hey, there we're live from the nasdaq market site in times square on expiration friday. the guys are getting ready behind me. here's what's coming up on the show. this is your portfolio this is your portfolio on tilray any questions? uh, just one how can i apply tilray using options? mike khouw with the psa. plus, tech is breaking down, and the chartmaster says there's something to suggest even more pain to come he'll tell us what's got him so worried. and talk about a rate

shocker. bonds are tumbling, and dan nathan has a way to make three times your money in just two months it's time to risk less and make more the action begins right now. ♪ >> and that is where we start. rates getting a big boost to the banks, the financials the second best-performing sector this record week for the markets, although reversing today check out the moves. citigroup surging 5%, jpmorgan 4% and morgan stanley and goldman up 3%. despite the good week, financials have lagged the broader market this year even as interest rates have climbed higher, but the above in the ten-year lead finally sparked the rally. and dan is looking today at the tlt. >> i'm looking at it, because we obviously have a fed meeting next week and one again in early november and then a third one in mother's day december here and the way i'm seeing things and some of the guidance we're getting from some companies and some of just the commentary we're seeing from our trading partners, it seems like that we do have a trade war here, we do have some slowing economic data

globally we're starting to see some companies talk about the effects of tariffs here. when i think about this, obviously, fed funds futures are pricing about 100% chance that the fed raises fed funds 25 basis points next week but what really is, you know, was at one point a certainty about a december raise and then three in 2019 seems to be something that's a bit debatable right now. so when i think about what's going on here, i also think about these midterm elections, i see a fed that wants to kind of, you know, proceed kind of lightly, especially when we know that the president has actually put some pressure on the fed chair about the pace of rate increases. so i think we could see a sort of sell the news on long-dated yields here. we've seen the tlt -- that's 209-year bond etf -- has had a pretty precipitous drop since august it's down about 4% the tlt's gone from 123, bounced off of 116 so we've seen yields rise as we've seen bonds go down i think there's a good trade

setup as we look out to november expiration in the tlt, being a bit contrarian one of the reasons i think it makes sense to do so is that implied volatility, the price of options in the tlt are very cheap. you can make very near-the-money, directional, long-premium bats for risking one to maybe make three for about 1% of the stock price. so, here's the trade, being contrarian it's kind of a sell the yield news next week into november when the tlt was trading at $117 today, you could buy the november $117-$120 call spread, paying $1.25 for that buying one of the november $117 calls for $1.55, skelg one of the november $122 calls at 30 cents it costs $1.25, break even up at $118.25. you could make up to $375 between $118 .25 and $122, and your max risk is that $125 or a little more than 1% of the price. i have a one-year chart. i'll let carter talk about the charts but this just bounced off of

$116 $122.50ish looks to be there and it's bounced off that. do you like my levels? >> dan, i'll give you a good anecdote i was a kid and someone says, if you can draw a straight line, you'll be okay in this business. this one, if you drew a straight line, sometimes that's all it takes. it's a perfect line. we're right down to it we have good rebound potential and here's the other thing, record short bond positioning globally and the big pain trade would be, is actually they don't quite move as aggressively as everyone's expecting and you do get some sort of lift here in the ten-year. >> but even if they do move reasonably aggressively, one of the things we could see potentially is some flattening, right, in the yield curve. and i think one of the things you have to look to is look to signs of inflation to concern yourself with ten-year rates or twenty-year rates, which is what the tlt is going to represent and look to the fed for short-term rates and i actually think between that and also any of a host of geopolitical or economic risk

factors -- a risk-off trade is long u.s. treasuries you know, here we are, right near the bottom. and finally, i would just say, at 1% of the current stock price, that makes a lot of sense. it has spent most of the last 60 days, which is about how much time we have until this thing expires, well above the break-even level, so it's easy to see it making that kind of move, even though options prices aren't implying a move that sharp. it could happen easily. >> i think you nailed it from a sentiment standpoint, it's bad that the chinese were selling treasuries, the fed will have to move in front of inflation. what if they're one and done in 2018 and more dovish in 2019 you'll see the tlt bounce back towards that resistance over the next few months, my opinion. while financials have been hot, tech is sitting out, ending the week as one of the worst-performing sectors chartmaster here says there's a bigger pullback ahead. what do you see, carter? >> that's right. tech has been faltering for a while on a relative basis and that's what matters in terms of opportunity cost could one have avoided the underperformance in tech since

june it's actually been going on for three months what i have here is the tech sector on top and i have relative performance to the standard & poor's 500. so, what you'll see, if i move this forward, is that this is ascending. we're making new highs in tech but the relative performance -- take a look at the next chart. the relative performance is what matters. we'd actually peaked around june 5th. and here we are, almost the end of september and as shown here, essentially, we are not progressing, and the relative performance -- if i could see -- it's stuck. the relative performance is down even as you make new highs and so, the problem with that is that it's still crowded, and yet, it's no longer paying it's no longer the reward one would think. let's draw the lines a different way. here is the same s&p 500 tech sector on the top with its moving average, and here is the relative performance we have literally lived perfectly in this channel over and over and over.

and every time we move -- okay -- every time we get above or below it, we are failing. and so, now you can see this here we are on the cusp of breaking for the first time in two years. not a good circumstance. one or two more charts semis. this is the smoking gun. semis. look at the relative performance to the s&p 500 this peaked seven months ago we've broken trend this is not good something is wrong here. so, xlk itself here is the chart of xlk the last two years here is the chart with a trend line what we know is that we have bounced beautifully off this channel, off this channel, off this channel, again and again and again. at a minimum, i think we come back down to the channel that implies another 5%, and then what if and i think, ultimately, that's it we break i want to be short xlk, take

profits. >> mike, what's your trade >> so, i think this is one of those situations kind of like what dan was looking at in tlt, where implied volatility is relatively low this is basically a basket of stocks, an indices we often see that. i was looking out to november. you could buy the 75-70 put spread, spending $1.65 for the 75 puts and selling the 70s against it for 50 cents. net-net, that will cost $1.15, which is less than 25% of the distance between the strikes that's the math that we typically look for it was trading on or about 75 when i was looking at this, and it closed a little bit lower you know, basically closing pretty much on the lows i think for the day or close to it so you might even be able to look at maybe a 74-69 for a comparable amount of money if this is where it opens up on monday that's what you're looking for here's one thing i would look at also, is that two of the biggest stocks in it, apple and facebook apple hasn't responded well since their product announcements. and facebook has been in real trouble for a little bit longer. so, they're going to basically sway the whole sector, then

they're giving us significant warning signs. >> what's interesting about the xlk, the makeup versus say the qqq, is that it's obviously heavily weighted to a handful of those big mega cap names, but it's also got at&t, verizon, visa quoted at an all-time high today. so there is other funky stuff that the market doesn't just have to be tech that goes lower, but telecom and some fintech sort of stuff and then this will be at $70 very quickly i think it makes sense at this point, given how much those top names in the xlk have outperformed if he's telling us, carter, that the relative performance has been topping for months, we could still have other sectors perform okay and this could underperform and even cut back >> it's not obviously quite aggressi aggressive, but tech which has been so good as been the source of funds that financials have profited from. you have to have, not necessarily, but you are getting rotation tech is the likely continued piggy bank. >> more broadly, some of the constituents you referenced like visa, are really part of the growth versus value situation

we've been dealing with in the marketplace more broadly so it's not just about the big tech names and if you do see a rotation as sometimes we do, you will see a rotation out of growth and into value, and that would be weak also for those names that you don't conventionally think of as tech stocks that are in this. >> one point about the trade you obviously picked 75. you want to get really near the money, so talking about a quarter of the width you're already in the money here as it not going to take much for this trade to be profitable on a short move as we go into earnings, and that's really, i guess, the target. you're going to be looking to take this off in late october, once we get the bulk of some of the big tech earnings. >> yeah, 56 days to expiration. for everything "options action," check out optionsaction.cnbc.com and check out our newsletter meantime, here's what else is coming up. tilray shares are crashing, but before you buy puts, mike khouw has an important psa plus, calling all "options action" fans reach into your pocket, grab

your phone it's nice, we'll ansn air, when "options action" returns. see that's funny, i thought you traded options. i'm not really a wall street guy. what's the hesitation? eh, it just feels too complicated, you know? well sure, at first, but jj can help you with that. jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade

(sighs) i hate missing out missing out after hours. not anymore, td ameritrade lets you trade select securities 24 hours a day, five days a week. that's amazing. it's a pretty big deal. so i can trade all night long? ♪ ♪ all night long... is that lionel richie? let's reopen the market. mr. richie, would you ring the 24/5 bell? sure can, jim. ♪ trade 24/5, with td ameritrade. ♪ welcome back to "options action." it's been a wild, wild week for pot stocks with options traders getting in on the cannabis craze as well. breaking down the action from the newsroom is dom chu.

hey, dom. >> that's right, it's not just pot stocks attracting attention. options volume on pot stocks is exploding this week, and a lot of that could be related to an inability to make short bets on these names, particularly on shares of marijuana-related stocks like tilray, like canopy growth and kroneos group as well one way to look at this is through the open interest lens or the total number of options contracts in each stock outstanding. we'll start with tilray, where as of september 20th, open interest between calls and puts was between 343,000 contracts. compare that to a month before, back on august 22nd, when open interest was just 8,000 odd contracts. for canopy growth open interest september 20th, almost 268,000 contracts. a month earlier, august 22nd, that was more like 96,000 contracts. and for cronos group, open interest september 30th, 380,000-plus contracts, open interest and on august 22nd, it was closer to around 69,000. now, remember on that crazy day, september 19th, when tilray hit

300 bucks a share, options trading volume also showed a huge spike for tilray, 237,000-plus total options contracts traded on august 22nd, total trading volume was just around 2,800 contracts. canopy growth trading on that day, total volume 102,000-plus contracts. 30,000 was what it was about a month ago. and for cronos, trading growth in september, almost 92,000 contracts versus 12,000 a month ago. now, the bottom line, melissa, that explosion in pot stock interest translated into an explosion for trading in options on those pot stocks, which already appears to be cooling off a bit just between yesterday and today. back over to you. >> all right, thanks, dom. dom chu in the newsroom. so, how is all this crazy options volume and rising short interest impacting the price of put options? professor khouw has got the answer in his "call to action. mike. >> yeah, so, when a stock becomes hard to borrow, as it does when the short interest really rises and you start to

see all of this activity taking place in the options market, generally speaking, you start to see a lot more volatility in the stocks, and therefore, in the price of options looking at cronos, we can see here as the short interest rose, we can see that the volatility of the stock similarly rose, very, very sharply we take a look at canopy growth, we've got basically the same dynamic going on we've got the short interest going up and the volatility also rising very sharply. how sharply? well, we can take a look at what these markets are actually implying when we look at tilray, there isn't as much of a history in options for tilray, but when i was looking at this earlier, the stock was trading about $130, and the december $130 straddle, that's taking the call and the put together, cost almost $90. that is essentially what the options market is implying the movement in this stock could be between now and december expiration now, if you've been paying attention to options prices, you might have noticed something else also. with the stock trading at $130,

the call was 30 bucks and the put was actually $60 with the stock right at $130. why was the put so much more well, what the options market is telling you is that it has become so expensive to borrow the stock that people are using puts they're paying up to get those puts to make those bearish bets. and if you add the strike, plus the call, so this is 130 strike plus 30, that gets you to 160. and then you deduct the price of the put. that's $60 the net is $100. that is the forward price for december expiration that the options market is implying for tilray so, if you're thinking about buying a stock, remind yourself that the options market sees this thing going lower. >> well, let's say you are thinking about that, carter, what do the charts show? >> buying that stock >> tilray. >> i think that's dangerous -- >> that reaction's priceless. >> here's the thing, if you look at the aggregates, right, the alternative harvest etfs, it's quite a good week. if you look at sort of the grandfather of indices, if you

can say that in this very young business, but the canada cannabis competitive peers index, all having good weeks tilray, that's a blow-off epic top and it will not be exceeded perhaps forever. >> yeah, mike, so we've seen this situation before with stocks that have hard borrows, small floats, that sort of thing, and manias going around are there strategies, short premium strategies that you can define your risk that makes sense in a name like this that is moving, you know, 30%, 40% a day? >> well, you know, it's interesting because it's very tempting to start dipping your toe into these things. one of the things that attracts options traders, for sure, is volatility the thing is, though, there are not a lot of free lunches. in a name like tilray, most of these options are four or even $5 wide. it makes it very hard to get into multileg strategies at prices that are going to be reasonable so, unless you really are prepared to spend a lot of time and attention and can trade this moment to moment, i think you're probably better off watching this one from the sidelines. >> i mean, you are looking at the options action in a lot of these stocks this week.

>> yeah. i think the most important thing is what mike just said, is that if you're looking at one option, it may have a $4 or $5-widespread. if you're looking at a spread, a call spread or a put stred, you know, double that then, right? so ifyou're going to go and pa the market in a fast market, the bid ask is almost making it impossible for you to be successful in this sort of trade. so the way i think about it is if you really need to make a directional bet, long call spreads or long put spreads, make sure that you're actually bidding for them you're not paying, you're crossing the bid-ask, and you're likely to get hit in a name like this. >> how about the other cannabis stocks out there do we see the same sort of increase i mean, we saw volume, obviously, increase. how about the price of options >> every single time you get into one of these sort of short squeeze situations where the short interest is very high, and it doesn't have to be a pot stock. we saw it a while ago in names like gopro, for example, the same situation when you have relatively small floats and you have a lot of people trying to borrow against it, you've got a lot of volatility and you get a high

cost to borrow and you get this kind of activity in the options. the one thing i would say is that if you own a stock like this and you could see that the forward price in the options market is so much lower, at the very least, consider rolling out of that stock position and into some form of a synthetic using options. we can write about that on the website and i think we'll do that but that's an important public service announcement i think for anybody who's in this. >> yeah. >> don't buy a stock that you could buy $30 cheaper in the options market. >> right, or playing gates aggregates eliminate this -- >> like the etf. >> sure. >> the group, though, trades as a group, correct they're very tightly correlated, even though tilray is to the extreme -- >> there are some lagging others, but if you look at the etf, the alternative harvest, that gives you a broad thrust of how we -- we were able to get above the january high for the first time since january and now we're consolidating at that high. >> at $100, you're dealing with an $800 billion implied enterprise value, maybe more

this is a company that had $20 million in revenue so if you're thicking geez, it's come down so far, so fast, it must be cheap now. it isn't it's not cheap now and it won't be at $100, either. >> all right. next, small caps mean big profits this year and that's good news for one of our traders. we will explain. live from the nasdaq market site, more "options action" site, more "options action" still ahead. (indistinguishable muttering) site, more "options action" still ahead. that was awful. why are you so good at this? had a coach in high school. really helped me up my game. i had a coach. math. ooh. so, why don't traders have coaches? who says they don't? coach mcadoo! you know, at td ameritrade, we offer free access to coaches and a full education curriculum- just to help you improve your skills. boom! mad skills. education to take your trading to the next level. only with td ameritrade.

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eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade welcome back to "options action." time to look back at open trades back in august, mike said small caps were the best way to play volatility in the market. >> taking a look at iwm, what we can see is that certainly over the course of the last couple of months, we've sort of been channeling in this area right here we're going to try to make a bet that this is going to continue very simply what we're doing is we're selling the 163-162 put spread, collecting $2.10 when we sell the put, paying $1.90 to cover the down side on the 162s and also selling the 171-174 call spread. >> the iwm etf up about 2% since the time of the trade. so mike, what do you do here >> so you know, this is one of those situations where we're trying to let time work on our

side, and i think the question you want to ask yourself is more of a technical one here. where this thing was going to break even on the up side was about $172.50 or thereabouts, approximately equal to the $171 strike we sold, plus the premium we collected to the down side, we can't really lose on this thing because we're only short that $1 put spread what are your thoughts >> what's remarkable is since that moment, it's been one of the most tight, sort of benign three to four-week periods in the last couple months it's literally stopped trading within a 2% to 3% range for almost five weeks. my hunch is that it will do just that, stay here. because we know that small-cap stocks outperform for a long time, but this is a moment when supercap names, certain names have come back to life and so, it's a relative underperformer and an absolute sideways >> so i've got to ask you this, supercaps. okay, we just had the dow jones go over its january high for first time since then. the s&p did it recently. there are a lot of strategists with 3,100 year-end targets, expecting a breakout and a

straight move up do you see that for the supercaps, as you like to call them >> yes, the supercaps. top five stocks are more than the.com 250 in the s&p my hunch is that we're stuck here and post elections we have a dip. >> up next, your tweets and the >> up next, your tweets and the final callymore, td ameritrade lets you trade select securities 24 hours a day, five days a week. that's amazing. it's a pretty big deal. so i can trade all night long? ♪ all night long... is that lionel richie? let's reopen the market. mr. richie, would you ring the 24/5 bell? sure can, jim. ♪ trade 24/5, with td ameritrade. ♪ does it look like i'm done?yet? shouldn't you be at work? [ mockingly ] "shouldn't you be at work?" todd. hold on. [ engine revs ] arcade game: fist pump! your real bike's all fixed. man, you guys are good! well, we are the number-one motorcycle insurer in the country. -wait.

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(indistthat was awful.tering) why are you so good at this? had a coach in high school. really helped me up my game. i had a coach. math. ooh. so, why don't traders have coaches? who says they don't?

coach mcadoo! you know, at td ameritrade, we offer free access to coaches and a full education curriculum- just to help you improve your skills. boom! mad skills. education to take your trading to the next level. only with td ameritrade. welcome back to "options action." time to take your tweets our next tweet is from a cnbc superfan, ivan, who asks, do you expect to see an election volatility premium creep into index options? if so, when? >> absolutely do vix is below 12 at the money 30-day implied volatility in the s&p right now is about 8% thp that's very close to the all-time lows. there's almost no place for it to go up but and we have plenty of reasons why it might. i think that will start as early as next week. time for the final call. options pits, carter >> xlk sell.

>> november put spreads in xlk. >> everyone's talking about yields going higher so fast, so far. i think it sets up as a good contrarian trade, tlt long. >> all right that does it for us here on "options action. see you next friday at 5:30. meantime, "mad money" starts right now. the following is a sponsored program paid for by my pillow do you find yourself sleeping too hot or too cold, not getting the support you need to help relieve painful pressure points or struggling just to get comfortable? then get ready for a revolutionary, new sleep experience. introducing the my pillow mattress topper, the next generation in sleep innovation from the company that brought you the world's most comfortable pillow. [applause]