the government can collect a portion of that income, which will then go back to victim investors. i think, from a purely voyeuristic standpoint, it's going to be great theater to watch. -- captions by vitac -- it is friday and it is time for options action i'm melissa lee live at the nasdaq market site in times square here's what's coming up. when the pendulum swings too far carter worth explains why the safety of utilities may be getting stretched. then, in case you haven't heard yet on cnb >> the stem cell research starts next week with the numbers. >> but tony zane thinks there is really only one to speak up about. finally, a special edition of look back, with professor khouw. how you manage some of our recent trade suggestions depends

entirely on how you are using them it's time to risk less to make more "options action" starts right now. >> let's get right to it today the markets closeout a losing week lately we've been spending a lot of time in offensive, defensive positioning. case in point, carter's hideout last month other sectors might be getting a little long in the tooth already. for a different reason carter what are the charts telling you? >> we thought we'd focus on utilities here there are very interest rate sensitivities in the market. the whole discussion we had at the top of the hour. but utilities in principle are less desirable, if you will, in a rising rate environment, all things held equal. and yet utilities are through the roof let's look at a table or two and a chart or two the thought is to fade

so the market low february 24th and you saw some statistics there from jeff mills. if you look at the 6-week return you see you tilts are leading the pack, defensive. health care coming in second, defensive. rates, staples and the s&p up 5. the point is and you'll see this in the next chart that at this point i think the spread is getting a bit wide just as it's a bit wide the other way with home builders. so this is a compirative chart, three lines. you've got xlu, the spider etf to the right versus tlt and the itb, the i shares homebuilder etf. i want to look at a couple ratio charts it's xlu not itself, its relative performance to the tlt. so which is to ratio and you see

the textbook break out but now it's literally so steep it's going up and to the left and you can't do that. look at the next chart this is going back some 20 years. i mean a definitive break out and in many ways it's the equal and opposite moment of the pandemic plunge. and then the final chart, we have an epic breakout. but it's broken out. utilities seem a little too far too fast, and we're thinking you fade this very defensive area of the market >> wow those charts speak for themselves mike, what's the trade here? >> you know, if we saw some other charts we might also think of it it's gotten to some pretty extreme levels so if we take a look at xlu, the utilities etf and take a look at the utilities select sector index that underpins it and take a look at valuations, now, carter has often told us va valuations are not a good timing

tool and i think that they aren't i think we need a context here price to earnings 22-year highs. whether we're looking at free cash flow debt, whether this is trailing or forward looking, doesn't matter it's essentially at all-time highs. some we're looking at cyclical stocks sometimes though can be contrary from my perspective this does seem a little bit too far, too fast maybe even a lot too far too fast i was looking out to june at the 76, 70 put spread. now xlu and the constituent stocks that are utilities are not super high volatilities.

but you'll notice you're actually collecting about a third of the premium -- of the money we're spending on the 76, collecting it on the 70s and that's the reason why i'm looking at a spread. the other thing is it's essentially from that 70 level that we really broke out so to me i think that's sort of the level i'd be targeting in the near-term. in this case we're talking about a little over two months and i think this is the way you probably want to play it i mean, it's always very difficult to pick a top, so we don't want to short something like this, but this is a way we can bet against it >> tony, what's your take on this trade >> so overall i completely agree with this. we've been adding long exposure to utilities on the break out, when it broke out to that 72 trading level. kp you look at xlu prior to that break out it projected $78 and because of that we started taking profits on those trades earlier this week. and i think that aligns quite

well with fading this particular move if you look at the major ones duke energy, southern, these are all companies currently trading at the same type of extreme exhaustion moves, so really sets up well for this collapse, if you will, or a fade the move back to that mean reversion. but i think what's interesting here is that typically when an asset like this the implied volatility tends to be inexpensive. that's not case we're seeing for xlu. so typically when i look at this type of elevated implied volatility i'd be more inclined to sell premium, but looking at mike's debit spread the fact he's able to collect one third of these $76 put options premium and he has a risk reward ratio here of over 3.5 to 1, i am far more inclined to take a debit spread because when we fade

these extreme moves we tend to see the collapse happen fairly quickly, and that's exactly what you'll be able to get from the debit spread structure mike's using. >> carter, i'm wondering are we entering the reversion territory since february 24th? >>thality is the irony of trading. you'd oil, crude my goodness went from 90 to 130 and you have wall street calling for $200 a barrel and the thing's in free fall now at 90 when it gets a little hot too far too fast or the reciprocal too much of a plunge, you do start to see mean reversion. so it's in all areas of the market, all subsectors and all asset class. let's switch gears here. check out the bank earnings on deck next week bank of america, jp morgan, citi all set to report.

so, tony, which one? >> the name i have my eye on here is wells fargo going into the bank earnings next week. if we take a look at a few charts here the first one i want to take a look at is the financial sector xlf relative to the market basically since february we've seen the sector make absolutely no progress. it's been range bounld, and right now we're at the bottom end of that range. i think from a timing perspective looking at financials going too earnings seems like an interesting time to do so now, when we look at the major banks here reporting next week from my perspective wells fargo seems to be the better performing one next chart wells fargo relative to the sector, over this past same time frame we've seen wells fargo actually outperform the sector and recently pulled back to a trend line, and i think this is, again, a good opportunity from a timing perspective to look at wells fargo going into earnings. and if you look at the -- what's interesting i think for a lot of investors currently asking about rising interest rates and why are banks struggling in this

rising interest rate environment, you really have to look at the spread between the ten-year and two-year to have a better understanding because it represents the difference between the rates that the banks lend out at and the rates at which the banks have to pay depositors and when we see a rate inversion here, that puts down side pressure here on banks like wells fargo and bank of america that generate a fair amount of their income from interest margin but as we get out of inversion, this starts to ease some of that pressure and lastly look at a chart here of wells fargo simply trading here again at the bottom end of the range. i'm looking for a bounce here going into earnings. we look at earnings itself, the market is currently implying about a 5.7% move versus an average over the past eight quarters of about 4.2% the implied probabilities here are quite high it's in the 70t percentile. i'm inclined to sell here

selling the 48, 45 put vertical here net net here collecting $1 in premium out of a $3 wide credit spread now, this is typically just the one third minimum that we seek on a credit spread, but it is a credit spread that is a fair amount already out of the money, so for those reasons i'm willing to accept a credit spread that collects only one third. >> mike, what do you think of this trade >> it's interesting, of course, because i haven't been overwhelmingly bullish on financials in fact, we put bearish trade on and we got long put spread in xlf. and part of the reasons of course is one of the things tony was discussing, which is obviously you have a flattening yield curve debt's not good. there are two things that end up hurting the financials one is the interest margin but of course the other is you need something to have a margin on.

and what i'm referring to specifically is that when you start seeing recessionary pressures, you know, the cni loan growth is probably also going to decelerate. so you're not really earning any margin at all on loans you don't make in the first place, not to mention the fact of course all equities typically are going to start to perform fairly badly if we have rapidly increasing rates and recessionary pressures that said selling the put spreads like the one he's doing whenna options premiums are elevated, doing so when it's out of the money, oftentimes when you're doing that in the catalyst, that can be a winning strategy so from an options winning strategy perspective i rather like it even if i haven't been overwhelmingly enthusiastic about financials >> let's mention that xlf trade. we're going to do an early look back a few weeks out mike laid out a bearish trade in the xlf

so, mike, what are you doing now? >> yeah, so this is an interesting situation when you put on put spreads or you even do outrights the important thing to remember is once you start seeing the underlying run through your long strike and some of the benefits of that real optionality you get starts to come down and so that doesn't mean i'm no longer bearish what i would suggest, though, is that people consider taking some of that money off the table and adjusting down you can roll those strikes down, take some profits here but up maintain that position and you can do that whether that is a hedge other other trades you might have on, which could be idiosyncratic ones like the one tony is producing. it's really a bullish one tony is producing on wells fargo. >> you can sign-up for our newsletter here's what's coming up next still to come, a special look back lesson inspired by one of your tweets

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welcome back to options action we've been togging a lot about rates this week, and of course there was a lot of bearish activity in tlt as well. professor khouw believes there could still be an opportunity here >> tlt which is an etf that tracks the 20-plus year loan treasury bond market has had one of its weakest periods ever. in fact, it's right up there the only other time we've seen declines as sharp as the one we've seen since december in this etf, since it was first listed in 2002 was in the rebound we saw off the credit crisis in spring in 2009 and we're actually not that far off the declines that we saw at that time. now, the thing is, of course, if you really do believe that rates are going to go higher but you've already seen this thing has gone down 19% over comparable periods of times we've seen in the past, you

might be wondering whether there's still an opportunity to get in you highlighted it there was a lot of bearish activity in tlt even this week i obviously there's some people still making some significant bearish bets the thing is this is an awfully tough time to try to make those kinds of bets. so the question we ought to be asking ourselves is if you are in the camp that bulls rate targets are in scope and to put things in perspective that would indeed put tlt back at the levels we saw in the fourth quarter of 2018 which is down around that 115, 118 level, what can you do now well, options premiums are pretty elevated in this thing. that's not surprising given the big move we've seen. the other thing i would say is we may be closer to the end at least in the near-term of the

move lower than we have been in a little while so finally i would also suggest it's probably therefore going to make some sense to try to minimize how much you risk by making a bearish bet and also to pick your levels i am, in fact, targeting that down side level that we did see in the fourth quarter of 2018, and i was looking up to june at at 120, 114, one by two put spread the idea here i'm trying to sell two down puts on or about my down target. but i'm also trying to put this in a way i'm trying to lay out little or no premium the idea being if it actually stabilizes here or if we get any kind of rebound, if recessionary fears keep the long end of the curve depressed then i'm not really risking anything. no harm, no foul, in other words, if the 20-year doesn't decline any further or even if it rebound when i was looking at that today

that was only going to cost about 30 cents the idea is you sell two down side puts, close to that down side target collecting enough premium you're essentially offsetting the cost of a higher strike put >> carter, what are your thoughts >> well, this is very much the same as, if you will, the utilities trade. there's a lot of auto correlation. these are some of the most rate sensitive areas of the market, and i think we've got two charts here just to put in context just how extreme the current move is. the first you'll see here is a ratio. this is, again, tlt but it's the reverse. tlt's relative performance so the treasury bond etf two utilities, and you have literally a collapse, a break down of epic proportions to all-time lows, one versus the other. but the tlt itself, the second of the two charts, is down to trend. so this is the all data chart looking at tlt, and we've come down to the trend line that

connects the lows with the 2018 event levels that mike was citing, and i think seek wansing calls for a bounce here were set differently, that the long end will start to reflect some recessionary issues that are around the corner. >> so, tony, you've got the charts and the trade where do you stand >> yeah, so, i agree with carter here on the expectation of a bounce especially given the extreme moves here, but mike's trade goes out to june and i think if you look a little long-term here the break down below 132 here on tlt the subsequent persistence and rejection of it certainly points us towards that 112, 114 low mike was referring to back in 2018 now, if you look at a ratio spread like this it might first look intimidating, but if you break it down you can break it down into a 120, 114 put debit spread and what he's doing, he's s

selling an additional cost against it and effectively getting it virtually free by owning the obligation of the stock by selling that 114 put. but a few things required to understand this particular strategy is the additional obligation to buy that stock at 114 but also the strike prices it's very tricky to pick the strike prices on that lower strike price he happens to pick a level 114 which aligns really well with the 2018 lows. but also the one standard deviation move for the june options, and that's what the market is implying if tlt is to move lower, that's the expected move and i think that is a great way to potentially quote-unquote thread the needle on price the last thing important to understand about these ratio spreads if tlt moves 114 relatively quickly you're actually going to see a paper loss on this particular trade.

you must hold his trade to expiration to actually thread the needle not only on price but also time. got to take a break here reminder here we're off next friday for the holidays so we thought we'd do a lot of house keeping this week. we're talking tech and tan don't go anywhere. more options action after this

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thinkorswim® by td ameritrade welcome back to options action time for another look back carter and mike laid out a bearish way to play the triple qs, putting the trade in the green and that prompted a fan to tweet us do i sell the triple qs now. i never make money on these options because it's all-timing. i'm green but chances are low we're below 360 in the middle of june so, mike, what do you do with this >> first the options market is saying this is 60% chance we're below 360 by mid-june. second it depends if this is a hedge. if you're hedging you need to keep your hedges on as long as you have your portfolio on finally, you don't need to sell it you can also adjust it >> good options. up next we've got tony's tan trade. we're back after this.

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as promised, a third look back tonight this one's on tony's tan trade from the last month. it's still in the green but expires on the 22nd of this month. so what do you do now? >> the rule of thumb is you get within the last three weeks of expiration if you're still above your break even price it's time to take your profits and move on >> time now for the final call carter braxton worth >> i think one of the best things you can do is put on a pair getting long home builders, short utilities. >> tony? >> wells fargo going into earnings selling a put vertical spread >> mike khouw? >> this is a bit of a barbel trade, but i think if you're bearish you can use put spreads. and if you want to press you should use ratio put spreads >> that does it for us on options action remember we're off next friday but we'll be back on april 22nd.

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