beta name and its options prices are also extremely low as a result

of that, in fact the implied volatility is less of that of the s&p, i think we can take advantage of that is look out to june when i was looking at that earlier today that was a little over $5. now, that's about a third of the distance between the strikes but i would point out that is also in the money. the stock was just under $177 when i was looking at that, and this is the 175 strike we're going to own why is that important here because that's going to lower our up side break even the up side break even if you get this thing around $5 is going to be 180. that's a very mild increase where the stock is currently trading and going to be risking the relatively small amount of the current stock price to do that trade >> tony, how do you like the trade, and how do you like the stock? >> if you look at the stock itself as carter was showing you the out-performance of johnson & johnson versus the under-performance we've seen in

the past ten years most of that has actually come from the past four years sense 2018. what we're really looking for is that potential break out now, the fact it has broken out above that 175 level i think is constructive for the potential break out here, but i really would like to see johnson & johnson break out above that 180 level to truly confirm what is this long-term under-performance is going to start catching up. i'm not sure how relevant that is for this trade. so the biggest risk i see at johnson & johnson at this point you are buying near relative highs and hoping you're going to be able to sell it even higher the only reason i'm willing to take on that risk is lay out the structure john laid out in a

debit spread and the fact he's able to do so while risking less than 3% of the stock's value really reflects just how strong the risk reward of this specific trade actually is. the stock only has to move about 2% higher before it breaks even, and he's getting about a 2-1 risk reward ratio if you do see this break out here to new all-time highs to johnson & johnson. that's really, again, the only way i'm willing to take on risk here at near all-time highs. >> tony, identified a 180 level he'd like to see the stock hold above a little bit what are your thoughts here? >> so those are the absolute highs while slightly below that. it's good technique to clear past all and then free and clear to run or which we're trying to do here anticipate it will >> it is important to remember

that some protective plays simply have their limits check out shares of consumer staple pepsico tony, what are you seeing? >> yeah, we're continuing to see the staples sector come under pressure, and i think pepsi is one particular name i've identified that could see some down side going forward. if we take a look at some charts, the first chart i want to take a look at here is a chart of the staples sector relative to the s&p 500. now, this is over the past six years. it's important to understand as a sector this is a sector that's continued to underperform the broader markets for this last six years. but if he look at the second chart here what we have seen is in recent times a bit of out-performance here the staples sector actually outpace the s&p 500 by nearly 10% since the december lows. and what we're starting to see

here now is that is starting foofizzle out. we're starting to see staples break below those trend lines and return back to its long-term under-performance here relative to the market. if we look at one particular name within the staples sector, pepsi, we see a very 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 over the past few weeks gets us to that trend line, we're on the wrong side of this right now it's quite elevated and i want to take advantage of that by going out to the may 6 weekly expiration and i'm selling the 165, 170 call spread if you own the stock itself you could outright just sell the calls against the stock you own, but if you don't own the stock you can sell a call spread like

this to still be able to collect premium and take a bearish position here in pepsi i'm paying about $214 for the may 170 calls so that limits my risk to the up side. in this particular case i'm collecting over 40% of the vertical whip because of the elevated implied volatility you currently get in pepsi >> mike, your thoughts >> yeah, i like this trade for a couple of reasons. first of all, credit spreads are a great way to look to collect premium while limiting your potential risk in case you get the direction of the underlying stock incorrect. and collecting 40% of the distance between the strikes really helps your probability of profit i mean, here's the way to think about it threethings can happen the stock can go higher, go sideways or go lower in this case two out of those three are good, so the probability of profit is also quite good and the risk reward relationship collecting 40% of the distance between the strikes is also an

important point. if pepsi is going to break up to say 170 or so in the short-term, that's not actually going to go to the full value of that vertical spread immediately. so you would even then have an opportunity to pair the risk reward relationship to an even better ratio than it is right now. something else, pepsi is not a high growth name it's not particularly cheap for something that doesn't grow very quickly, so i think there's a lot of reasons to like this kind of trade finally, the esh operation date he's chosen. when you're selling options premium you want to keep it relatively short dated take a look at the expiration he's chosen, inside of 45 days i like that, too >> carter? >> first what mike just said think about this versus j&j. before a multiple j&j is 16, 17. this one is 25 but they're both low growth, mature growth companies. then you have the technical setup.

pepsi broke trend and now thrown back to the under side of the trend line just as depicted by tony i'm a seller, not a buyer. >> all right for everything options action cleck out our website and our newsletter here's what's coming up next 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 jeopard intent pluls calling on 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 on-air when 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. personalized education to expand your perspective.

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♪ ♪ welcome back to options action we're gearing up for micron earnings next week the semi stock is down 14% in the last month. but there could be some rift in this what does the chart tell you >> the first the here and now chart. the three month decline and dropped to 68.50, 38% from january to march remember that 98.5 number and let's look at the next chart this is the all data chart when it backed off where was it? it was at its dot com peak

it went from where it was in january to where it was 22 years ago and the perfect setup is to back away from there high and then you can re-approach it. look at the next chart it's the same thing but longer rhythmic last chart it's an ascending wedge of sorts and toying with the prospects of breaking out, but then a bit of fundamentals just for fun so back then in july of 2000 in the year 2000 the company earned $2.63 cent it's projected to earn 9.20 in the next 12 months let's play for break out >> all right, mike, what's a trade ear? >> yeah, so this is an

interesting one with earnings coming up. first of all, the options market is implying a pretty big move here the straddle that expires next week 9.5% of the current stock price. so clearly the options market expecting something big after they report earnings what's interesting, though, of course when you have stocks like this that can sometimes, you know, behave based on fundamental cyclical behaviors like the prices for deram and pricing which have remained relatively stable, that's sort of the underlying theme here what is really interesting, carter pointed out it's expected to make full year numbers of about $9.20 a share. you don't find stocks that cheap in this market too often now, of course, it's 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 that it could go higher, and by the way it went more than 15% higher the day after they reported earnings last december we want to buy some calls to do that, but we've got to find a way to essentially offset those high premiums. so i was looking out to july, the closest i could find at the money call option was to 77.5 calls, and then looking to sell the april 85 calls against it. now, you'll notice the distance between the strike, two things about this this trade was about $6.5 when i was looking at it. something else i was also factoring in that nearly 10% implied move off of earnings, i wanted to make sure i was selling a call that was somewhere near that implied move if it should do it to the up side and so this is a way you can try to offset that very elevated options premium by selling some of the stuff most expensive

which is the thing that captures 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, and the only concern i have from the charts is the relative performance of micron 2, its sector but the fundamentals look extremely strong here for micron trading about 6.5 times next year's earnings. and a pretty steep discount to not only its historic average but also its peers if you consider the fact micron is starting to shift more to that advance technology, higher margin business and doing a really good job of returning free cash flow to investors, i think micron at 6.5 times earnings is a really compelling buy here and especially since it's trading near the bottom range. and if you look at mike's trade structure this implied

volatility where he's going out to july buying the options with the low implied volatility and selling the april expiration that has very elevated volatility he's able to take advantage of the skew you're seeing in the term structure and the only comment i'll make here to mike's trade here is you want to pay less than the distance between the two strikes. he's paying about $6.5 for a 7.5 wide diagonal. i think i would like to use somewhere around the 77, 78 strike price and giving yourself another $2 here to the up side and especially where you could see an explosive move to the up side and i'd like to give myself a little more room on that first esh operation date >> what do you think of tony's amendments to your trade, mike >> yeah, i mean, i hear what he's saying. there's two things i would consider when i'm looking at a spread one is the relationship in the

premium that i'm collecting versus the premium that i'm spending so in this case we're collecting 1.60, 1.70 and that doesn't really give you quite as much of a rationale for doing it that's the first comment i would make you know, and the second thing i would make is also when you're looking at the amount of premium you're collecting, look at it in relation to the value of the stock also and the context you're dealing with. this is a stock that moves 15% what i really want to sell an option down to say $1 maybe not. i think we also have to consider it might go higher, may also go lower and 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 into any catalyst like earnings

up next, we're taking a look back on a prior health care trade from a few weeks ago don't go anywhere. more options action right 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 help for some gapes. >> the next is a comparative chart and this is united health care versus google and apple for the last ten years it has paced some of the greatest names in the market >> i was looking at the june 500, april 520 call diagal buying the june 500, selling the april 520s net net that would cost about $19.25 a share, about the value of four shares of stock. >> now there's still some time left on this trade but unh has climbed 5% since then. that prompted one of you to ask what happened to the sold call on april 18th. won't it be extra sized and be a naked call so, mike, how do you manage this one? >> okay, so this a great question and also it's a good

reminder if you don't already be sure to follow all of us on twitter because we did actually respond to this question, but i thought it brought up some points which are important enough we ought to discuss them, but first thing is first if you're in a situation short in option going into expiration where it's through the strike price in this case above it will be a sign. but you won't be naked, why, because you own that longer data call i'd be short stock but also long a call what i'd recommend is before expiration, if it's in the money you want to cover that short call the other thing you can do is roll the structure up and out if you choose to and you'd be taking some profits on the table. so a couple different ways you can manage that, but ideally you probably want to close them on that expiration date >> up next your tweets and the final call ♪♪

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welcome back to options action, time for a tweet our first fan asks thoughts on the buy now pay later space in the higher interest rate environment. assuming the fed raises rates around four to six more times before the end of the year tony, your thoughts here >> higher interest rates not onlym pacts the valuations you assign to these companies but the economics itself buy now pay later there's nothing propriety of the products these customers have. i think what you're going to see a quite a bit of consulidation over the next few years similar to what we saw in food delivery two years ago. >> time for the final call carter, what do you say? >> tony? >> pepsi selling a call vertical

spread >> mike khouw, two ways to use call spreads >> all right, that does it for us see you back here next friday at 5:30 p.m. eastern time 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