>> wrote live at the nasdaq market site in times square. the guys are getting reviewed hip me while they're doing that here is what's coming up on the show >> announcer: talk about going up in smoke. tesla shares are in free fall. and you won't believe how low some options traders see it going. mike ko breaks it down and. >> they're magically delicious. >> maybe but soup and cereal stocks could be bad for your portfolio hell so says dan nathan and he has a way to profit. plus talk about hanging tough. despite rising oil and rising

rates, retail stocks rallied 5% this quarter but the chart master says watch out, it might be time to ring the register he will break it down. it's time to risk less and make more the action begins right now. >> and we start with retail hanging tough this quarter, the xrt retail e tf rally this last month this night of tariff concerns and higher gas prices. the xrt trading within a few% of the all-time highs best year since 2013 but the chart master says it could be in trouble. let's get to cart he plasma to break it down. >> it's been dormanen the past two to four weeks. and those who care about the fundamental apparently the comps are impossible anyway, xrt, a great etf rermt equal waiting. 9 of stops you can see the number here.

2.2 trillion and -- well a big chunk of the s&p 8.3% let's look at charts and see if we can figure it out first brands names you know biggest prominent, amazon and wal-mart great competitors. crowing crow supermarkets, wahl greens be costco was massies target, ebay what i have here is a two panel chart. the first is the xrt itself. then which is key ekey the relative performance to the s&p 500. we put in lines here i would call out the following one, what we know is that we got above and made a slight new high a slight new high. but basically we have been rebuffed there but more importantly relative performance to the s&p 50 oh, notices it's been straight down. there is no alpha here this top thing relative to the choice in the market bup what's really important is that every time we have gotten

to this downtrend line we have failed it's not a good setup. i don't like it. moving on. here is the xrt itself there is that double top let's put some lines in and see if we can show that. there it is. at a minimum i think that we're coming back to the trend line that's been in effect. and that would put us right back here and so i'm betting that that is exactly what's happening for xrt. if i were in i would take profits. but there is a message about retail and consumer in general >> all right he doesn't like it he was clear mike how you doing this. >> this is kind of an interesting one and sets up well for options. one of the things carder alluded to is the fact that xrt is equal weight what that means is names like target and kostka coand the wal-mart thefr the same amount of as car vana and kmik o and etsy honestly they have the same impact on xrt. and what ends up happening is that typically if the market

takes a downturn the volatility of those rice sharply. and if you look at xrt versus the s&p in terms of volatility it can get sharply more volatile than the s&p right now it isn't that much more it's been subdued as it has risen recently from my eye, i think the way to look at it i was looking out to december, looking specifically at the 51-47 put spread that $4 put spread costing you $1. and i think this is just -- again we are talking about a basket of stocks tip ke we don't buy puts outright on those because there is a downside limit to how much a basket or index might call in this case we have a situation where this one with some of those lesser known names -- there could be a very sharp inside in volatility in this if we start to see any kind of pullback. >> dan what do you think of mike's trade. >> i like the trade and i like first off i like the levels of target that carter is targeting down to 47 seems like a

retracement of the move over the last six or so months. as far as mike's trade he is risking one to possibly make three to get back to the level opinion and i think more importantly carter mentioned this the comparisons into the holiday season they are tough. 2016 was a horrible period for retail that's when everyone and their mother was pricing amazon to kill everything. the big box, the department stores that sort of thing. so the comps are going to be hard with this -- the etf kind of stalling here, i think if you get any bad news the next couple months you'll have this xrt back towards 47. >> actuallythat comps comment is also an important one the xrt is 20% higher than a year ago the multiple remains the same and the forward multiple remains the same what that tells you is that the market is basically pricing in a great deal of growth here. and you know, generally speaking when you think growth might tail a little bit -- because that was obviously impressive talking about 20% earnings growth for the entire basket over that period of time do you think that kind of thing is going to continue

i mean, that's the kind of multiples they were assigning. i think it's optimistic. >> if you think about some of the best performners the standard and poors 50 ots massy off the low processes aber kronl, left for dead, chip poelgts. a lot of stocks went too far too fast that's the risk. they have done such a precision there is not an incremental dollar to go there. >> the specific constituents among the megacap stocks in this also are stocks that once were cheap but are no longer. i think wal-mart is the most prominent example. a stock a lot of people said well obviously it's facing significant pressures from amazon they hadn't figured out the online presence story. not that it weighs on the index but it tells you have small stocks where there is greater risk and large stocks that have run far fast. >> now to an area that of let consumer space, the staples, the safety stocks acting like anything but this year down 5% processes as a worst performing sectorer of 2018 dan says it could get worse and one of the biggest names in the group

reports next woke. walk us through, dan. >> pepscy is reporting talking about consumer staples here this is kind of an interesting conversation right after that retail one you know, consumer staple stocks have the worst performing secretary ner the s&p right now down 3.5% on the year. the xlp, the etf that tracks the sector is made up different than the xrt. the top five stocks make up eye% of weigh pepscy coke, proctor and gamble, phillip morris and wlrnlt process. all i've stocks act badly .best on the year is unchanged on the year the worst one phillip morris is down 23% on the year i'm not holding my breath for any of those names to report q 3 earnings and drag this sector up lab. so i thinks pepscy how it reacts next woke the options market is not complying a big movement 2% in either direction. but how the stock reacts how investors take it could be interesting. earlier in the year the group was volatile input costs went higher you know and margins were pressed a little bit

this group trades expensive to the broad market here. so as i think about the chart and the technical setup here, look at this uptrend since 2011. it broke it earlier in the year when things started to getted about. just got rejected there. i want to play over the next couple months or so for a move back below 50 bucks here so very specifically, the trade when the stock was trading at 53.85, the xlp you could simply low back out to november expiration by the november 54 put paying 90 cents. they brake even at 53.10 down 1.5%. that's the max risk. one of the things interesting when mike talked about the equal weighted xrt and why to sproid it there is not a lot of risk when you have five stocks making up 50% of the weight there is where you want to let it run a little bit i'm in the money on the 54 strike and i want to see this thing start moving back down closer to 50 and at some point i may spread it by selling a lower

strike put in november to make a vertical put spread. >> yeah, you know it's interesting, again, the he was engs ming he didn't use a spread here the xrt is more volatile than this particular one is and you'll notice that actually this option costs about as much as a spread in the other which is why going ahead and buying that put outright also makes a lot of sense we obviously have the upcoming earnings season in here. as he mentioned you have a halve of stocks that could make it move around a decent amount and the options are cheaper which justifies the structure. >> as a setup goes, the key thing from my seat is what dan showed on the skroen there which is a long assent and then initial breck, followed by a throwback to the point from which it broke that historically is a very bad situation to be in you've had a lot of volatility -- remember the beta of the staple as a sector is.82. more volatility really than the market of late in a dormant

asset that breaks and recovers the likelihood of failure here is high. >> does the outlook change, dan if the markets break down if you see a pullback in the markets is there a safety trade. >> it's funny i'm not worried about that preponderates is the one thing we didn't talk about, right. a lot of the names we talked about that make up the big weight have great are than 3% dividend yield we know with the 10 year back above 3% that's one of the reasons they have lost luster but i don't think that we're in a position where if the market is higher these stocks are not going to perform they're the worst acting in the broad market if we go lower i expect them trading at the frothy p.e. levels in the high teens, 22%, p.e. for some. i don't see them going higher and outperforming on the downside either. >> all right for everything "options action" check out the website. which will there be sure to sign up for the news letter it's been likened to the pravda of options. what are youway waiting for here

is what's coming up. >> you want to see something scarey. >> check out shares of tesla continuing to get pounded. mike ko tells you how to profit. plus calling all "options action" fans reach into your pocket, grab your phone and tweet us your question at "options action. if it's nice, we'll answer it on air, when "options action" returns. see that's funny, i thought you traded options. "options action" is sponsored by think or swim by titrade, we cau "options action" is sponsored by 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 the nation's largest senior-living referral service.

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you know your family, we know senior living. (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." tesla plunging and having the worst day in five years after the s.e.c. sued elon musk for securities fraud, sparking a flurriy of activity in the options market let's get back to dom chu at

headquarters to break it down. hey, dom. >> if you thought that tesla stock was all over the place, melissa, look how the options are doing. options volumes surged for the shares on the heels of the s.e.c. lawsuit alleging fraud by founder and ceo elon musk. tesla was the most active single stock name with nearly 800,000 contracts changing hands most of those were puts. those put contracts giving you the right but not obligation to sell the stock at a lower price. saw more than 4 times the average daily volume you could say that the options were sizzling. so you will a of that activity has translated into a surge in implied volatility or the price for those options. in fact, options prices on tesla are at their highest point of the year melissa, it might take a little while longer before trading gets back to whatever you want to normal for tesla shares. and of course those options. back to you. >> all right, dom thanks so with the stock down 14% today, somehow should you play

it. >> mike with his call to action. >> sure what we're looking at is actually playing a range bound thesis the thing is dom just pointed out the stock is moving around sharp lirp in the options are extremely expensive and implying it's moving around sharply this range that we are talking about is going to be a very wide one. the the thing is doing this usually means you look to sell options. is there a way to do this but also limit the amount of risk we are taking to take in premium. if we take a look at the stock over the course -- back to january of 2018, the beginning of the year we can see this thing had a huge range you know, actually i was looking at this earlier. this right here was essentially one of the first tweets that elon musk threatening the shorts would have trouble and that they would see something explode in their faces in three weeks about three weeks later they were up 14%. i guess he meant the profits would explode. then of course this is when we saw the tweets about the potential of it going to private. so now that the stock has

obviously fallen sharply and almost down towards these lows what kind of a trade might we be able to use? i'm looking essentially as trying to play a range that is as i pointed out going to be pretty wide. i'm looking at a range of about 200 to the downside and 300 to the upside the at the money straddle was up to 60 bucks looking at this earlier today. specifically i'm looking at buy a march 240 put. costing me $38 and then selling a november 240 put for 2050. >> this can be cusicking because this tells us what the profit and loss is looking like after the november put expires until then the november put will dekay more rapidly than the march one i'm long actually what happens is if it finished at the 240 level that's the best i can do because that long dated put still preserves a

lot of value but the november one isn't going to have any. if it goes down down to around 200 that's what he the profits start dropping off down at that level and then up around 300 the same thing happens but this is like selling a straldle the advantage is that i'm not short naked put and not short a naked call which would have unlimited risk. >> dan what do you think of mike's strategy. >> i really like it. it obviously leans to the short side a little bit it's important to note that the short strike is in november. so he is looking out about like six or so weeks from here. he doesn't want to really be short options too much longer than that. but then he sets up to own the longer dated put which he helped finance, the 240 to thetown side that's more than 10% i'll make another point mel you said the stock was down 4% shockingly only down 15% on the year i would assume we are having a major move one way or the other on this. it looks like traders right now or at least investors are bracing for that to the

downside. >> carter was making the interesting point that 14% is not a huge move for a stock like tesla. >> in the sense that in any given day that's the ski for tesla. >> right. >> one of the movies transfer the equity assets there is with the short interest that there is and if facebook can drop 25, 27 in a matter of two or three days, tesla could have been down 40%. that thing happens in biotech. this is a binary thing too either this company is literally the most overpriced there is or he changed the world did he in many ways do that. but the maybe the asset reflects that the volatility is normal in a way. >> sure. >>en a the level -- we were here a week ago and we were here in march. exactly at this point. >> they could easily go lower like i mentioned the options market is implying movement of almost $60 from where it closed today that would take you to down to 200 cutting the stock in half from the tweet

news propelling the stock higher i do think the upside is limited. it looks like you're fading do to the sound zblood it is hard for me to understand what could take it higher the thing that could have done it would have been if elon had actually settled that offer if that -- what was reported is correct, that could have basically helped stabilize things the other thing that could potentially end of october get some earnings information, do they somehow miraculously get to cash flow break even that would be material too. >> we will get delivery numbers this weekend, i believe. so, dan, let's say we get delivery numbers and the stock reacts positively. does that make you rethink maybe the stock can move on fundamentals >> fundamentals don't matter until the thing with musk is cleaned up one really quick point about that 15% drop, very unique situation, musk owns about 20% of the stock he he is never selling there's about 26% short interest they match that thing up a

little bit. >> still ahead, banks getting slammed this week down more than 4% but dan has a way to profit from the breakdown. he will explain. plus got a question for one of the traders. send us to a tweet if it's good we will answer it later. we are live in nasdaq markets. times square more "options action" right after this (indistinguishable muttering) 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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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 welcome back to "options action." it's time to look back at some of the open trades two weeks ago dan said there was trouble brewing in the banks >> i mean there was some decent news out of goldman. there was decent news out of jp morgan decent news out of citi on the fundamental front. the stocks couldn't rally. i'm not certain what they're going to say on q 3 earnings in mid-october that's taking this up you can look at november expiration buy the 28-26 put spread paying 40 cents for that. >> and dan was right the xlf falling 4% this week

dan how are you trading the financials now. >> you stick with this trade in and out mel. right at the break even. you have the setup for the earnings season. i can't tell you how much i hate this group seems like every day we have a new analyst pb pundit or investor telling us how the great rotation is happening in the bank stocks and finally participate. there is one global bank stock actually up on the year jp morgan might have just gotten rejected as a massive, massive double top if there is no good news in earnings in the next couple weeks this sector is going lower in my opinion. >> also two weeks ago mike said netflix's big rally was getting started. >> it's what we have noticed is that the current price of options is implying a move lower than that which we have actually experienced. it's implying a move about 7% on evenings over the last 8 quarters averaged about 8%. right now options are looking like a decent value pl i was specifically looking at 375-4.15

call fred. 18.60 looking at those earlier today. and i could sell these 4.15 calls for shh 6.15. >> and good call, mike since the time of the frayed shares in netflix jurpd 3% what are you doing now. >> obviously we were targeting a bigger move. we also put on options position that would capture earnings. i could understand if somebody put the trade on a couple days ago we saw 3.84 maybe some of you took profits backup. but that wasn't what we were schutting for i'm going to defer and see what carter has to say. >> you have a tfrg by the tail meaning this stock acts better than the tech sector. >> i haven't heard that in a long time. >> acts better than the fang index, better than the market. and it already had a big drawdown that's the circumstance with the amazon and the steep names i like it a lot. >> up next we have the tweets and the final call stay tuned oh, and there's the closing bell. (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. ♪

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and swimming pools, public cafes, bars and bistros even pet care services. and there's never been an easier way to get great advice. a place for mom is a free service that pairs you with a local advisor to help you sort through your options and find a perfect place. a place for mom. you know your family we know senior living. together we'll make the right choice. (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 first tweet at the time is by chad if you think you own is going to go down is it better to sell or deep in the calls or buy a put for production. >> i'm assuming you can't sell the stock itself that would be one of the things you could consider but i would buy puts rather than selling deep calls a lot of time there is no premium in there those. >> the next from joseph. says high guys love the show can you tell me what percentage of a loss you typically close out of options trades dan take that one. >> a great question i use a 50% premium stop on long premium drexel trades once you get below that, the probability of a toemgts loss increases dramatically. >> all right time for the final call dan kick it off. >> yeah, xlp november 54 puts. >> carter what about. >> you xrt retail likely lower >> mike ko. >> the xrt the best way to play look out to does

51-47 put spread a bear ib bet there fl thanks for watching see us back here next friday at 5:30 p.m. eastern time don't go anywhere. "mad money" with the one and only jim cramer starts right now. ♪ hey i'm kramer, welcome to our last night from cnbc one market in san francisco. welcome to "mad money. people want to make friends i'm trying to make you money my job is to teach and educate, not just to entertain. so call me or tweet me the third quarter is in the bag and it's been a good one, best in five years. even september was good and historically that tends to be a rough mo