hey, live at the nasdaq market site this friday. here's what's coming up on the show. shares of biotech stocks have been doing something very funky ahead of next week's earnings. we'll tell you what that is. and how you can profit. plus -- here's what some traders have betting could happen to tesla shares next week. and if they're right, we have a way to triple your money. and -- ♪ fire >> one dow stock has been on fire. but there's something in the charts that suggests a run might be done. we'll tell you what that is.

the action begins right now. let's get right to it. because we are heading into the busiest week for earnings with mega cap stocks like alphabet, apple and amazon all set to report. so what should traders expect? what will it mean for the rally? let's get in the money right now. dan, what do you say? >> well, listen. i think microsoft kind of set the stage for some things that we're going to see over the next couple weeks. fast-growth businesses like a public cloud business, are going to continue to do well. continue to grow fast. but legacy businesses and we saw this from microsoft and intel, continue to do poorly. and then the other really important point is that enterprise spending, businesses, is not particularly robust right now. so i think that, you know -- i think i said this last week on the program. i think the stuff that's been growing -- the facebooks, the amazon, the stuff that i can't get my arms around, and i can't tell you that you should be long these things, they'll probably continue to work until they don't. >> yeah, i mean, amazon basically -- i think the story is the narrative continuing, and i don't have any reason to think that it isn't necessarily. they don't necessarily have to

have, like, the blockbuster earnings numbers we have seen time and time again, as long as people believe they're long-term. bezos' vision remains on track. the iphone hasn't done as well as it could have done. the hard number itself is going to be most revealing there. >> this is -- in a way, not just specific to these names, but it's about the market. what we know is that the five biggest tech names are equal to the value of the bottom 250 stocks in the s&p. and if there is any trouble in paradise, that's not going to be good for the market. so we know that microsoft has come out and that's been good. but we've got big earnings coming and they'll need to be good, because if you get the opposite reaction, instead of a gap up, a gap down, it's not going to -- >> of course, this comes on the heels of a stellar third quarter performance for technology. so they really have to deliver in order to justify that run. carner, i know you have worked up some charts. >> i have some. let's go look. the first is a group chart.

so just those names that i mentioned. this is a chart over the last five years of the top five largest tech stocks in the market. so, of course, that could be apple, followed by google, then microsoft, amazon, facebook. and it is a near-perfect trend. in fact, you could draw a trend line and it's bounced off the line, off the line, off the line. but at this point, usually at some point, you get some sort of checkback. checkback. checkback. checkback. i mean -- this is with microsoft's performance today. so i'm just going to make the bet that this is due for your next checkback. a group chart of the top five stocks in the s&p tech. all right. now here's that same group. this group juxtaposed against the s&p. and that's something that also is a little bit -- your s&p has made no progress for essentially two years. which means if there is any stumbling here, what's that going to mean for something that's made no progress in two

years? let's keep going. all right. final chaurt. this is telling. relative strength, relative performance, is one of the highest-rated factors in all quant models. the top model is qqq, the top big stocks, a third of the waiting. and the bottom panel is a relative performance to the s&p 500. and so what we know is that the qs actually got up back above their high, made new highs, absolutely. but have not made relative highs. meaning after all this, after all this steepness, they actually are still not making regular active highs to the market on a one-year basis. so you have this long-term outperformance, and you have this steep circumstance above trend. only just to get back to even with the market. if there is any trouble in paradise -- yes, we heard from microsoft, but if google were to be bad or facebook or amazon, you can only expect what would

happen. >> oh-oh. mike. >> the way i want to do it, it's hard to catch the falling knife basically betting stocks will rebound. and also hard to call tops. that's kind of what we're trying to do here. there are some things that make it vulnerable, valuations would do that. if you sell a call spread on the qqqs, what you're doing is betting either it's going to drop or stay round about where it is right now. all you really need to see on next week's earnings is a split decision. the way you can do this is by selling the december 118, 122 call spread. when i was looking earlier today, you could sell the december 118 calls for $2.20. buy against that for 85 cents. net-net, collecting $1.85, very nearly half of the $4 width between these strikes. if it stays right here, you're going to slowly collect in premium. if it drops, you collect the premium much more quickly. even if you do get a quick, rapid bounce -- because let's say all the earnings turn out to be spectacular next week.

it's not likely to go all the way to the $4. i feel like if you're going to take at a coin toss, wouldn't you take the coin toss that pays you nothing if that happens. >> when you think about the biggest numbers of the qqq, dan, which concern you next week when it comes to earnings? >> i'll tell you, apple could concern you. it has had this run. mike said something about the phone has done so well. we don't know the phone has done so well. we just don't know the phone has done so well. we're going to find out next week how well this phone has done. and i think that stock could be vulnerable. i think that stock could be the most vulnerable between all the names reporting next week. i think, mel, you said it. if there is a split decision i think you're probably going to have some split decisions. that's the way the qqq has been trading in a tight, consolidation. and i think mike's trade, selling premium, for a bet really there is a continuation of that consolidation, is probably the better trade between now and december, in my opinion. >> i mean, again, these are -- the market is very dependent on these names, because they have growth, right? and when economic data rolls, which we know is happening, globally. there is only two trades. you go for idiosyncratic growth,

something independent of the economy or the market or you go for yield. and so these will have to be perfect. just what you're saying. otherwise not good. >> all right. well, biotech will also be in focus next week, but the number of large names reporting. seema mody is here to give us a preview. >> that's right. some big names in biotech, colleague biogen, amgen and sell jeanne. over 3% over wednesday's earnings announcement. biogen, the options market implying a 3% move in either direction. for cell -- biogen, a 6% move up or down. together, all three, biotech giants have an implied market move of over $10 billion. this as biotech stocks have fallen 10% over the past month, due in part to the political rhetoric around drug pricing. we'll have to see if earnings can change that story, melissa. >> all right.

thank you very much, seema mody. so, dan, how -- >> that rhetoric is really interesting in a lot of ways. i've been kind of saying this over the last couple weeks, that i don't think hillary clinton is elizabeth warren. and i think there is a lot of really bad news brycpriced into b biotech sector. the real fear is the democrats would win the presidency, win the senate and then they win the house. and then, you know, the headwinds about pricing, drug pricing, become a very big deal. i don't think that's all going to happen. so i think that there's a good chance that into year-end or maybe into the new year, biotech stocks start to rally. the two charts i want to pull up quickly, the ibb, nasdaq, biotech, etf, traded in a well-defined range, 34% from the 2015 highs, down 20% on the year. only up 12% from those lows. that's a problem. but i want to look at the xbi, the s&p biotech etf and look at that one. it looks very different. i think carter will probably agree with me. it's actually made a very nice move off the bottom, a series of

high/lows and higher highs. look at the rejection over there at 70 bucks or just below it. that's when the likelihood has been increasing the dems run the table here. i think this trade sets up pretty interestingly. in the xbi, playing for a bounce into the new year. today when the etf was trading $59.75 and i've got to say this, option premiums are very high here. this is not a particularly easy trade right now. but i think you look to january e perration, you look at the january 60, 75 call spread that cost about $4 by one of the january 60 calls for 440, selling one in the 75s, kind of a throw-away at 40 cents. your break-even at 64 bucks, make up to $11 between 64 and 75. listen, people. you've got to get the direction right on this one. so it's one of those ones where you have to be convicted that it's not as bad as it looks. if the democrats kind of at least take the white house, maybe take the senate.

and maybe take the house too. >> yeah, i mean, i do think -- the high options premiums are justified for exactly the reasons you criteria. if you take a look at the fundamentals of some of the biggest constituents of both of these two indexes, the names like gilead and biogen, names like this, these look fundamentally very cheap. the reason they look cheap is because of this overweighing concern the whole business model is a broken one. and i think this is actually a situation where we are probably going to see a big break one way or the other. and we haven't identified -- >> are you willing to -- would you be willing to make that bet on the direction, though, a break higher or a break lower? >> my inclination would be to make it on the higher side. because the -- these stocks have absolutely been punished severely. so you have to figure that if that's what's baked in the cake and everybody gets a surprise, it's going to be the up side. >> how are my lines? >> my lines are good. >> good, or -- >> i mean graded. like a "b"? >> they can draw the lines whenever they want. should it be 16 times free cash

flow or 18? it's all nuts. here's the reality. i think this is important. this is almost like classic -- this was the greatest performing part of the market, right, for a three or four year period and then it has the wipeout and i think ultimately, there is more up side potential. the i didn't do names have been destroyed. gilead has been destroyed, sell gene destroyed. >> does it concern you this has become a bipartisan issue? you saw the mylan hearings. it wasn't like it was down party lines. >> i think valuation is a big issue here. still some pent-up demand. i want to make one point. when i looked out to january. the xbi was offered at about 15% of the underlying stock price. that's nuts. the s&p, between now and the same time period in january 20th, which happens to be inauguration day, is only pricing up 5% move in either direction. three times the potential volatility. if you get the direction right -- >> one final point. the drug pricing issue is one

that keeps coming and going. right now we're in election season. so, of course, we're going to hear a lot about it. wouldn't surprise me if we hear a lot less when the election is over. >> got i question out there, sent y sent us a tweet and check out our website. we've got the hottest and i mean hottest actions news. and check out our super cool newsletter. what rough waiting for? go do it. here's what's coming up next. that's what some traders are saying could happen to shares of tesla after earnings next week. >> that's terrible. >> it sure is. but we've got a way to protect yourself. plus -- >> what's the matter? cat got your tongue? >> caterpillar shares are suddenly falling. but that's great news for one of our traders. we'll explain why, when "options action" returns.

[pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade. i've got a nice long life ahead. big plans. so when i found out medicare doesn't pay all my medical expenses, i got a medicare supplement insurance plan. [ male announcer ] if you're eligible for medicare, you may know it only covers about 80% of your part b medical expenses. the rest is up to you. call now and find out about an aarp medicare supplement insurance plan, insured by unitedhealthcare insurance company. like all standardized medicare supplement insurance plans,

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i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade. we've got a newsletter on the potential att/time warner deal. seema. >> shares up, time warner spiking after hours on a bloomberg headline that at&t is nearing a deal to buy time warner for about $110 a share. including debt, that would value time war fleury at $100 billion. cnbc did report the price tag could be up to $110 a share. again, looking at shares of time warner up about 4% in ex trended trade. >> thank you very much, seem mody. david faber reported up to 110 earlier today. what kind of options activity have we seen? >> first of all, of course the brain nailed the number.

the options value -- call volume was five times that a put. 130 calls traded. 100 calls and november 85 calls. people looking for somewhere up towards that number. >> a little perspective. when time warner acquired aol, you know what they paid for that company in january 2000? $164 billion. and now they're being acquired for what? 100? talk about value destruction. killing money. unbelievable. >> brought to you by carter worth. moving on to tesla. reporting earnings wednesday after the bell and the options market implying more than a 5% move for the stock. the only question is which direction. mike is over at the smart board with today's call to action. >> the implied move actually -- only implying 5% doesn't tell you how the options are. if you bought a december straddle, nearly $30. we're going to take a look at the bearish bet. when do you want to do a trade

like this? number one bearish on a stock. number two when stocks are expensive and three, when you identify a specific price target. let's take a look at the possibilities here. this is tesla trading right around 200 bucks when it closed today. you can see, pretty much we're looking at a pattern. i'm going leave this to carter to address this in a second. i'm not the technician here. this looks like a down trend to me. the oh other thing is, we have a short interest -- creating some measure of support if the stock does fall. i'm targeting a price of about 170, right around december, basically, is my price target here. the way we're going to play this, you're going to buy the december 190 put. you're going to spend $9 for those and then sell two of the 170s at $3.5 a piece and then finally, by 150 put for 120. the whole package costs $3.20. the maximum profits of $16.80 is going to be found if it hits the 170 price target. that's the reason we're doing

this. the other thing is, why are we buying this put that's so far out of the money? tesla, if it does start to move, can move a lot. and i don't want to be sitting there if it ends up moving much further to the down side than our trade expects. >> what do you make of that level? >> mike, looks like a down trend to me too. i mean, yeah -- the stock acts poorly. and the burp burden of proof is on the bull. down to the right. not keeping up with the market, something burdening the stock. probably something to do with the business or the valuation. >> well, right. and we know what they are. they already preannounced their deliveries for q3. that takes a little of the mystery. 24.5,000 deliveries, up 70% year offer year. that takes mystery out of the quarter. we know we want some information about capital-raising and -- >> addressed that. >> he's going back and forth in the last month about that. we don't need it, we do need it. and then the last point is the solarcity stuff, which is obviously pretty much in flux. the only thing i'll say about the trade structure. i'm a big fan of butterflies.

you're threading a needle in a stock like this that has the potential to move. i would look to move it closer he to the event. i'll look to take it off. still ahead, the performing dow stock of the year, what it is and how much worse it could get when "options action" returns. [pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony, warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade. voiceohigh blood pressure,sk all day can cause neck and back pain it even slows your ability to burn calories and lose weight. man #1 on camera: fortunately, there's a solution

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hey nicole. hey! i just wanted to thank your support team for walking me through my first options trade. we only do it for everyone gary. well, i feel pretty smart.

well, we're all about educating people on options strategies. well, don't worry, i won't let this accomplishment go to my head. i'm still the same old gary. wait, you forgot your french dictionary. oh, mucho gracias. get help on options trading with thinkorswim, only at td ameritrade. we've got more details on the possible at & t and time warner deal. seema. >> reuters reporting that at & t and time warner reached an agreement on most merger teams and are aiming to announce a deal as early as sunday. so this discussion seems to be moving very quickly, and according to this report, a deal could be announced as soon as sunday. back to you. >> all right. thank you very much, seema mody. we are showing the quotes at after hours session. for time warner shares, a lot of volume behind the 5% move

higher. dan, you were saying you still don't think the deal is going to go through, though. >> it's going to take a very long time, right? here's the thing. >> it's going to be a stock deal, predominantly here. and the stock is going to trade time warner at a discount to the price whatever the price agreed upon is. and probably at least 10%. so if it was a $110 deal, the stock is trading at 94 in the after market. there is not a heck of a lot of up side. unless in a bidding situation, which it's not likely to be. >> does it still trade at a discount. >> yeah, let's say the doj came, the stock is going straight back -- >> it faded today, a high of 94.45 and ticked down all day after the initial news. you have to assume they're rushing to get this done, because they're going to get it done. i think that's -- >> well, they don't know. they thought -- >> the regulators, not with standing. they wanted to beat someone else sniffing around. >> >> frequently what happens in situations when you hear there is a deal announced, you're

goings to see the price of options decline if it's a cash deal. it's not likely to be the case. so, you know, if you are going to be inclined to try to press and become your own merger arbitrage player, you know, normally the merger arbitrage guys -- do i race out and buy calls? what the marginer arb desk do, they're actually sell calls, trying to sell premium. so for those of you at home saying i don't want to go out and buy a stock price. call spreads are probably going to be the way -- >> and if you're long a stock and you want to stay long it, and you want to give yourself some time -- it's going to take at least six months to get any clarity, i would suspect, then you can think about selling up side calls and buying down side puts. collar your stock and kind of define the range at which you participate to the up side and have protection to the down side. >> to dan's point, if you think the deal is not going to go through and there should be a bounce in at&t stock, is the safer trade to be effectively long at&t, playing for a bounce off a breakup of this deal. >> well, i mean, first of all,

we already are sort of in that trade already, although -- >> for this situation -- >> for this situation, it makes it more compelling, will trade at a bigger discount than it was. that is one play you could do. again, you're not going to get an answer that quickly. so if you're going to make that play, you have to make it try to play out over time. >> well, and not only that. ta and t is a stock that usually implied volatility the price of options usually cheap. 5% dividend deal. they're going to tick up a little bit. obviously a lot of -- some risk to what's going on here. if you're long at&t and you own it for your kids or whatever, you can start selling calls against that to take in a little bit of premium on a regular basis, maybe every couple months it gives a little buffer to the down side. >> all right. coming up next, we've got your tweets in the final call from the options pits. [pony neighing] what? hey gary. oh. what's with the dog-sized horse? i'm crazy stressed trying to figure out this complex trade so i brought in my comfort pony,

warren, to help me deal. isn't that right warren? well, you could get support from thinkorswim's in-app chat. it lets you chat and share your screen directly with a live person right from the app, so you don't need a comfort pony. oh, so what about my motivational meerkat? in-app chat on thinkorswim. only at td ameritrade. on a perfect car, then smash it into a tree. your insurance company raises your rates. maybe you should've done more research on them. for drivers with accident forgiveness, liberty mutual won't raise your rates due to your first accident. and if you do have an accident, our claims centers are available to assist you 24/7. call for a free quote today. liberty stands with you™. liberty mutual insurance.

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is strong, cat is the inverse or very weak. up very strong. continue with this tracking? oa is great, now you have a bearish bet in cat. no you guys. >> we do, we do. so cat -- around 90 pulled into 86. i want to stick with this one. presumption is lower prices. >> we're in good shape on this trade. short the 87.5 call, stock went at around 86.5 bucks. basically, even if the stock just sits here and languishes from now until december expiration, we're getting paid to sit in the trade. >> the broader question on the dollar, strong. >> making its way back to the highs and a lot of people didn't think it would happen and rates haven't moved up a heck of a lot either. that's going to be a headwind to u.s. corporate earnings who have exposure outside the u.s. >> time for the final call. >> a contrarian bet on perfection and short the qqq. >> mike? >> you know if you're inclined to make a bearish bet in tesla.

>> danny. >> i like your fly stuff -- i actually on "options action" twitter feed have it on there. >> our time expired. i'm melissa lee thanks for watching. don't go anywhere, "mad money" with jim my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain but to educate and teach you. so call me at 1-800-743-cnbc or tweet me @jimcramer. today should have been a day where we focused on earnings and earnings alone, and we had some big ones, some good ones lik