now you stay safe. bye-bye. now you stay safe. this is "options action". tonight -- >> i'm going to kill the bear. i'm going to kill the bear! >> after a huge bounce, some traders are calling the correction over. but we have a stunning chart that could get the bears roaring again. we'll show it to you. plus, iprotection. a way to protect your apple shares ahead of monday's earnings and it costs less than $2. >> that's $2. >> we'll break it down. and down for the count. ♪ we'll tell you why next week's amazon earnings could break the stock for good.

the action begins right now. >> live from the nasdaq market site, i'm melissa lee. we have carter back on the charts. dan and mike on the desk in times square. what a week it was as the market got panicky. the vix breaking 30 for the first time since 2011. s&p 500 briefly flirted with an official correction. before mounting an impressive comeback. so our question tonight, is this all the bears will get? let's get into the money and find out. so dan, do you think that was it? >> well, here's the thing. it could have been for the near term. when you think about the volatility, you think about the panic, it wasn't manifested in the equity markets. it was in commodities. the move in bonds this week was astronomical. that morning on wednesday when they couldn't buy it fast enough. so to me, so that showed a little bit of panic. in the equity market, it was pretty orderly. i know it sounded worse than it was. we had a down 2.5% morning.

just because we haven't had that in so long, and i think that's a big part of it. >> valuations haven't changed that much. nobody has enough precision to forecast earnings to say are we at 17 1/2 times forward earnings, 17? he's right, though. take a look at credit spreads. those things blew out massively. if you look at option adjusted spreads on high yield, what you saw was decent blow out to 500 basis points. they have not come out that much. so what that tells me, either it's a great time to buy high yield or there is still a lot of concern. and i think there still is a lot of concern. what held up stocks essentially is a little bit of market rigging. bullard saying maybe that put is not done yet. >> when you talk about handicapping earnings and that type of thing, look at some of the earnings we did see. people thought the bank earnings looked pretty good. and then we had tech earnings that weren't that great and they sold off. so to me from a sentiment standpoint, i don't think there is a demand for initiate new

longs. could have been just short covering. and that speaks to when the -- >> when the market goes down, it's often things like energy and materials that lead the way. and that is a space that has been absolutely crushed and it remains crushed right now. despite a decent bounce on thursday, this is a space that still remains remarkably hard hit. >> and it looks like we may have found some sort of floor in oil. we had a nice rally in the oih today. these are looking more constructive than they did a couple days ago. >> going back to the conversation we were having about high yield, though, that's where a lot of the junk exists. is in the energy space. and that's where people are still expressing credit guys often ahead of things on the way down are expressing concerns about that. i'm inclined to watch them. >> so did today's rally mark the end of selling? >> so let's ask the chart master himself. carter braxton worth. glad to have you back.

>> glad to be back. holding aside all opinion, let's look at facts and data as are relates to history. so we're in a correction now of some kind. and what i have here is all corrections of 5% or greater going back to 1927. it's important that it's 5% or greater because you go down two or three, nothing matters. once you go down five, you typically go done more. whether the risk manager calling up stop losses kicking in, the spouse calling and screaming we're losing money, do something, but once down five, you typically go down more. there have been 210 such 5% plus corrections. if you were to look at the median, it actually is down 8.24% and it lasts about 22 sessions. if you were to look at the average or mean, which of course picks up outliers which skew, it's down 12.19 lasting 40 sessions. this correction, we've met the

median, we're down 9 from the peak to the trough and it's been exactly 19 sessions in the making. so if it were to be just average, it's not over in terms of magnitude. it implies more or duration. but let's look at the chart of the s&p in another way. these corrections again that we've seen over the last two years, they have always stayed above trend. this time, we broke trend. and that is an important circumstance. and then finally, let's look at the day to day chart. here is our peak. it was a friday as everyone knows, ali baba kind of ironic, biggest ipo in the history of markets. and here is our low of wednesday. this is 9.1% from peak to trough. but here is the problem. this ricochet from 1820 low to where we closed today is exactly a 33% retracement. and it leaves you right back at the kill zone. we think you fade this right here.

we think it stops here. because you're back to where all the dead bodies are. this is where there's overhead supply. so we've come back to where interested sellers likely emerge. we think you sell the s&p right here. >> back into the kill zone. that's vivid. >> that doesn't sound good. >> no. >> here's a situation that we have higher implied volatility. higher options prices than we've had for many weeks, even months. we kept highlighting the fact options prices were extremely low. just buy puts. what i will do is take advantage of the fact that these premiums have been elevated a little bit and i'll use a trade calling a calendar put spread. i'm looking at the dec to march quarterly spread. you can spend about $3 to buy that. basically what you're targeting is a decline of about 5% from here between now and december. this is one of those situations where in general on my portfolio, i like to be long outright puts. but this is a situation where i

want a little decay and i'm hesitant because of bullard's comments. if they will start issuing put, i want to sell some as well as buy some. >> as far as the kill zone, i'm with carter on that level. that 1900 level in the s&p could be resistance. and we'll actually get a test of it early next week. and so to me, rather than putting on a put calendar, i don't really mind the trade. but this isn't the trade that will offer you the sort of protection that you may want if we go back down towards 1800. and so to me, what i would do is wait until we have a test of that line right there, the 1900 level. if it fails, if we start to see the commodity and greater volatility, then you just go and you buy near the money puts. and then you look to spread them after the move. i think it's almost spreading the needle in a market that has gotten more volatile in the last month. >> carter, just to put a bow on this, back in to the kill zone. what is the presumption in terms of where we would retrace to? >> back to revisit the low and achieve a new intermediate low which would put us more in line with the average correction

going back to 1927. more time and lower prices. >> okay. let's move on here. earnings on tap for next week from mcdonald's, caterpillar and the big guy, we're talking apple. analysts are looking for good news from the tech giant. news. $1.31 a share, that compares to a year ago. and traders were getting this on apple today with two calls trading for every put. so dan, what do you think? time to buy? >> in the context of the conversation we just had, apple's reaction to the results will be very important as it relates to sentiment toward the market. this is the largest market cap company and sentiment is very positive. there has been a lot of news on the product front. we know iphone 6 and 6 plus sales are going well. they took maybe 20 million reorders in china. and that's going to be a great opportunity. the ipad stuff is a problem. that was an uninspiring presentation yesterday on a product that is about to go x growth.

when you think about it. so to me, a lot of news that is in apple. i think the stock is deemed to be defensive. they have about a their of their market cap in cash. things are just fine. they have 2% dividend yield. so to me, the quarter will be in line. guidance should be strong. if the guidance is not strong, it could get sold like google. i'm not saying anywhere near netflix. again, this is a defensive sort of story. so to me, i think you have to watch and see how the market treats the results because we expect the results to be good. >> and i would say that what our concerns are with respect to the ipad are probably offset by payments. it is a defensive name number one because of the cash, but when we think about ipad and what that means to their bottom line relative to what payments could mean, and i think it holds a lot of promise, this is not an expensive stock. and if i was going to try to hide out someplace, this is probably one of the places i would look. >> and i would make one last point. >> and the stock got down to 95. it touched there yesterday morning. this is a key level. this is like carter's kill zone

here. so what i want to do, if you're long the stock and you think there is a bunch of good news coming out and investors overlook a worse than expected gross margin, i would look to just buy some weekly puts. i was looking out when the stock was 98. october 24, next friday expiration, costs about $1.40. the break even is down 3.5% at 9460. that is right below that really important support level on the chart. and what this does, you're risking about 1.5% of the underlying stock price to hedge your portfolio in a potentially volatile event and also the jury is not out on the market yet. who knows what happens here. >> actually, although i defend apple stock, i also defend this trade as a defensive play. and one of the reasons is that actually the implied move for apple is relatively low going into earnings next week. so this is actually one of the places where options still do remain cheap on a cheap stock. so you get to own essentially cheap calls. >> carter, what do you see in the charts?

>> the thing about apple is it exhibits impressive relative strength. the other stocks were faltering for weeks. apple has been unchanged while the market is selling off. it's also occurring right at the pass top, normal reaction. we like apple on the long side. >> i'd say on the chart the momentum is waning a little bit. it's made a series of higher highs and lower lows. since the september 3rd all time high here. so you'll really have to see some blowout gross margin guidance to get the stock going forward. >> don't you want to own apple going into the fourth quarter? with payments lawnking on monday. >> we talked about this on this show. >> payments will be a 1% thing, the watch -- the watch to me -- >> 1%, look at the size of visa and then you can think of the market share. >> at some point don't the stock at current prices discount some future things that we don't even know yet. >> got a question out there. send us a tweet.

#options action. and check out our website. it's better than netflix and hbo combined. here's what is coming up next. which tech stock could be in serious trouble when it reports earnings next week? >> if i told you that, i'd have to kill you. >> we'll tell you and we won't kill you. plus, is the worst over for germany? we'll give you the surprising answer that could determine the market's next move when "options action" returns.

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so we talked about apple. amazon is also reporting next week. last three earnings periods have been very rough. so grim dan had to make his way over to the smart board. so dan, what are you watching? >> this is also an important one from a sentiment standpoint. you mentioned apple. we know amazon just kills in these periods. they're expected to have $90 billion in sales for this calendar year. but this one is really important because the stock has been a massive underperformer. and it almost feels like -- in 2014. down 24% on the year. it almost feels like something has turned in this name. as far as large investors are concerned. and i want to make a point, when you think about some of the performance of large cap internet stocks, i think we have a display here, a lot of them really performed very poorly this year. google down, ebay down on the year, priceline down on the year, amazon. and so to me, i think it's important when you think about

the health of the rally, you need to see some of these market leaders perform well. so next week amazon scheduled to report q3 earnings. never do we expect earnings. and i just want to make the point implied move is about 8%. that's a one-day move. that's $25 in either direction. here is the thing. over the last four quarters, the stock has moved on average about 10%. and when you look at the year to date chart, you can see these huge gaps on these earnings misses here. and so when you think about it, it is suggesting that investors are no longer happy with this company not demonstrating their ability to earn cash. and i just want to go here. look at this two year chart of amazon. the stock obviously had this massive run. it gave it all back. and some of you know what this is. this is the triangle of death. if you have a break below this 300 on big volume on fundamental news, it could be completes out. -- it could be lights out. you could see 250, something like we saw in netflix. and one other point. amazon is a big component.

of the nasdaq 100. this is the qqq. it had a fairly precipitous drop. so all in all between apple, amazon, all these things we've been talking about, we need to see things hold for the right reasons. if they got sold off on good news, that's very bad for the broad market. >> so triangle of death. you guys are bearish on amazon. so what do you do now? >> for one thing, we do have that position on in the january 315 puts. so what i would suggest to any of you who own those, you probably want to take some of that money off the table and actually roll down. you can play with house money. but i'm going to maintain a bear -- bearish bet on this. this is one of those stocks where it was a hold it and hope story. and it doesn't seem like people are holding out much hope. it also isn't great to own stocks fund managers won't be proud to have on their sheets. so you want to continue to maintain a bearish position. >> he draws on the smart board in a convincing way. but triangle of death --

support levels -- >> triangle of death is a bit catchy, but it's not exactly -- holding aside that vernacular, the charts are right. this is exactly what we did three weeks ago. look at the gaps, look at the levels and the presumption is this can really fall apart like a netflix type drop. >> i was going to mention that. netflix is sort of the backdrop, the poster child of investors questioning growth rates and questioning what valuation do i pay for what growth. >> yeah, and i think it was a function of the risk environment that we've been in for the last few years. you knew that you had this back stop and bad stories that had good revenue stories really worked out well. well, at some point this year, we saw that end with some of the cloud stories where investors were not willing to pay outrageous multiples for these stocks. that had gone up is 100, 200%. so to me, you've seen a rotation. some people would say it's very healthy. this is maybe one reason why apple is $600 billion market cap

company and trades very well in one of the worst downdrafts we've seen in two years. coming up next, want to know where u.s. stocks are headed next? we'll tell you what which market could determine the next move. we're back right after this.

time for the up side call where we take a look back on winning trades and find a way to make them even better. last month mike and carter made a bearish bet on germany. take a listen. >> i'm inclined to take advantage of the fact, >> when you look at an index like this, option prices tend to be a little bit less. you can pay about $1.10 for those. >> those puts are now worth $3. what do you with the trade? >> these things approached $3.86 earlier this week. pay attention and look for opportunities to either roll or spread. we're through that strike. so actually what i'm going to do is roll, but keep these on otherwise. >> so carter, is there more room for down side here in german stocks? >> seems that way. this is a big index and it will go the way of other parts of europe. we think lower. >> so what does that mean for the s&p then?

>> s&p lower. >> i guess kill zone is where he gave it away. just last week, dan made a bearish bet on microsoft. take a listen. >> i bought the november 44 puts. the stock up 17%. with the carnage we've seen in large cap tech, all of these names despite fundamental merits, i think they're all very crowded. if we see a continuation of this week's selling, this stock will get 40. >> earnings of course next week. so you stick with this trade? >> i think you have to manage it in front of it. what i was looking to do when we had the selling mid week, i had a nice gainer. if it had broken its 200 day moving average, i was looking to take profits on the position or look to spread it by selling a lower strike put. but here is one point i want to make. in this gappy market, squishy, crashy, whatever you want to call it you have to be careful. you don't want to spread things.

so what i will look to do, if we do have that break in front of earnings, i'm looking to take profits or risk off the table. that being said, if i have an unchanged position or slight loser, i'm not so certain i'll take it out. >> carter, how are you feeling about large cap stocks these days? we've seen large caps roll over. this used to be a hand-off here. >> that's right. ultimately that's what takes the s&p lower. if you think about it, we've had deterioration in a long time. what happens is it starts to spread. so semis last week and then big financials. what happens ultimately, it gets over to things like walmart which this week dropped in gaps and then spills over to certain health care names. so it's over when every that was resisting has succumbed. and we haven't seen that yet. >> this is another situation where a couple of these big caps, it seems like everybody thinks they're the place to hide out and in some cases it's true. but in microsoft's case,

despite the fact we have elevated volatility, these options aren't that expensive. so i don't mind owning them when they are priced lower than they usually are. that when the market is squishy. is what i would call it. >> squeezy is what dan call it. >> be sure to tune in for jon fortt's interview with satya nadella. monday morning at 6:00 a.m. on squawk box. you won't want to miss it. even icons make mistakes. we'll explain why. stay tuned.

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great to be a billionaire unless you were carl icahn this week. uncle carl seeing serious losses. in netflix, ebay and apple. so dan, do you think he will unwind some of this? >> it wasn't just that.

it was herbalile too. he's been an amazing investor for so long and some things you can't bully around. in the instances with apple and ebay, he pushed for change. he got what he thought he wanted. but the stocks are going lower. so to me, it's a function of the market we're in. >> netflix is a real story that i think is in big trouble, although my expectation is we'll learn that's he paired his positions. herbalife, i don't see that one recovering either. >> so you think it was him unwinding. >> i don't know that he was unwinding that day, but i'd be surprised to learn -- he -- he's expressed skepticism about high flying high valuation stocks. i think he probably took some off. >> time for the final call. >> take advantage of this rally in the s&p to reduce exposure. we do not believe the correction is over. >> dan. >> i agree with that. and i think if you get the buy back at 190, that is your shot. >> make sure you roll your long

puts. keep that protection on. >> looks like our time has expired. thanks so much for watching. check out options actions.cnbc.com. we'll see you back here next friday at 5:30 p.m.. have a great weekend. >> announcer: the following is a paid advertisement for the 21 day fix, brought to you by beachbody. this time, you'll lose weight, get in shape, and stay that way. >> welcome, welcome. thank you, guys. thank you. have a seat. thank you so much for joining us today. as someone dedicated to health and fitness for my entire life, i am so excited to share this amazing program with you today. it's called the 21 day fix, and, believe me, it works. it worked for me. it's gonna work for you, no matter what your fitness level. if you're struggling right now to shed those last few pounds, if you don't think you'll ever be in that bikini again or if you're even dangerously overweight, today is the day to