because it gives you convexity the increase in the value of the call option will speed up as it goes through the 11.5 strike price. that's the opportunity to consider either rolling up an out or spreading one of these things but sometimes high options prices are justified here. i think they are. >> i think this trade is speculative in nature for the reason you pointed out the chart, the reason is got above the 51.50 level is not bearish but it doesn't say for me oil is going higher but i think the trade makes sense. if you get the 20% bounce in oil you have a nice trade. >> just quickly from fundamentals you have about 4 million barrels off line coronavirus, libya, iran had issues but capital spend something slowing as well. opec talking about cuts. there is a huge battle going on in oil right now. >> that's exactly- dsh i think you're exactly right but the fact is that all of these are knowns one of the reasons we have seen this big decline in oil prices, because of these things that you just sighted combine coronavirus with that, what's is it going to take to get some sort of bounc

and trying to get the convexity we talked about.eing 65 cents for the $2.5 call spread gives me limited exposure and limits the amount i'm taking relative to the call price you see the opportunity you have here you can see basically since the news has come out, this is tha 12 plus percent decline we see down here. it did end up at $52.5 this is what we are looking for here if the news we see lately reverses or people look it at the least you might expect it to recover back to the levels even at the levels, well below the average analyst target there, the stock is cheap. 11 times earnings up there. >> mike, why don't you come back tony, what do you think of this trade? >> i think mike is right i think the stock is oversold on the fears about the coronavirus. if you look at revenue growth, it is a strong stock this is simply overdone. i like the trade here. because i was looking at a covered call on this name. if you own this stock i was going to suggest you sell the march 57.5 call, which is the call mike has chosen instead of being

you have also seen some convexity below. insurance companies have to hedge.he rate move is getting ahead of itself. i am still extremely worried, to quote the who, how big is this iceberg? now that infections are outside china, this will keep growth weak for a while. this rebound we are looking for, i'm arguing we have not yet seen the weakness, let alone the rebound. jonathan: this is more technical than fundamental? priya: the movement in treasuries over the last couple technical, largely it is largely flow. it is a function of positioning and hedging. if the growth data weaens, which i will argue, it is only a matter of time, it will show up in global growth data first, then the u.s. i think treasuries have a lot more room to decline. jonathan: what do you make of that argument, that this is a more of a technical move in treasuries, not a fundamental move yet? tony: i think there's a combination of factors. the fundamental view is there could be significant weakness from coronavirus. people are starting to price that in. convexity hedging is showing part o

convexity hedging is showing part of this. there is a significant technical component.ne thing to keep in mind is not only is the treasury market the most liquid in the world, yields are still the highest in the world, but when you look at safe haven flows, japan is typically a beneficiary of that. right now, they happen to be in the crosshairs of weakness in china, and it is spreading to broader asian markets. there's a little bit of uncertainty around looking at both the yen and japanese markets as a safe haven. so all of those flows are pushing to the u.s. i think technicals is the biggest portion of the move right now. you also have to respect the fact that fundamentals could be impaired as we move through the month of february in a significant way. jonathan: your take? vishwanath: i think what is happening with fundamentals, the evolution has expanded. we have a much greater uncertainty. it is hard to precisely say what is the growth impact, when is this going to peak? all of those are estimates. the uncertainty band around those estimates has widened. we have our

. >> we were talking about uso, out of the money calls those offer convexity. you get gearing if you get a sharp move with these trades you have more direct exposure to the equity. if you bought deep into money calls, they'll behave just like the stock will the lower the strike of the call you buy, the more the stock is going to behave. it's going to be lower probability of profit but maybe a higher rate of return if it is profitable those are the balances and tradeoffs that you try to make. >> learning every night, appreciate it. optionsaction.cnbc.com sign up for the newsletter here's what's coming up next on the program. >> you know somebody >> of course, that's not the point. >> cruise stocks getting rocked. our mike khouw is betting on smooth sail is for one name in the space when it reports earnings next week >>> plus calling owl "options action" fans reach into your pocket, grab your phone, and tweet your question @optionsaction. if it's nice, we'll answer it on air. ♪ ♪ ♪ [ fast-paced drumming ] oh yeah, you going to place it? not until i'm sure. why do

convexity is another way of saying there'll be potentially violent swings as dealers have to continuedynamic hedging. it is also true in the options market. it is one of those things where if the market is not getting what it thinks it is getting and what is priced in, and again people have not been position for. people in the equity markets are under hedge. when that swings in the direction, it will be passed. alix: convexity means if we wind up seeing a mortgage repayment we will see people going out on curve and selling that? barry: think about it as follows. the biggest source of risk is that mortgage prepayment risk. if you are long on mortgage, you are sure that option. your mortgage goes away, your bond goes away. weekancing, as of last they were running at 206 percent above one year ago. you're getting that refinancing and also getting new mortgage issuance. the fed does not hold as they used to. when fannie and freddie held at precrisis, they hedged. the fed did not hedge. now as you put the wrist back -- whoever holds the mortgage bonds will have to hedge. that just means yo

i do not think anyone expected the convexity of this call was as high as it is.ce piece you wrote a little earlier. walk us through the numbers. luke: i feel bad for the holders of the tesla 1000 strike call because those are only up 800% and yesterday they were up close to 10,000%. this is just a fun way of viewing how much some of the options might be feeling the move just because you have a lot of people who are wanting to punt on tesla. you are seeing the off sending -- the upsetting activity because dealers do not want to be short tesla. that the fact oh short cover you see on that end might be contributing to circular spiraling effect that we continue to see in the shares. vonnie: how much of the moves are we seeing thanks to earnings? .alph lauren up 10% earnings are great but even that seems overreactive. luke: it is interesting that we are in a time where we are supposed to have real-life correlations that break down turnings earnings season. because of the macro spare the coronavirus was and is to a certain extent, the correlations have not broken down

iowa with a couple other places we are looking to to send people and we will definitely be about convex-- conventions and may be a debate and because the inauguration happens on our front lawn. host: tell our audience how this began? who had the idea to say we need to go to the states to get this material are two great question and i'm not sure right now the answer i know larry bird was the curator they would have the most often, terry and larry became to people the media knew to look for it i think their male than one cycle before they went, but i'm not sure. host: this seems like a lot of fun for you? guest: as having great fun. iowa really energized. i'm not used to driving in this weather, so new hampshire's more my challenge for. host: for those that want to follow the work of the website how can they do so? guest: our web addresses american history .-dot si.edu and if you go to the website you can pull up exhibits labeled like american democracy or american presidency or if you want to see all this stuff, that is collection .-dot f5 .-dot you can either type in the candidate or th