we are live from the nasdaq marketsite. and carter, did anything happen this week? anything we missed? while carter and brian are getting ready, here's what's coming up tonight. >> you won't believe the dream i just had. >> after a volatile week you won't believe which sector traders are suddenly buying. we'll break it down. plus, did you see that? stocks just flashed a major buy sign. we'll tell you what it is. and don't call these guys small fries because they just made a small fortune betting against the russell. and they have a way to make even more. the action begins right now. >> let's get right to the question everybody is asking tonight. after a week like this, do you play offense or do you play

defense? carter, straight to you with that. >> well, we're very much in the -- i think the key issue is here. we just had of course one of three most epic drawdowns in the history of the equity market on a very short-term basis and one has to ask oneself what were you doing a week or two weeks ago? there are people who were prepared for 20 and other people prepared for 87. it's not out of nowhere where weakness comes from. now that we've had it and we've had a big ricochet what to do. now, you either determine that the ricochet is the primary data point, meaning the resumption in strength, or that the break is now the primary and the ricochet is secondary. i'm in the camp that the break is the primary data point. the ricochet is feeble, not convincing. >> mike, are you in the same camp as carter? >> yeah, i absolutely think people should be defensive here. i mean, think about where every investor was two weeks ago versus where they are now. two weeks ago you looked at the

s&p and maybe you had a 5 1/2%, 6% earnings yield for owning all of those stocks, and at least half of the day we moved less than half a percent. the average move was probably .7%. from the beginning of the year up until two weeks ago. in the two weeks since, the volatility has been so great we saw one day where we had a 4% move. that kind of thing is going to shake investors and say you know what, if stocks move around this much i think i want to get paid a little more. >> and brian, what were you noticing about this week? and how do you feel today? >> i feel pretty good because i've been protected all week long. i mean, we trade the vix, we trade volatility all the time. and, you know, one thing you have to do is carter talked about being prepared. sometimes it is costly to be prepared. but in our case we were pretty active in taking out some of our hedges when the markets had dropped and putting them back on now that we rallied here. and certainly, listen there, was a big air pocket that was broken. that 2040 level in the s&p 500, once we breached that and hit 1980 and then went below there, it was all technical trading. you look at a lot of the fibonacci retracements. it was trading on that all week long. there was nothing but technicals

trading out there because nobody knew what to do. so that plunge, we got that rip back which was actually somewhat encouraging. when you see the vix fall from 50 down to 25, 26, that's pretty encouraging that a lot of fear has come out of that market and maybe we get to rally back up to that 2040 level but we're not out of the woods by any means. >> okay, so, you're in the same camp basically as carter. >> here's the thing. one thing about capitulation as a concept is it's the precondition that determines it. it has to be after long period of suffering at which point someone capitulates, gives up, they can't take it. there was no long period of suffering. it happened very quickly. and guess what? if you talked to big long-only players, how many shares did they sell in that down-up? zero. because you couldn't sell any. there was no volume. look at the volume in individual securities. it doesn't smack to me of being anything other than another crack in the wall. >> okay, so, carter, there's one name in particular you think investors could actually sort of -- >> there are plenty of names. you can always find idiosyncratic ideas.

this is a little bit of offense, little bit of defense. so, if one were just to look at the following statistics, this is the russell 3000 of course, which is the whole market. and if you were to try to find a stock that was both up on the week, yes, up on the month, two months, three-month, six-month, out of 3,000 stocks, actually the list shrinks to about 60 plus minus. and only about eight of them are actually in the s&p, and two of them are being acquired. so that's what accounts for their strength. so you're talking about very few stocks that could manage a stunt to not be down in this kind of market, meaning no one sold them. they didn't attract anyone's margin calls or fear. okay. well, one stock that has done that is sprint. and the pattern to my eye has all the look and feel of a bearish to bullish reversal, meaning 10 to 3 and now starting to bottom out by all accounts. now, here's the long-term chart really going back quite some ways. and what happened today is that we moved above this line for the first time in quite some time.

this is constructive. and i want to look at the daily and end with this. here's where we think it goes. we've obviously had a big move. and many will try to fade that or short it. but i don't think that's the primary data point. i think the long-term bottoming out is the primary data point. and you'll see the authority here of the 5 level, where this gap is. 5, 5, 5. the presumption is that after some backing in filling that we quickly retrace this gap from 6. we're looking for a buck, we'd be long sprint. >> so, you know, mike, when i first heard that carter was going it talk about sprint as a so-called defensive play, i was kind of surprised. i never thought of sprint that way. what's your take on this? >> you know, also as a defensive play if you were going to go out and buy the stock i'd say that's not really playing defense. i would say that's almost taking a flyer. let's take a look at how far and fast this stock has moved over the course of a relatively short period of time. this is a name the street really dislikes. and i think that's actually one

of the reasons that it's showing some strength here. it has a 20% short interest. and the average analyst target for this stock is four bucks. that's more than 20% lower than it's currently trading. but i think those things are the reason why we're seeing such strength. and this is also the reason why with a stock that's only trading $5 normally you might not look to trade the options. but i actually think you're much better off doing that here. the way i would do that you can look out to november and buy the 5 1/2, 6 call spread. that's only a 50-cent-wide call spread but also 10% of the current stock price for just 15 cents. and if you buy the stock at $5, you're not risking 15 cents. you're not even risking a dollar. what you're really risking is how much the stock has moved off of those lows. and from my perspective i think the options are certainly a better way to play it. >> brian, do you like this trade? >> i like it in terms of risk reward. you talk about 15 cents for this call spread, and that's fantastic, and you're looking for names out there that

actually have held up okay in this whole market volatility place. and sprint being one of those. i think there's a handful of other names i've been playing that might be a little better take here. i would caution one thing. in the options market in sprint today we did see heavy put volume being traded, about 6 to 1 put to call ratio, which is very high. that 5 strike put was being bought. i think we saw one go up about 13,000 times. so certainly some traders playing a fairly sides move for sprint whether it happens to the down side or the up side. >> but you know what's going on here, i think what you're seeing with all of that put activity, there were a lot of people who were short this thing and a lot of those people got burned because it obviously was able to move close to 40% in a very short period of time. and so i think anybody who was saying to themselves, gee, i really like being short the stock at 4, now it's up 25% from that level. the only thing that they can really do is look out and say i'm going to buy puts to do that. but the flip side of that is that if people get short of this thing that will ultimately only create pressure for it to go higher. you can create a real squeeze that way. >> there's one other data point that can't be ignored. 80% of the stock is controlled by soft bank in tokyo.

that's a factor that has to be a part of anyone's equation. >> does that mean that it's a floor in the stock? >> well, or maybe if you ever owned 80% of something wouldn't it ever come to mind that maybe you might want to own 100? >> i see. okay, the implication is they could buy the rest. all right. moving on to the big winner of the week, it actually might surprise you. crude oil, which has been hammered this year, closed up the week more than 12%. that's the best week in almost 6 1/2 years. so, mike, what was this bounce? does this signal any kind of all-clear for energy investors? >> i don't know if it signals an all-clear. some of the fundamentals we see in crude and the weakness that we've had there, some of those remain, but i think it's important for investors to remember one important thing and that is that demand, globally, despite all of the stuff going on in china, is growing. and that imbalance that we have where we have an excess of supply of about 2 billion

barrels of oil is going to eventually narrow. and one point, and this might not apply as much to crude as the energy space. the street is going to front run that trade and find the bottom before the fundamentals tell you that's the case. basically, just like you were going to see it in the rates, you're going to see it in energy and i think that's a little bit of what we're seeing here and also you're going to find a little bit of short covering. there was a lot of negative sentiment in energy. people are going to look for a spot to try to cover and this week looked like a pretty good spot to try to do that. >> so, carter, was this bounce a break higher for oil? >> it's a countertrend rally in an established down trend. i think one thing independent of the charts that has to be said about this, and we've seen this in history, whenever we have a group that's really literally been decimate, by definition for a bottom to form you need action from the very weakness and the very strongest. the weakest meaning some bankruptcies and/or people cutting their dividend. rig has done that this week. and action from the strongest meaning we can acquire our competitors, which we've seen acquisitions. so you're getting movement at the extremes. that's the beginning possibly of the end. but after a big ricochet like this, do you chase it?

we think you can own it lower still. >> okay, so, you're looking at exxonmobil today. >> yeah. >> what's the thesis here? >> i think a couplefold. to carter's point you're looking to own it lower. so let's use some put options and sell puts, which basically if you get exercised on you're stuck buying the stock, right? and you're stuck picking a lower level that you actually want to get long. the other thesis i think is from the technical level when you look at crude oil and we spoke about this earlier in the week that that 42.40 level that traded back on march 17th this year that was a low print, we ticked above it and as soon as we hit that you saw oil tick up and trade above 45. we are starting somewhat of a bottoming process. the fact we could hold below those lows and stay hammered down and it actually ticked up like that on volatility. i think that's a good sign. i would like to see some easing in some of the volatility going on out there. but certainly i think you can start to play some of these integrated names something like exxonmobil. >> you alluded to the trades, selling puts, walk us through it. >> when you're looking at exxonmobil i was looking at the april 72 1/2 put. i'm looking to sell that put for

roughly $4.75, it was trading at earlier today. right? so now my break even, 67.75. right? that's almost near where the lowest traded earlier and it's kind of bounced off of that. that's a level, that 72 1/2 put, if it trades below that i'd be exercised on that, i'd have to buy the stock, but i've collected $4.57. so i've lowered my break even. this is a stock i want to get long, i'm almost collecting 7% basically of the value of the stock or the strike price. that's a huge premium going all the way out to april. those are the type of options i'm looking at. with volatility very high, option premiums are high. you can take advantage, collect some income, and hey, if you're a person also playing dollar strength, right? long dollar positions i think this is a great countertrade to that as a hedge, as an overlay. you're collecting a huge premium to be able to get long exxon at lower levels. >> now, mike, there are plenty of beaten-up energy stocks you can play with the notion that perhaps we're nearing -- or closer to a bottom than we were two weeks ago. is exxon one of them that you would? >> no. i'm really not all that interested, i have to say, in any of the integrated names.

and there's one other thing i would say is, in a space that has moved as far and fast as energy has am i really interested in trying to catch 7% over the course of time that we're looking at here? not really. brian, i love you, man, but this is actually a trade i can't get behind. i think if i was going to do something i might be looking at call spreads if i wanted to reduce the risk because this is one of those places, we've talked about this several times, the energy names generally deserve the high premiums for options that we're seeing. >> well, i just want to make one counterpoint. we talked to jim paulsen earlier this week and he he talked about these commodity crushes, they've happened about four times since the '70s. and as commodities start to bottom inflation creeps into the economy very fast. and this is sort of an inflation point, a reflation in case commodity prices start to turn that you put this in your portfolio, doesn't have to be a huge holding, this is something i want to do to basically get long exxonmobil at lower levels. >> quickly the chart, carter. >> here we have exxon's had five countertrend rallies of 10% or more. this one's huge, 65 to almost 75. and each one has been net with resumption of selling pressure,

and i would say try to do the strategy, buy it lower. >> got a question out there, send us a tweet @optionsaction. if it's nice we might read it later on in the show. for everything "options action" there's only one place to go and that would be optionsaction.cnbc.com. the hottest options action, news, videos throughout the week and exclusive trades. you want to check it out. here's what's coming up next. >> the only thing we have to fear is fear itself. >> that's because the vix just sounded the all-clear to buy stocks. and we'll tell you what it is that has traders so excited. plus, kuo and carter doubled their money betting against the small caps. now they have a way to make even more. they'll explain when "options action" returns. here at td ameritrade, they work hard. wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart,

plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this. it means you can also afford to get up to 50% swedish-er swedish massages. making it the place to find a place for labor day. go and smell the roses!

ahh... steve, other than making me move stuff, ces. what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series.

okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim? for all the confidence you need. td ameritrade. you got this. historic week for the vix. dom chu at headquarters with some remarkable statistics. >> they're big ones. the cboe volatility index that vix known as wall street's fear gauge, that gauge soared amidst all of these ups and downs that we've seen in the market. so take a look at the chart for the past week. we actually got as high as 53 intraday back on monday. we were at 16 just a couple weeks ago in mid-august. as things stand right now the vix is on track for its biggest monthly gain ever going back to records in 1990. but keep in mind that we're still marginally lower since friday's close. so it's come down as stocks have gotten less volatile as the week's progressed. so, here's some food for

thought. options on the vix futures have gone up in popularity. no doubt. but they've gotten red hot during just the month of august. according to cboe data month to date, the average daily trading volume for vix options contracts is around a little over a million. and in the five days through yesterday's close that average volume soared to 1 1/2 million contracts per day that you compare that with last august when it was a little over half a million. now, the options market has grown, but it may be fair to say that recent swings in stocks are driving a lot more traffic into these types of products, options on those vix futures. melissa, back over to you guys. >> dom, thank you. so, what will the surge in volatility mean for stocks going forward? our resident fear merchant brian stutland is at the smartboard with the vix road map. brian what do you see? >> when you're taking a look at the vix there's a very good reason why it did spike this week, and when you get these levels basically in the market where you have these tight-range areas of the market, right? and all of a sudden you get

these certain big, huge plunges out of nowhere, these have huge air pockets and the market rips lower very quickly and rebound at least in a bull market has rebounded very quickly. the reason why the vix spikes is you need fast movement in the market, so option prices are trying to play in that very fast movement. now, when you take a look at it, the question is is this good for for the market or bad for the market when we start ripping back and forth. and one thing i'd like to take a look at is after we get these huge big spikes here, right? a couple times this has happened. what i'd like to look for in the days to come afterwards is basically the big bars. in a candlestick chart when we see the vix sort of open here and close near its low following these huge spikes, which basically happened right in here, that's usually a sign of an all clear. the fear has come out of the market. and typically the market has rebounded back. now, the question is is this 2008 credit crisis or is this still the bull market? to me it feels like one more thing we need to happen, right? when we took it to take a look at the vix, on times when the vix, the last two times it's been trading over 26, and ended the week down below 26, what we found is the market really took

off after that point. looking six months out, once we fell below 26, up 9%. up 7% there. and then 12 months out, 10 and 24%. some huge moves back to the up side. i know these are only two data points here but, when you take a look at it if you're in a bull market and still in that rate, you take a look at there's a lot of other price action that happened. that huge heavy volume that dom talked about, that seems like a washout, people overplaying vix options to try to play some sort of hedge. they were late to the game. we got rip back. the rip back continues that 2040 level is on target for the s&p if it keeps going like this come monday or tuesday. >> mike, this doesn't sound like this overplays with your view of what's going to happen in the markets. >> i think what we did see because of that spike in the vix was that a lot of people came in and a lot of stocks got cheap, starbucks trading around $45 bucks was an opportunity. jpmorgan down 20%. that kind of whipsaw, you're go to see some buying opportunities. i imagine it's only a handful of stocks and then people are going

to start digesting what's going on here. we are above historic average valuations for the market. so i suspect this may be more of a bounce than a continuation of the bull market. >> carter, does the vix factor in at all with this? >> it doesn't happen to be a part of my process but i know a lot of people do use it. obviously this is an options show. a perfect thing to be talking about. but, i mean, i guess the issue is did we see capitulation? again, i don't see that. i don't think a lot of people were able to sell a lot of shares down at the bottom. it was a very illiquid day. it doesn't smell to me of anything other than almost an errant day, down up. coming up next, small cap stocks are down 6% in august. and that means big profits for kuo and carter. we'll tell you how they're cashing in. right after this. here at td ameritrade, they work hard. wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday.

we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this. i'm here at the td ameritrade trader offices.

ahh... steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim? for all the confidence you need. td ameritrade.

you got this. it means you can also afford to get up to 50% epic-er epic rides. making it the place yippeeee! to find a place for labor day. go and smell the roses! time for the up side call where we look to manage our winning trades. three weeks ago kuo and carter made a bearish play on the small caps. they were able to double their money. and here's how. on "options action" it's how we make big profits. risk less so we can make more. and that's just what kuo and carter did with their big bet against small caps. carter thought small caps were sounding the alarm. >> even as we are just to get

back to trend, well, that's going to give us something on the order of a minimum of another sort of 5%, 6%. it's all yours. >> hmm, mike thought. a small idea that could make big money. so to make a bearish bet kuo bought the october 1.20 strike put on the iwm. the etf that tracks the small caps for 4 15ds. to make money khouw needs the iwm to fall below 120 by more than the cost of the put, or below 115.85 by october expiration. but paying 4.15 just to bet against small caps? >> your only responsibility is to put meat on the table. >> so to cut his costs khouw then sold the october 110 strike put for $1.30 and created his put spread. and here's how it works. between the 4.15 he spent on the higher strike put and the 1.30 he collected by selling the lower strike put khouw cut the total cost of his trade down to

$2.85. and now instead of the iwm to fall below the 115.85, khouw sees profits if it falls below 117.15 by october expiration. >> greek for lack of a better word is good. >> but there's a trade-off and by selling that put khouw has capped his profits at $125. since the time of the trade small caps have had a big move lower, falling 5%. now, "options action" faithfuls all over the world just want to know one thing. what will khouw and carter do now? >> well, despite the sell-off the russell still closed the week in the green. so, cart, now what do the charts look like? >> this opportunity has come and gone. there's something to say. if you were to look at this how it did compared to all other options when everything collapsed it might not be that good. in fact, this small cap index actually held up a little better than the s&p. so if you're really talking about alpha generation there isn't any alpha in the trade. but everything went down, we had a short on, we made some money. mike, what are you thinking?

>> mike? >> i'm thinking that you obviously want to take profits on this put spread because we're between the strikes. but as far as the snap is concerned i'd probably take some of this money and roll down and out and put some put spreads on an spy. >> just quickly, stutland, what would you make of this trade at this point? >> yeah, i think i like taking it off too. we could get a push up to that 120 level but there will be some resistance so i think you get a push there then that's when you roll down the iwm trade like any other trade that you have on in the market. because there will be some headwind up another few percent from here. >> coming up next, the final call from the options pits. here at td ameritrade, they work hard. wow, that was random. random? no it's all about understanding patterns like the mail guy at 3:12 every day or jerry, getting dumped every third tuesday. this happens every third tuesday. we have pattern recognition technology on any chart, plus over 300 customizable studies to help you anticipate potential price movement. there's no way to predict that. for all the confidence you need. td ameritrade. you got this.

it means you can also afford to get up to ♪ 50% romantic-er romantic sunsets. making it the place to find a place for labor day. go and smell the roses! i'm here at the td ameritrade trader offices.

ahh... steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool. hang on a second. you can even see the anticipated range of a stock expecting earnings. impressive... what's up, tim? for all the confidence you need. td ameritrade. you got this. brian's family is here. that's his sister erin, his mom andrea, son zachary and daughter lilia joining us. we have a live audience today. welcome. time now for the final call. brian stutland, kick it off. >> stay resting, my wife donny. sell puts on exxonmobil. >> carter. >> sprint. build a position, long-term bottoming out.

>> mike khouw. >> roll your hedges. volatility is back. >> all right. looks like our time has expired. i'm melissa lee. thanks so much for watching. see you back here next friday at 5:30 p.m. eastern time. meantime, don't go anywhere. "mad money" with jim cramer starts right now. have a great weekend. ♪ >> announcer: the following is a paid advertisement for dr-ho's physio belt, brought to you by dr-ho's. >> hi. i'm john cremeans. welcome to our show, "living without back pain." do you suffer with back pain, hip pain, or shooting pain that runs down your legs? well, stay tuned and discover how others just like you have found the new way to relieve their back pain. >> it's really funny. i just put the belt on. i've had it on for about a minute, and already, there is a reduction in pain that i have in a particular spot on my back. it's weird. i didn't think it would work so fast. >> the belt allowed me to walk for the first time in a year without a cane.