Week of earnings season. Afraid computers might crash your i. T. Guy mike khouw has some patches for your portfolio. It is time to risk less and make more options action starts right now. Lets get right to it. Despite the weak selloff in the market, one group of stocks managed to lay down some strong foundations for a rally. The itb managed to rally 4 this week carter says there is one name in that that would make for a particularly sturdy trade. Whats the name . Its Sherwin Williams its the right environment its the one area within consumer discretion that is holding up so well and yet not extended and not overbought. So a lot of characteristics that make this desirable. Lets look at a few tables and charts talking about Sherwin Williams, this is one of the best performing stocks in the market regardless of its line of business here youre looking at a comparative chart. Going back to the beginning of data in 1985, youre talking about a sixfold increase over the general market if i introduce the nasdaq 100, this is apple, microsoft sherwin is even beating the nasdaq 100 by a healthy margin in fact, take a look at the next slide. This is a simple table if one were to have been so lucky as to put 10,000 in sherwin back in 1985, that is now 1. 3 million or thereabouts versus 850 for the nasdaq and youd be as a paltry 168,000 in the s p. In any event, Home Builders act well and sherwin is the best performer longterm. Its not a home builder, but thats the key it doesnt have the cyclicality. The fourth chart is itb year to date versus the market Home Builders as a group were up 10 . Its like home depot in a way. Its tied to Home Builders, but its better than Home Builders heres one way to draw the lines. Its a textbook conventional buy juncture a convention, generally agreed upon, a stock thats breaking out is a stock to be bought. You can see at the 600 level, sherwin has already started to poke up above that level we like it a lot finally the same chart really but just drawing a trend line in effect since the march low whether you call it an ascending triangle or wedge or what have you, it doesnt matter what it is is a breakout from a welldefined formation and theres every indication that it is headed higher. Earnings next week, we like it a lot. That is pound the table from carter worth, mike khouw so whats the trade here so its interesting sometimes you will see charts where basically stocks are going from the lower left to the upper right and its largely a technical pattern and we have a hard time justifying it from a fundamental standpoint thats not actually the case here Sherwin Williams is one of the better and more consistent growers of earnings per share. For the last 12 months were looking at about 20 per share thats a fivefold increase in earnings right now trading about 28 times forward earnings that doesnt seem terribly unreasonable given that growth but the stock has had a very strong run we might look to make a bullish bet using options so if it gives some of that back, were not going to take all the same risk. Also at 620 a share this is a very expensive stock some Market Participants might be reluctant to go out and buy 100 shares of it, which is going to set you back about 62,000. I was looking out to september you could buy the 620680 call spread and selling the 680 for a net price of 20 per share thats obviously considerably less than the current share price. Heres something i would quickly point out, that the month following earnings, the stock has typically moved 5. 5 the september options obviously expire considerably further beyond that. Its 20 that were spending for this options spread. Were really spending give or take about 3 or a little bit more of the current stock price to put this trade on i think it sets up as a good risk reward into a known catalyst that has already made a pretty good move to the upside. Tony, do you like this trade . Do you like the story of Sherwin Williams yeah, i particularly like this trade for a couple of reasons. First of all, if you look at the underlying stock, not only is housing one of the strongest sectors and i think one of the brighter spots for q3 but Sherwin Williams is also part of the materials sector which carter laid out a pretty nice thesis for a potential breakout of xlb if you look at the chart of Sherwin Williams, very constructive chart breaking out of that 600 level looking like its consolidating and potentially moving higher. A debit vertical spread, its a very efficient way to take a bullish view with a very small amount of risk hes only risking 3 of the underlying stock price even if it misses on earnings, youre only risking 3 of the underlying stock price mike, a lot could happen between now and september, so im wondering, in that time frame are ther certain events youre looking at thinking, oh, that might be a catalyst either to the upside or the downside for sherwin yes so i mean obviously we have the earnings catalyst, theres going to be a lot of Economic Data that follows then of course we have the issues that are going to be driving the market more broadly. The other thing is that it is not uncommon to see upticks in volatility as the summer draws to a close going into september. Thats when the expiration is. This isnt really a play to tend of the year so much as recognizing weve seen a really big decrease in implied volatility it seems like it might be a better time to be a net buyer of premium than a seller of it. There is one group of stocks hit particularly hard this week. Its been turbulent for the airlines thats got tony betting against the one big aircraft supplier. Whats the name, whats the trade . So i want to take a look at boeing, because i think there are a lot of elements here at play going into earnings next week i think that the risks here are skewed to the downside if we look at the 737 max recertification, at this point it looks like its looking unlikely thats going to happen in 2020. If you look at boeings order book, 13 of that order book has already been cancelled in 2020 i dont see that trend reversing any time soon given the outlook airlines have been giving us every single day youre getting worse and worse guidance for 2020 and looking out to 2021 and the next three to four years. Im not particularly constructive on boeing going into earnings. You couple that with the chart its very hard to make a bullish case here for this particular chart. You have a major resistance level at 185 which boeing has failed to get above. If you look at the relative performance to its sector, its really starting to underperform here over the past few weeks those are really typically the things i look for for a potential miss here on earnings. If we look at the options here, they are implying a big move here, about 8. 7 versus the average of only about 2. 9 over the last four quarters so options are implying a big move to the downside the options structure im looking to do here is actually to sell premium. Im going out to the august 28th weekly options and im selling the 180195 call spread. Costing about 14. 5 for the 180 calls and paying about 9 for the 195. Netnet here im collecting about 36 of the width here the spread is about 5 out of the money. Its a nice collection im making here on this particular trade. My breakeven price is just above 185. Im expect boeing to guide down. And potentially trade lower here orn earnings mike, do you like this trade . I do like the trade i would make one quick point about how much the stock is historically moved on earnings since everything thats happened, theyve taken on a decent amount of bet the equity market capitalization is lower the net effect i you would anticipate to see higher volatility. All of that said, i agree with pretty much everything tony said here it is hard to imagine exactly how all the clouds are going to be lifted for boeing, you know, in the shortterm. Lets bear in mind that the valuation for the company is not far off two years ago when they had a 5,000 deep order book and everything looked brilliant for them Going Forward its a very different picture right now. You say, okay, well, would i buy it at this valuation or would i have bought it at that one knowing what we do and what we did. Its kind of hard to see why youd be a big buyer of it here. About 22 times earnings is the best it is values. The options are quite expensive as tony pointed out. How does that chart look, carter the word ominous comes to mind it is hovering ominously and welldefined intermediate lows and the presumption is its going to break those lows. The thing thats so important about this great winner and i say that because boeing is one of the great commercial franchises ever to open its doors, after dropping from its peak, it lost 80 of its value this is a 450 stock that touched 80 on the pandemic low it looked like a sherwin this plunge, pandemic or not, this has wiped out all of its relative performance to the s p since inception. To be 80 on the march low, now back to 173. I think its going to break and its going to break hard. All of the relative gains over the s p 500 since inception, thats amazing. Check out our website optionsaction. Cnbc. Com sign up for ouz newsletter here is what is coming up next. Coming up, Professor Mike khouw plays the role of insurance salesman and shows you how to protect yourself in what could be a hazard fraught busy week of earnings season. Plus, reach into your pocket and tweet us your question optionsaction. If its nice, well answer it on air. When options action returns. Save without even leaving your house. Just keep your phone and switch to xfinity mobile. You can get it by ordering a free sim card online. Once you activate, you only have to pay for the data you need, starting at just 15 a month. There are no term contracts, no activation fees, and no credit check on the first two lines. Get a 50 prepaid card when you switch. 5g is now included with all new data options. Switch and save hundreds. Xfinity mobile. Welcome back to options action. Take a look at big tech. Tesla, facebook, apple all facing big losses as investors rotate out of the space with only amazon escaping in the green. You may be wondering how can i protect myself from further downside lucky for you, mike khouw is here with a call to action mike, take it away so this is pretty extraordinary, of course what weve seen so far this year the tech indices are up about 50 off of their lows. Some of the most broadly held stocks obviously are one of the big reasons that might be true you might be thinking okay, now that weve seen these gains, how can i hedge my exposure . Identify a decent proxy to use for a portfolio. Final of course we need to size the trade. Lets try to work through an example together lets imagine that you have 100,000 in your account and a number of the most commonly held stocks represent that 100,000, a couple shares of apple, amazon, facebook, netflix, tesla, things like that. These are the stocks that the top ten of which in the nasdaq 100 composite index represent about 57 of the weight. We could use qqq which is the etf that tracks that index so how much do you need to buy take the 100,000 of overall exposure that you have, divide it by the share price of qqq im simplifying it to about 250 that works out to 400 shares of qqq is roughly equivalent to your 100,000 portfolio of tech stocks since each option represents 100 shares, that would mean you would need four options to hedge if you use qqq options thats going to get you to about 2600 in premium thats how much you would be spending to protect your 100,000 tech portfolio. Again, im going to make the point that everybody already knows that bears repeating these biggest stocks have had quite extraordinary runs here. Of course, they are a big part of the reason why the index has gone up as far and fast as it has. We saw some cracks that something could happen this week they will also be the same ones that will drag it lower. Owning options on each of those stocks individually could be quite expensive. This is a cheaper way to hedge your risk going into september. Tony, is this how you would hedge . Yeah. So we actually hosted an education event last night specifically on this strategy. One of the things and i think this is personally a timely time to talk about this because we surveyed over 500 Retail Investors last night, how many people felt that the market was going to be lower one month from today outpaced the number of investors who thought the market would be higher one month from today almost 51 a lot of Retail Investors feel a down trend is about to come. I think mike did a really good jobbing showing how to choose a proxy for your protection. The one thing i want to add to that is around timing. Statistically markets only move more than 5 lower in a month typically only about 12 of the time probability is not quite in your favor. So we always advocate when times are like this and things are starting to turn around but not quite getting ugly yet, its time to sell covered calls this way you can generate a little bit of premium that can be used to buy these puts or put spreads. Another thing that we also look at as an indicator for timing a particular hedge is actually vix futures. When vix future is elevated or higher than the threemonth vix futures, that is usually a good sign that markets are stressed and its potentially time to put on a hedge. They probably caught your segment, carter, about the tech stocks flashing warning signs. But in a nutshell, carter, it doesnt look good for some of these big cap tech stocks. Well, in the sense that you have the dual circumstance of being extended, overbought, crowded, hysterical in many ways, and then you have now the facts coming out, so to speak. Microsofts earnings, whether you say its good or bad, there is no such thing as a good or bad Earnings Report. Theres only an Earnings Report and its how the market reacts did the stock go down . Facebook, netflix. Look at intel. The point is that you are getting fundamental information from stocks that have the precondition of being very extended, priced for perfection. For the most part amd was good, of course, but for the most part the risk is to the downside. Up next, we look back on two of our open trades well tell you what they are doing next stick around more options action comes up turn on my tv and boom, its got all my favorite shows right there. I wish my Trading Platform worked like that. Well have you tried thinkorswim . This is totally customizable, so you focus only on what you want. Okay, its got screeners and watchlists. And you can even see how your predictions might affect the value of the stocks youre interested in. Now this is what im talking about. Yeah, itll free up more time for your. Uh, true crime shows . British baking competitions. Hm. 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Welcome back to options action time to take a look back at a couple of our open trade khouw and carter said we were living in a Material World last week we are toying with the prospects of important breakout type move to new highs that is not the case for financials or energy or industrials. They are not in this position. We are looking at trying to play for new breakouts in the index itself, you can keep the trade really simple. I was looking out to the september 62 calls they were about 2. 25. When we think about that, thats a relatively small percentage of how much slb costs at this point. Thats really the key right here well, gold costs above 1900 an ounce today carter, what are you doing with this carter, well start with you what does this chart look like i think the key here is in a very sort of sloppy week for the market, materials were up and it is tied to a handful of names. But what we do know is what you just said, of course, is that precious metals, this week silver had its fourth biggest twoday move ever going back to the history of the data. Gold, of course, just crossed over at 1900 an ounce i think theres more to come and one wants to be long here versus not. Mike . I think we say with this trade. Theyre slightly higher now. Were not risking a great deal if things turn against us. Id stay with it. Tony said opportunity was calling in tmobile. As we stare down 35 million Unemployed People in this country, i think what were going to see is a lot more Price Sensitivity to your wireless carrier Going Forward. This is something tmobile is not shy about going after both at t and verizon customers and competing with them based on price alone. Im going out to the augustseptember call diagonal where im buying the september calls and selling the august 7th call against that for about 1. 92. Tony, this is doing exactly what you wanted it to. So what do you do now . Yeah. So at this point were Still Holding onto this call diagonal as you said. As long as tmobile stays around this particular price im looking for that call option to roll off and then potentially sell another one Going Forward and holding onto that september 105 call and potentially rolling that higher if the stock continues to move higher up next, some tweets to answer and the final call. Im searching for info on options trading, and look, it feels like im just wasting time. Thats why Td Ameritrade designed a firstofitskind, personalized education center. Oh. Their awardwinning content is tailored to fit your investing goals and interests. And it learns with you, so as you become smarter, so do its recommendations. So its like my streaming service. Well except now youre binge learning. See how you can become a smarter investor with a personalized education from Td Ameritrade. Visit tdameritrade. Com learn welcome back to options action. We have time for a tweet a bullish call on roku expiring on august 20th he asks any thoughts tony any thoughts i like roku here. If youre bullish, roku reports earnings here on august 5th. I would hold onto a call vertical like this going through earnings. Carter . What do you think of tonys chart work thats exactly right. Two things we know, in a week where this is the kind of stock that might have gone down substantially with other names, it held in very well there is a welldefined level from which the stock can break out here so a conventional buy juncture buy. It is time for the final call tony, what do you say . Gray skies ahead for boeing sell a call credit spread. Carter braxton worth . Sherwin williams. I think its a great way to play the housing theme. The 600 level has authority. Up and out from here. Mike khouw . I like Sherwin Williams for those of you really benefitted from this strong rally in the tech names, maybe now you could consider hedging by september puts. 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