we're live at the nasdaq markets in times square. here's what's coming up on the show >> 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. soup and cereal stocks could be bad for your portfolio's health so says dan nathan, and he's got a way to profit. plus, talk about hanging tough. ♪ oh, oh, oh despite rising oil and rising

rates, retail stocks rallied this quarter, but thechart 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 rallying more than 5% in the last three months, this in spite of rising rates, tariff concerns and higher gas prices. trading within just a few percent of its all time highs. the chart master says the retail rally could be in trouble. let's get straight to carter to break it down. >> it's actually been quite dormant for the past two to four weeks, and those who care about the fundamentals, apparently the comps are going to be nearly impossible as we go forward. anywhere, xrt it's a great etf, almost equal weight. it's 96 stocks you can see the numbers here,

2.2 trillion, and well, a big chunk of the s&p, 8.3% first, the brands, the names you know, some of the biggest and most prominent including amazon and walmart. great competitors. krogers supermarkets, walgreen's, costcos, macy's, jewelry, ebay target what i have here is a two panel chart. the first is the xrt itself, and then the relative performance to the s&p 500. we put in some lines here, i just 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've been rebuffed there, but more importantly, relative performance to the s&p 500. notice of course it's been basically straight down. there's no alpha here, this top thing relative to your choice being in the market, but what's really important is that every single time we have gotten to

this down trend 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 going to come 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 going to happen with xrt. there's a message here about retail and consumer in general. >> all right, he doesn't like it he was pretty clear. mike, how are you doing? >> this is kind of an interesting one, and it sets up well for options one of the things carter alluded to is xrt is equal weight. names like target and costco and walmart, they have the same amount of that as they have of names like ulta and chicos and etsy honestly, those have the same impact on xrt, and what ends up happening is that typically if

the market takes a downturn, the volatility of those rise sharply. if you take a look at xrt it can get sharply more volatile than the s&p. right now it isn't that much more it's been relatively subdued as it has risen recently. inthe way to take a look at at this, i was looking to december, i was looking specifically at the 5147 put spread. that $4 put spread would cost you $1 i think this is just, you know, again, we are talking about a basket of stocks typically we don't buy puts outright on those because there is some downside limit to how much a basket might fall in this case we do have a situation where this one with some of those lesser known names, there could be a very sharp increase in volatility in this thing if we start to see any kind of a pullback. >> dan, what do you think of mike's trade >> i really like the trade i like the levels that kargtcari

targeting there, down to 47. it seems like a retracement of the move over the last seven months i think more importantly carter started to mention this, those comparisons as we go into the holiday season, they're really 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 really hard so with the etf kind of stalling here, i think if you get any bad news over the next couple of months, you're going to have this xrt back towards 47. >> that comp kind of i think is also a really important one. the xrt is about 20% higher than it was a year ago. the multiple remains the same and the forward multiple remains the same the market is basically pricing in a great deal of growth here generally speaking when you think growth might tail a little bit, because that was obviously impressive 20% earnings growth for the entire basket over that period of time, do you think that kind of thing is going to continue?

that's the kind of multiples they're assigning to it, i think they're optimistic. >> some of the best performers have been macy's, abercrombie, a lot of stocks that have gone too far too fast basically they've done such a provision that there's not an incremental dollar to go there. >> the specific constituents among the mega cap stocks also are stocks that once were cheap and are no longer. walmart is the most prominent example. that was a stock that a lot of people are saying obviously they're facing significant pressure from amazon what it does tell you is you have snamall stocks with greater risk: now to one area of the consumer space that has been sitting out the rally, that is the so-called safety stocks acting like anything but this year down 5% as the worst performing sector of 2018. one of the biggest names in the

group reports next week. walk us through. >> pepsi is reporting. we're talking about consumer staples here this is an interesting conversation right after that retail one consumer staple stocks have the worst performing sector in the s&p right now. they're down about 3.5% on the year the etf that tracks the sector is made up very different. the top five stocks make up 50% of the weight, those are pepsi, coke, procter & gamble, phillip morris and walmart the best one 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 drag this sector up a little bit i think pepsi how it reacts next week, the options market is not imploo implying a big movement. how investors take it could be interesting. earlier in the year it was very volatile margins were getting pressed a

little bit this group trades expensive to the broad market here. as i think about the chart and the technical setup here, look at this uptrend since tler2011 it just got rejected there i want to play over the next couple of months or so for a move back below 50 bucks here. so very specifically the trade when the stock was trading at 5385, that's the xlp, you could simply look out to november expiration by the november -- those break even at 5310, down about 1.5% mike was talking about the equal weighted xrt and why he wanted to spread it there's not a lot of idiosyncratic -- this is where you want to let this one run a little bit i'm already 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. >> it's really interesting, again, he was mentioning he didn't use a spread here the xrt is much more volatile than this particular one is, and you'll notice that actually this option costs about as much as a spread would, which is why going ahead and buying that put outright makes a lot of sense. we have an upcoming earnings season here. as he mentioned you've got a handful of stocks that could make this move around. the options are a whole lot cheaper, which justifies the structure. >> as the setup goes, the key thing from my seat which is a long assent, and then an initial break 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 the beta the staples as a sector is about a 0.82. more volatility really than the

market of late of a dormant asset, that breaks and then recovers the likelihood of failure is high. >> is there a safety trade >> i'm not really worried about that, and you know, rates is the one thing we didn't talk about, right? a lot of those names that we talked about that make up a big weight have greater than a 3% dividend yield with the ten-year back above 3% that could be one of the reasons they've lost a little bit of their luster i don't think we're in a position if the market goes higher these stocks are not going to perform if we go lower i expect them trading at the frothy pe levels and the high teens, 22% pe for some of them, i don't see them going higher and outperforming on the downside either. >> all right, check out our website. while you're there, be sure to sign up for our news letter. it's been likened to the pravda of options so what are you waiting for? here's what's coming up next

you want to see something really scary, then check out shares of tesla. plus, calling all options action pass. 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. 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

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tesla having its worst day in five years after the s.e.c. sued elon musk for securities fraud, and that sparked a flurry of activity in the options mark. let's get back to don at headquarters to break it all down. >> reporter: if you thought tesla's stock was all over the place, take a look at how the options are doing. options volume have surged for those 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 those put contracts, which give you the right but not obligation to sell the stock at a lower price saw more than four times their average daily volume you could say that those options were sizzling. all of that activity has translated into a surge in implied volatility or the price for those options.

options prices on tesla are at their highest point of the year. it might take a little while longer before trading getting back to whatever you want to call normal for tesla's shares and of course those options. dom, thanks. how should you play it mike's at the plaza with his call to action mike. >> what we're going to be taking a look at is playing a range bound thesis dom just pointed out the stock is moving around very sharply, and the options are also extremely expensive. so this range that we're talking about is going to be a very wide one. the thing is doing this usually means you're going to look to sell some options. is there a way we can do this but also limit the amount of risk to take in some premium if we take a look at the stock back to january of 2018, so the beginning of the year, we can see this thing had a huge range. this right here was essentially one of the first tweets that elon musk made threatening that

the shorts were going to have trouble and they would see something explode in their faces in three weeks three weeks later they were up 14%. right here of course is when we saw him make these tweets about the potential of it going private, so now that the stock has obviously fallen quite sharply and we're almost down towards these lows, what kind of a trade might we be able to use. i'm looking essentially at trying to play a range that is going to be pretty wide. i'm looking at a range of 200 to the downside and upwards of about 300 to the upside. the at the money straddle was about 60 bucks going to november when i was looking at this earlier today. what's the trade specifically i'm looking at buying a march 240 put that would cost me $38, and then selling a november 240 put against it for 20.50 net net i'm spending 17.5 to put this on.

this chart can be confusing. this tells us what the profit and loss is going to look like after that november put expires. that november put will decay more rapidly than the march one that i'm long, and actually, what's going to happen is if it just finishes right at this 240 level, that's the best i can do. the november one isn't going to have any if it goes down, probably down to around 200, that's when my profits are going to start dropping off at that level and up around 300 the same sort of thing is going to happen this is little bit like selling a straddle the advantages that i'm not short a naked put and not short a naked call >> dan, what do you think of mike's strategy? >> i really like it. i think it's really important to note that the short strike is in november he's looking out about six or so weeks from here. he doesn't want to be short options too much longer than that, but then he's setting up to own that longer dated put which he's helped finance and

that 240 to the downside, that's obviously more than 10%. you just said the stock was down 14% today. shockingly it's only down 15% on the year i would assume we are going to have a major move one way or the other on this one, and it looks like traders or at least investors are bracing for that. >> carter was making the interesting point earlier that 14%, that's not really a huge move for a stock like tesla. >> in any given day that's what the key is for tesla one of the most controversial equity assets there is with the short interest that there is, and if facebook can drop 25, 27, tesla this could have been down 40%. that kind of thing happens in biotech. this is a binary thing, too either this company is literally the most overpriced asset or he changed the world. the volatility is normal in a way. and 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 down to 200 which would be basically cutting the stock in half from the immediate, you know, tweet news basically propelling the stock higher i do think the upside is significantly limited. dan mentioned, he said it looks like you're fading it a little bit to the downside. it's really hard for me to understand what could come out in the near term that would take this stock sharply higher. the thing that could have done it would have been if elon had actually settled that offer, if what was reported is correct, that could have basically helped stabilize things the other thing that could potentially end of october we'll get some earnings information, do they somehow miraculously get to cash flow break even. that would be obviously 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 that maybe the stock could move on fundamentals >> fundamentals don't matter until this thing with musk gets cleaned up very unique situation, musk owns about 20% of the stock he's never selling so they kind of match that thing up a little bit. banks getting slammed down more than 4% dan has a way to profit from the breakdown he'll explain. >> send us a tweet, if it's good we'll answer it later in the show we're live at the nasdaq markets in 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.

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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 welcome back to "options action." it's time to take a look back at opening trade. two weeks ago dan said there was trouble brewing in the banks. >> there was some decent news out of goldman there was decent news out of jpmorgan there was decent news out of citi the stocks couldn't rally. i'm not certain what they're going to be able to say on q3 earnings when we get into mid-october that's going to take this sector up you could buy the 28, 26 put spread, paying $0.40 for that.

>> and dan was right, falling 4% this week. how are you trading the financials now >> yeah, i think you stick with this trade it's right at the break even you have this trade setup for the earnings season, and i just can't tell you how much i hate this group it seems like every day on fast money we have a new pundit or a new analyst or a new investor telling teus how this great roesatiroe rotation is happening and they're finally going to participate. there's one up and it's jpmorgan, and it might have gotten rejected. if there's no good news, this sector is going much lower. mike said netflix's big rally was just getting started. >> what we've noticed is that the current price of options is implying a move lower than that which we've experienced: it's applying -- it's averaged about 8% options are looking like a decent value

i was specifically looking at the 375, 415 call spread these were $18.60 when i was looking at those earlier today and i could sell these four 15 calls against it for $6.15. >> good call, mike since the time of the trade shares of netflix have jumped 3% what are you doing with it now >> obviously we were targeting a bigger move. i could understand if somebody put this trade on a couple of days ago we saw about 384, maybe some of you took your profits. that wasn't what we were shooting for right now this trade is only up about a buck or so i'm going to defer and see what carter has to say about it. >> i think you have a tiger by the tail here, this stock acts better than the tech stock >> i haven't heard that in a long time, tiger by the tail. >> better than the market, and it already had a big drawdown. that's not the circumstance with amazon and some of the steep names. i like it a lot. >> up next we've got your tweets and final call oh, and there's the closing bell.

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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 chad asks if you think a stock you own is going to go down, is it better to sell or buy a put for production >> i'm assuming you can't sell the stock yourself that would obviously be one of the things you could also consider i would buy puts instead of selling deep calls a lot of times there's no premiums in those. >> joseph, says hi, guys i love the show what percentage of a loss do row typically close out of options trade? >> that's a great question i use a 50% premium stock. once you get below that the probability of a total loss increases pretty dramatically. time for the final call, dan, kick it off. >> xlp november 54 put. >> carter. >> xrt retail likely lower. >> mike co, i think for xrt look

out to december, the 51, 47 put spread for a buck looks like a good way to make a bearish spread. >> thanks so much for watching you can see us back here next friday "mad money" with the one and only jim cramer 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]