hey, there we're live from the nasdaq market site in times square. we have a big show for you tonight. here is what's coming up ♪ unbreakable netflix shares soared today after a wild week. >> it's merrickle! >> but the chart master tells us don't trust the bounce he'll tell us why. plus, industrials are getting crushed! >> ahhhh >> chill out, dude, because mike khouw has a way to protect from more losses. and ship stocks are sinking and dan nathan says the recent sell-off is the tip of the iceberg.

he'll lay out the trade. it's time to risk less and make more the action begins now. welcome. we start with the chip stocks rallying today but closing the week down around 5%, and it was a number of once high-flying names hit hardest, nvidia, advanced micro, intel, taiwan semi, all getting crushed. the group now on track for its worst month in six years could the move be the beginning of the end of the chip rally let's get in the money now and we are all over the map today. dan and mike out in san francisco, carter is at the plasma dan, we start with you and your semis trade. >> hey, scottie, how are you like you said, the semis had a really bad week, down 5% on the week and today's bounce wasn't particularly impressive, in my opinion. i think it really sets up for a retest of today's lows we have a quick one-year chart here it bounced off the low that it made a few months ago, but this is an index, the smh, the etf that tracks the semiconductor space, that made its high for

the year back in march it's never even tested that again. it's been rolling. then when you think about all of the issues that we have regarding this potential trade war with china, semiconductor companies are right in the middle of this, and i think they're taking a big brunt of this and i also think that the early-year strength had to do with a lot of double ordering in fear of a potential trade war. so, to me, you know, you had this bounce today off of 95-ish. i have a five-year chart here. i think this is really important, and carter can speak to it in a little bit, but it broke the uptrend in place from the 2016 lows. i think there's a really good shot that if we bounce a little bit more early next week, it sets up as a great candidate to put back out as a short. i want to look to november expiration we do have a couple data points, though next week, taiwan semi, the largest component of the smh, reports earnings it's a really important company. 17% of their sales come from apple, and they make chips for qualcomm they make chips for amd, for

nvidia and texas instruments so, this could be the catalyst so i want to put this trade on early next week. i want to bounce a little bit more on monday in the smh. this could be a good hedge if you own nvidia or amd or some of these that are still up a lot. looking out to november expiration, when smh was trading at 97 bucks, you could pay $2 for the put spread, breaking even at $93. you could make $5 between $93 and $85. your max risk is about $2, about 2% of the stock price. again, this is a sector etf that is basically down a couple percent. it's got a few large components that are holding it up if earnings season doesn't hold up here for those big ones, this thing's going lower. >> all right carter, what do you think? >> yeah, i mean, you can see the line's drawn it's a fairly textbook uptrend and then a break in trend, just as dan described it. one thing i would point out, of course, which is also part of that, not only do we have -- and you see a two-panel chart

here -- not only do we have a break in trend, but what we have is deteriorating relative performance. and really, in many ways, that's what alpha is, right the opportunity cost to be in one thing versus something else. so, as depicted here, essentially, semis have been in a range for the better part of eight to ten months, but they've not been in a range in terms of relative performance, and you can see here, if i just zoom this in, we've basically -- we're breaking down on a relative basis, i.e., performing much worse than the market in fact, the semiconductors socked in on the year where the s&p is still up about 3.5% absolute down, relative worse. it's never a good setup. >> how about mike? what do you think about this trade? >> well, i think using a put spread here is going to make a lot of sense, and one of the reasons is that because the market has rolled over even net of today's bounce. we've seen a really steep increase in the price of options, implied volatility. when you go out and buy

outrights, typically, you like to do that when options are inexpensive. maybe you do that when you think the market might roll, but once it's already started to do that, one, you've seen a portion of the decline you're likely to see, and the second thing is you've seen that increase in options premium. so that's when using the spreads make a lot of sense. and another reason that you would see the elevated options premiums is that we are entering earnings season, a period where you'll generally see elevated options premiums anyway. combine that with the volatility over the past week and you want to look to spreads to make your directional bets right now, i think. >> danny, final word. >> i would make one last point so, we had a really rough week there was a lot of groups that got really beaten up today was a huge, huge bounce day, but it wasn't that impressive i mean, you know, it doesn't follow through on monday, i think the market's going to have real problems, so this is not something i'd want to press a short, a group that's acted poorly, and precedent the lows let's see monday afternoon, and if it doesn't feel like a great

two-day bounce, that's when you put this trade on. >> good stuff. now, netflix shares soaring after a brutal sell-off this week, up about 6%, bouncing off key support, this after citigroup upgraded the streaming giant to a buy this morning. that's despite today's move, though netflix shares still down nearly 20% from its june high so, how should you play it into earnings next week who has the answer, but the chartmaster! break it down for us, carter. >> i'm not sure i have the answer, but i'm going to try to give an answer, or a answer, rather than the answer so, a couple things, that optically, there is a risk, is that this is something of a head-and-shoulders top, and those are reversible formations that have implications but let's move forward and take a look at what netflix has done. what netflix has done, it looks a little crowded here. but basically, since, basically, the spring and summer of '16, over the past two years, you've had major sell-offs. as we know, this is 19%, this is

14%, 13%, 14%, 13%, 18%, 19%, 26%. we just had another 18%. the question is, is this just a very volatile stock? of course it is, but is it out of the woods on this next earnings print let me get rid of all those circles and things and put in the trend line that effectively has been in play for the past two years. so, the thinking here from my point of view is that we are going to come back to trend, that the head-and-shoulders top is in effect, and that would take us down it looks like nothing, but that's another 10%, 12% to get down to that level so, i'm going to stop it there my hunch is that there's more risk than there is opportunity. >> all right we'll see what the trade is, then, michael. >> yeah, so, i was just looking out to november, looking specifically at the put spread you could spend $12 for that i think it's important, two things here.

number one, netflix typically moves very sharply on earnings we've seen a lot of sharp up moves as well as down moves. right now it's applying about an 11% move but here's something else to think about. in the month that follows earnings, this is a stock that typically moves about 16.5%. that implies a range that goes down to as low as $280 or maybe slightly lower, and obviously, sharply higher i think if you're going to make a bearish bet, considering the elevated options premiums we were considering earlier, this is definitely a place you want to be using spreads as well. same situation as we were looking at before, elevated options premiums this thing could move a lot. this captures that range, by the way. you'll notice that the downside put spread we're selling $2775 is just below the 16.5% move we've seen typically after earnings. >> i would say -- >> it is a big mover usually on earnings. >> no doubt about it for a company that actually has a $150 billion market cap or so, implied movement in the high

single digits is pretty massive, scott. i would just say this, that the target of this trade is really interesting because it lines up really well with carter's technical levels that low from april, down about $275 or something like that? that seems like a level where if they miss and continueto go lower, that's probably the spot there. >> yeah, i mean, that's exactly right. one of the reasons we identified this particular spread, and it seems like a wide one. we're talking about a $50-widespread, is because of that movement and also targeting those specific levels. so, i think this is definitely a situation where, you know, number one, we want to use the spread because of the elevated premiums, but look to your levels really carefully. how far do you think it could move and in what kind of a time frame? here we're specifically targeting about a month after the earnings are going to be announced. like i said, $280 if it moved that 16.5% that it's historically moved to the down side, it will be hitting that level of that other strike. >> you've heard it, level from dan, level from mike, and there is a key level there's also a gap, and we'll just zoom in here.

there's a gap left behind on an earnings beat. often, gaps are filled it doesn't have to be that way, but that would be exactly where this level comes into play seems to be the risk is to the down side. >> all right, guys, good stuff for everything "options action," check out optionsaction.cnbc.com and while you're there, sign up for the "oa" newsletter. i read it before the show. it was amazing, i promise! here's what's coming up next ♪ industrial stocks are burning investors, but if you own any of these beaten names, mike khouw has a way to limit your losses. plus, calling all "options action" fans reach into your pocket, grab your phone, and tweet us your question @optionsaction. if it's nice, we'll answer it on air, when "options action" returns. i don't know what's going on. >> announcer: "options action" is sponsored by think or swim. looked at chart patterns. i've even built my own historic trading model.

and you're still not sure if you want to make the trade? exactly. sounds like a case of analysis paralysis. is there a cure? td ameritrade's trade desk. they can help gut check your strategies and answer all your toughest questions. sounds perfect. see, your stress level was here and i got you down to here, i've done my job. call for a strategy gut check with td ameritrade. ♪

♪ i'm in love with you ohhh ohhh ♪ some things are meant to be together. get the new iphone on xfinity mobile ask how you get xfinity mobile included with xfinity internet so all you pay for is data. and now get $200 back when you buy a new iphone. click, call, or visit a store today. click, call, or visit a store today. (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." industrials melting down this week, the group sinking more than 6% as one of the worst performing sectors in the market for more, let's get to bob pisani down at the new york stock exchange robert >> hi, scott industrials has suffered more than most sectors in the recent downturn, and with good reason, they're exposed to most of the issues that are most worrying investors. let's run down the checklist of worries. higher rates, check. higher raw material costs, check. stronger dollar and weaker foreign currencies, check. tariffs, check

potentially weaker chinese economy. for many industrials, check again. little wonder industrials and their close cousins, materials, are the worst performers in the latest downturn, down 8% since the turmoil began last week. that's worse than technology, down 7%, financials down 6%, and far worse than health care and consumer staples but a lot of the biggest names have had larger declines with dow components caterpillar and boeing down 11% and 9% respectively, 3m's down 8% eaton, fedex, lockheed martin almost down as much. then there's the airlines. rising fuel costs, canceled flights due to hurricanes and worries about too much capacity have combined to make it a miserable year for airline investors. even as consumers are traveling more than ever back to you, scott >> all right, bob. thank you so much. bob pisani down at the new york stock exchange so, if you own any of these big industrial names, how can you protect yourself from more losses let's kick it over to mike with

his "call to action" on ba that's boeing, mike. >> yeah, i was taking a look at boeing, and i think we are actually seeing a setup now in the market to do this kind of a trade, which we're going to be looking at right now, a covered call in a lot of stocks. the first thing i would talk about here is resistance there hasn't been much resistance for many stocks, but i think there might be once stocks start to break down, you create levels of resistance above where they're currently trading. the other thing right now is, of course, because of all of this, options have become a lot more expensive. and as we were saying, because we have upcoming earnings, that only adds to that. finally, the reason we typically use covered calls is to try to collect some premium when you own stocks, there's really only a handful of ways to make money the stock either goes higher or you collect dividends, maybe a combination of both, but when you use options, you have the opportunity also to take in premium when you sell upside calls. specifically, i was looking out to december at the 375 calls you can collect 10 bucks for those when i was looking

earlier. the stock at the time was trading about $358 the idea is you'll basically collect the $10 if a stock should rally up to the $375 strike, you're going to keep the premium. above that, you could have the stock called away from you however, net of the $10 that you've collected, you are actually going to net about $385 on your stock. and i don't think there's a really good chance that the stock's going to blow through those levels between now and december expiration. and the other thing is that if the stock just sits here and goes sideways, or even if it goes slightly lower, you're actually going to buffer the down side somewhat with the premium you're collecting. i typically like to collect about 1% a month or more i think that's basically what justifies taking the risk of selling that upside call to begin with here we're collecting about 2.6% of the current stock price in 70 days. >> yeah, i think the most important point mike is making here is that this was a low-vol name boeing, implied volatility, the price of options was about 20% this is about a month and a half ago. and now it's about 30% so, mike's taking advantage of the fact that options premiums have gotten much higher as the

stock just declined 8% and now he's looking at that resistance and saying, you know what, this is a stock that spent most of 2018, after an early ramp, in a consolidation it broke out, it failed. now he's targeting a level where he's willing to basically get called away up at $385 so, to me, i think this makes a lot of sense, this trade idea. he's taking about 2.5% over the next 2 1/2 months or so if the stock stays range-bound. >> typically after earnings, this is a stock that moves about 6.5% in the month following. it's going to have to move more than 7.5% to the up side before this trade actually looks like a fail and the only place it does look like a fail if you own the stock is if it happens to rally significantly through that $375 strike. >> one other point about an override mike said you would be called away at $375, but effectively take that $10 in premium you're receiving, that's $385 if you got to a level above that short call strike, you don't actually have to have your stock called away. you could cover that short call. you would be taking a bit of a loss on it, but that's how you

would keep the stock position in place if you do not want to be called away. >> yeah. carter >> well, i mean, really, the same setup in many ways as semis, but also with a twist so, boeing, as you can see here, basically over the past three years, '16, '17, '18, has effectively gone from $100 to $400, hit a high of about $395 then it's been consolidating for the better part of 11 months, which is often a bullish setup where you have a big run-up and consolidate to ultimately assert yourself again while it was consolidating, it's basically been a market performer. then, bull trap, you have a lot of people buying because, quote, it's breaking out, whether it's chartis or fundamental individuals. and it turns out that that is just exactly what that was, a bull trap. we didn't break out. we got here and we faltered. so, the relative performance never confirmed. the absolute breakout, i think you've got people maybe trapped here, having purchased it for

the breakout only to have to reverse themselves it's not the greatest setup at all. industrials themselves just moving forward here is the xli. and of course, it's optically very clear, isn't it i mean, a well-defined uptrend and a break in trend and this is the worst part if you do break trend and then you try to rally all the way back to the underbelly of the trend line, and then, of course, fail again, that's not a good sequence and then you see quite closely here, it was an epic double top. i mean, no thanks. >> mike, you want to comment on that >> yeah, you know, it's interesting. right before we came on the air, we were talking to mark lehman of jmp securities. one of the comments he made is that there are sellers higher. it definitely felt that way to me today every single time we caught a bid, seemed like we had ample sellers coming in. it makes me feel like we have a lid on prices at this point. maybe in this stock, maybe in

the industrials generally, and maybe in the broad market. so that's one of the reasons why a strategy we haven't talked about as much lately is one i'm more comfortable with here, which is look to sell covered calls against stocks that you own as a way to take in a little bit of additional premium, because you might not start seeing a lot of appreciation between now and the end of the year, i think. >> interesting all right. still ahead, banks under pressure earnings are under way, and one name in the group could see a bigger breakdown we're going to tell you what it is plus, got a question for one of the traders? you are in luck, because we are taking your tweets later on in the show as you know, we are live tonight from the nasdaq in times square. more "options action" is still ahead. what do you look for when you trade? i want free access to research. yep, td ameritrade's got that. free access to every platform. yeah, that too. i don't want any trade minimums. yeah, i totally agree, they don't have any of those. i want to know what i'm paying upfront. yes, absolutely. do you just say yes to everything? hm. well i say no to kale. mm. yeah, they say if you blanch it it's better,

but that seems like a lot of work. no hidden fees. no platform fees. no trade minimums. and yes, it's all at one low price. td ameritrade. ♪ vof hundreds of families, he'se hmost proud of the one the heads he's kept over his own. brand vo: get paid twice as fast with quickbooks smart invoicing. quickbooks. backing you.

i'm not really a, i thought wall street guy.ns.

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 welcome back to "options action." time to look back now at some of our open trades. last week, dan said wells fargo could be in for some trouble going into earnings. >> if we don't see good guidance for the end of the year, i think wells fargo goes back for that neck line on that head-and-shoulders little formation. when you look at this thing, it looks like it's poised for at least a move back to $50 today when the stock was trading at $53.15, you could buy the october $53.50 put spread,

paying 80 cents for that you're buying one of the october $53 puts for $1, selling one of the $50 puts at 20 cents >> well, the stock was up today but still down 2% since the time of that trade. dan, what do you do with wells here >> yeah, so, i think you give it a couple more days, scott. obviously, it had a little bounce, but it's still down week over week, and i think the price action in jpmorgan is the one you want to focus on the fact that it could not rally today, i think you probably see more weakness in the banks, but at some point, if you think wells fargo is going back to $50 and it's at $52.15 right now, you're going to need to roll this thing out a little bit. so, keep this one on a short leash. what i would do is early next week, if this thing goes unchanged from that 80-cent purchase price, that's where you blow it out and you think about rolling the view out. >> all right let's move on to what mike and carter said last week, the techs rally was coming to a screeching halt. >> 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, if you're long. >> 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. >> boy, were they right. the xlk down 5% since the time of that trade. mike, what's next for tech >> yeah, i mean, first of all, we were targeting a 5% down move we got it actually a lot faster than we expected it ran right to that short strike and actually, i still have a bearish view on the space right now. so, my inclination, because there isn't that much left in this particular spread, is to roll it down sometimes you talk about rolling down and out here i don't think we need to go out and time this expires in november that's fine. sell this one, buy the mectionz 70s and sell the $75 puts against it to get into a spread

that's lower. >> what have you got >> i think that's dead right we've had a break, but we've had a rally back so, in a way, there's new opportunity on the short side because there's complacency. people have bought in thinking maybe the lows are in. looks to me as though it's headed lower still. >> all right we'll step for two, come back and do final calls 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. ♪

i've done all sorts of research, read earnings reports, looked at chart patterns. i've even built my own historic trading model. and you're still not sure if you want to make the trade?

exactly. sounds like a case of analysis paralysis. is there a cure? td ameritrade's trade desk. they can help gut check your strategies and answer all your toughest questions. sounds perfect. see, your stress level was here and i got you down to here, i've done my job. call for a strategy gut check with td ameritrade. ♪ welcome back time for some tweets now our first question from jeff, who asks "what's the general rule for exiting a spread that's going against you? dan, take it >> yeah, great question, jeff. everyone has their own rules mine is 50% of the purchase price of a long premium spread that makes sense to me you cut your losses there. >> all right, good stuff thank you. thanks for the question as well. carter, final call from you. netflix, it's been a great trade, stumbled of late. i'm sure there's a bit more stumble to come. >> even with a big upgrade today from citi.

michael? >> use your put spreads. >> we have to give a shout out to nancy primavera, she's the stage manager taking time off to have a baby. good luck, nancy >> great stuff have a great weekend "options action" next friday meanwhile, don't go anywhere "mad money" with jim cramer starts now - [announcer] the following program is a paid advertisement for the nuwave brio digital air fryer, brought to you by nuwave, the makers of the nuwave oven pro and the nuwave precision induction cooktop. we all love fried food. french fries, wings, onion rings, fried chicken. but who wants to deal with the mess and added calories? deep frying food has been linked to high cholesterol, heart burn, acid reflux, kidney problems, and even cancer and alzheimer's. now, you can have all the fried food you love without the added fats and oil. introducing the revolutionary nuwave brio digital air fryer. the nuwave brio uses super-heated, cyclonic air