The chart master is drilling down on the one sector running low on energy. How you can play it for a jolt its time to risk less and make more options action starts right now. Hopefully the dog days havent gotten you down too much it is friday, why not, 2 30 on the west week. It was a record week on wall street that should give you energy. The nasdaq and s p 500 hitting fresh all time highs and the dow turning positive for the year. All this after the fed made a major policy shift saying theyre going to allow inflation to run hotter than normal to help the american economy. Jobs over inflation headline that was big in the bond market. The tenyear yield hitting its highest level since june, and the yield curve sharply. Tony zang says theres only one stock that can be a big winner, at least one stock that could, tony, who is it . Take it away. I wanted to take a look at Morgan Stanley because of this pickup in rates, thats going to provide support for a rally in financials if we take a look at the chart of Morgan Stanley, its one of the strongest from a relative strength perspective easily outperforming the sector since the beginning of march if you couple that with the top 53 and the triangle formation we have, i think the stock is prime for the breakout above the 53 level. If you look at Morgan Stanleys business, they have built a well diversified business around their Wealth Management, and with the Strong Capital ratios they have, the only head wind they have is interest rates. By looking at the rate curve, the recent uptick in terms of Inflation Expectations we have seen and the fed policy this week, that has driven the long end of the curve substantially higher while the fed policy is keeping the short end of the curve near 0 when you have the steepening of the curve, thats going to reduce the head winds. The trade set up is a structure that number one is trying to capture this potential breakout above 53 and taking into account the fact that the applied volatility percentile sits at 15 , so relatively lower out to october, im buying a 52 1 2, 57 1 2 vertical spread paying about 2. 75 for the 52 1 2 collecting about 95 cents for the 57 1 2 im paying about 1. 75 debit for this 5 wide debit spread which is only about 3 of the underlying stock price betting for the breakout higher on the steepening ate curve good stuff there on Morgan Stanley. Mike, he laid out a lot of reasons, technical, fundamental, why he looked Morgan Stanley what is your take on tonys trade . From the fundamental standpoint, theres not a lot of places you can buy companies at one times tangible book, trading at less than 11 times full year estimated earnings because their Wealth Management business is a big part of their strategy and they have a fairly strong balance sheet, as asset prices increase, one can assume the fees theyre going to earn on the assets they manage are also going to increase i do like Morgan Stanley the one thing i like about the afraid and like at money calls, the higher the probability of profit on a rise, i would probably hold off on selling personally the higher strike call the market is obviously running exceptionally hot. If you start to see a big move, you can roll the position you have or sell calls against it. Fundamentally, i like Morgan Stanley a lot. I like the set up, so i think this is a good opportunity. Let me flip it with this, mike, fundamentally, do you like what the Federal Reserve did and what the Federal Reserve said . Well, what the Federal Reserve said is pretty interesting, right we basically have been dealing with fed speak since allen green span and we have to interpret. What they were talking about is restraining themselves from taking their foot off the accelerator pedal. Its not just financials, but essentially they are encourage youg ing you to buy all risk assets i dont feel the fed or any central bank has much of a choice when theyre talking about policy what theyre suggesting is they have a lot of options and theyre trying to choose the best course. I dont think they have much of a course, and were all going to have to live with the consequences of that, but im not surprised by the language theyre using to describe what theyre up to. Yeah, good stuff there. Carter, your take on either the fed, tonys trade, the financials, the yield curve or all of the above. All of the above. Mike was talking about what is their plan there is no difference between 62 basis points on the tenyear, 48, 98, rates are basically at 0, and there has been a steepening the key thing is Morgan Stanley is a better operator in the market tony laid out the technical perspective. It is a coiled spring. Compare to Goldman Sachs year to date goldman down 9. 7 its the only really important broker dealer or bank thats up on the year. Out other financials that are up are things like black rock, or Insurance Companies or rating agencies like moodys of the 66 stocks in the s p 500, a financial sector, only 15 are up, and Morgan Stanley being the only real bank, if you will. The technicals look great. It is a lot of tension importantly here, though, this is a stock, even if it breaks out and gets back to its january high at 57. 50, the all time high is long ago. Theres much work to be done for financials in general. Yeah, i mean, we didnt even mention the fact that wells fargo, maybe for a different show is down 54 in a year, maybe the most important stock out there. A good discussion on Morgan Stanley. Bullish comments there and also the fed. The fed of course is a big piece of the puzzle but its still just a piece of the puzzle by the way, were also just 66 days, 6 hours, 22 minutes and 20 seconds away from the president ial election. And the Options Market is pricing in to potential major volatility, heading into November Mike has a way to navigate that in his call to action. Mike so, you know, its interesting, i mean, we were just talking about financials, and usually when we talk about the market, we talk albout the s p, were talking about stocks, talking about the biggest constituents of the years best performing index and thats the nasdaq 100 you take a look at the top stocks, were talking about apple, amazon, microsoft, tesla, n netflix, these represent essentially 50 of the index, the best performing stocks, and here we are trading at all time highs, and valuations are trading maybe 32 times forward earnings thats considerably higher than the 22 averaged over the last ten years or so. When you look at that situation, but you combine it with the fact if you sell your stocks right now, youre selling the biggest winners in the economy you will be selling against the feds wishes, encouraging us to be long risk assets and weve got the election coming up its true exactly what you said, when we take a look at the implied volatility in the indices, what we can see is the Options Market is basically predicting a pretty big spike in volatility around the election in fact, we are seeing some indications that there might be some prolonged volatility into the end of december. What do you do if you cant sell your stocks, you have big gains in your stocks, you know volatility could be coming that is the perfect opportunity to hedge i was taking a look at the qqqs, thats the etf that remits the nasdaq, if you own stocks or the nasdaq itself, this is a good instrument to use as a proxy to hedge. Im not saying that the markets just going to roll over here what i wanted to have was some protection against a bigger downside move if newscast what we get, so i was looking out to november so i could also capture that election. I was looking at the 275, 250 put spread when i was looking at that earlier today, you could buy the 275 puts for a little over 12 sell the 250s against it kne net youre going to end up spending about 6. 60, if you held the qs thats probably what theyre up the last three days sacrificing the most recent gains to buy protection in the event of increased volatility come to pass. A lot of complicated stuff there, tony, the one thing i like about it is mike just said basically youre playing with free money if you have been in the market for three days, youre playing with free money. Overall, what do you think of the trade . During market tops, buy puts are relatively claeheap you could have put on any type of hedge like this starting the beginning of june and you would have lost that premium its hard to fight the bullish trend. When you see these types of stretch valuations and warning signs of markets being exhausted and leadership continuing to nai narrow i think its difficult not to seek this protection youre giving up roughly three days of gains to pay for it. The only thing i would add, you can potentially, if you own qs, look out to october, and sell some upside calls. I was looking out to october selling the 310 calls would give you another 6 1 2 upside over the next 50 days well collect 5 in premium, which will pay for the put spread that mike has laid out he here thats another way that you can offset some of the premium here for that. For everything options action check out our web site optionsaction. Cnbc. Com you may have heard about this news letter. Sign up for it meantime, were not done heres whats coming up next. Its a major sign of the times. After nearly 100 years in the dow, exxon is getting the boot and the chart master isnt surprise, why carter says big oil could be in big trouble. Calling all actions fans, reach into your pocket, grab your phone, and tweet us your question optionsaction. If its nice, well answer it on air when options action returns. Action big changes are coming to the big board after a hundred years on the dow exxon mobil is getting the boot. The change will take place on monday morning, and carter says that could be the big start for bin big pain for big energy. Its pretty much been a decade with no gains. What do the charts show . Not the start of the pain the pain has been long standing, theres more to come nothing to do with starting. Lets look at a few charts and tables the first, this is a comparative chart of the xle, the s p 500 Energy Sector versus crude oil, and you can see theyre fairly correlated they both plunge in march with all equities, and they bot recover, but energy, the commodity has continued to recover while Energy Stocks are not. You can see the divergence there. Look at the second comparative chart. Its a fouryear chart look how well these two instruments track, which makes sense. The Energy Stocks do well when the commodity is up versus down, and then the divergence, and so this is the issue. How rare is this circumstance. Take a look at the next slide. We have a threemonth spread between the commodity and the Energy Sector thats greater than 35 that has only happened 13 times on any rolling threemonth period going back to 1990. Thats an incident rate of 0. 16 . This is exceedingly rare take a look at what happens to the next slide one would think if the commodity is going up, the Energy Stocks will play catch up actually, its the opposite. This shows you the performance of the Energy Sector, one, three, six and 12 months later you can see the statistics, theyre very clear on the screen it does not imply good things for energy next chart, this is simply the xle, the vehicle to use if one wants to buy and sell energy as a theme. No drawings or annotations by me, and finally xle chart with drawings and lines we have worked ourselves into a well defined wedge and we are breaking down, so a couple of Things Energy is not really a sector anymore, its almost like teleco, there was at t and verizon. Exxon and chevron are half the weight of the sector, and all of the other stocks only add up to 3 of the s p. Either way, dwoewe dont like i thats amazing, just all of those stats, including three times in 30 some years on that divergence mike, your comment, very well researched and executed of course, detailed information there, do you see any trade in energy at all . Well, not on the long side. Jim cramer said energy was uninvestable, and im inclined to agree with him. When looking at options to trade, one of the things were looking at is this is a relatively volatile sector now, a lot of Balance Sheets become increasingly leveraged the integrated oils less so than some of the e and p companies. It is a very distressed industry and of course the very low cost of capital that many businesses have arent necessarily going to be enjoyed by some of the peripheral companies here. Were going to focus on companies at the top of it that hes talking about, the integrated oil companies, seeing options premiums relatively el va elevated the october puts were 1. 65 when i was looking at those today and 30 strike puts were 30 cents, thats more than 1 the value of the etf right there, and of course those 30strike puts are considerably out of the money. I think this is a way we can spend about 1 pn 1. 25 to make tt bearish spread, and really what we have is a situation, its hard to short stocks that have been so distressed you really can only use options if youre trying to press a bearish bet here. Pressing that bet tony, whats your take on the trade . So i agreed with carters charts here, the main theme is the under performance of xle, not just the shortterm but over the last few years, thats the theme here i dont particularly have a strong view in terms of the directional view of crude prices the historical volatility is trading at a 1 in the last two weeks. Oil is particularly low. If you get a pickup in volatility, i like mikes trade, hes only risking 3 1 2 of the etfs value to take a bearish bet. Tony, thank you very much interesting trailed there on xle. Up next, nailed it, one of those guys, laid out a very bullish Home Improvement trade last weekend and the stock rallied to all time highs what was the trade, whats he doing now . Were going to find out and of course take some of your tweets, send your questions to optionsaction on the twitter. Well back right after this. I have an idea for a trade. Oh yeah, you going to place it . Not until im sure. Why dont you call Td Ameritrade for a strategy gut check . Whats that . You run it by an expert, you talk about the risk and potential profit and loss. Couldve used that before i hired my interior decorator. Voila maybe a couple throw pillows would help. Get a strategy gut check from our trade desk. That selling carsarvana, 100 online wouldnt work. But we went to work. Building an experience that lets you shop over 17,000 cars from home. Creating a coast to Coast Network to deliver your car as soon as tomorrow. Recruiting an army of customer advocates to make your experience incredible. And putting you in control of the whole thing with powerful technology. Thats why weve become the nations Fastest Growing retailer. Because our customers love it. See for yourself, at carvana. Com. Its a thirteenhour flight, tfifteen minutes until we board. Oh yeah, we gotta take off. You downloaded the Td Ameritrade mobile app so you can quickly check the markets . Yeah, actually im taking one last look at my dashboard before we board. Excellent. And you have thinkorswim mobile so i can finish analyzing the risk on this position. You two are all set. Have a great flight. Thanks. Well see ya. Ah, theyre getting so smart. Choose the app that fits your investing style. Welcome back to options action, its time to look back at some of our open trades last week, tony zhang said shares of home depot were about to break out. Earnings knocked down from the 20day moving average a much better entry point for a long position in home depot, the october 2nd, weekly options, selling the 277 1 2, 262 1 2 put vertical here collecting about 5. 90 for this 15dollar wide credit spread. Well, tony, you nailed it home depot is surging to new all time highs what are you doing with that trade now . So as i said, the pull back to the 20day moving average, the stock has moved nicely off of that. However, this is a trade thats still in play. This is going out to the october 2nd expiration im holding on to this trade, looking for home depot to continue to rise over the next few weeks. Lets move on congrats on that mike laid out a retail play heading into those earnings. The relative outperformance period, every time we have gotten to the trend line he has failed you can see the arrows i have drawn there. The bet is its going to fail as a relative outperformer and start to falter. I was looking to the october 2nd weekly, 50 strike puts, those were trading for 1 pn 1. 5, trying to carry through labor day, september, sometimes an up tick in volatility the first part of the video, i thought mike, how you have changed. The xle retail bouncing higher since that trade, so mike, and then well get to carter, what now . First of all, i will say that we do often see an up tick in volatility in december, and all of the reasons i was highlighting with the qqq put spread, im inclined to stay with we didnt risk a great deal. They were quite cheap at the time, and they are cheaper now, so im going to stay in them. What about you, carter . Hes staying. For sure. I mean, weve had big moves out of big names like walmart and target and still xrt is hunch over the past week we dont think theres any ammo to go higher. Good stuff on the xrt, watching retail, up next, your tweets and final call. Stick around 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 its got all my favorite shows turn oright there. Boom, 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. Didnt peg you for a crumpet guy. Focus on what matters to you with thinkorswim. Lets wrap it up on options action by taking some of your tweets our first viewer says this about a month ago, carter pointed out skhc as a tremendous opportunity. If so, what is the options trade use, carter . So, this is, i think, the greatest turn around opportunity that might exist in the market, youre talking about a hundred dollar stock that plunged to 20, and then key is its made this move from 20 to the mid 30s and that often is the foreshadowing of more to come. If your options trade is expired or run out of time or roll it out, i would leave that to my team may mike khouw, but i would buy time and expect very good things to come. Yeah, its bounced off the lows pretty nicely but still have a long way to go, long way back to one hundred. Our next viewer asked this, i bought a march 21st, 500 call on apple, up 75 , im bullish in general, how long before a call expiration so far into the future, should i exit before time decay, mike, starts to hurt him . You dont have to worry just yet on this one, but what you can do is sell some out of the money upside calls of shorter expiration to offset some of the decay youre currently experiencing. Yep all right, guys, thanks, great show thanks for taking it easy on me. That does it for us on options action, well see you next friday at 5 30 dont go anywhere because Summer School starts right now. Back in the session with frank and the game have a great weekend [man] the following program is a paid presentation for the oxypure air purifier brought to you by nuwave, llc. Asthma and allergies are at an all time high, and it seems to get worse every year. 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