hey there we are live from the nasdaq market site in times square. we have a big o.a. show tonight. here's what's coming up. ♪ >> netflix shares soared after a wild week. ♪ it's a miracle >> but the chart master says don't trust the bounce he'll tell us why. plus -- industrials are getting crushed. >> no! >> chill out, dude mike has a way to protect from more losses. and stocks are sinking for ships. we'll lay out the trade.

time to risk less and make more. the action begins now. >> welcome we start with the chip stocks rallying but closing down around 5% it was a number of once high flying names hit the hardest nvidia, intel, taiwan semi could the move be the beginning of the end of the chip rally let's get in the money now we are all over the map today. dan and mike in san francisco. carter at the plasma we start with you. the semis had a hard week. today's bounce wasn't particularly impressive in my opinion. i think it sets up for a retest of today's lows. we have a quick one-year chart it bounced off the low it made a few months ago this is an index, the smh, the etf that tracks the space that made its high in march

it's never even tested it again. it's been rolling. when you think of the issues we have regarding this potential trade war with china semiconductor companies are in the middle of this i think they are taking a big brunt of this. the early strength had to do with fear of a potential trade war. you had a bounce off 95ish i have a five-year chart this is really important carter can speak to it in a little bit it broke the uptrend in place on the 2016 lows. there is a good shot if we bounce 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 have a couple data points taiwan semi, the largest component of the smh reports earnings 17% of their sales come from apple. they make chips for qualcomm, for amd, nvidia and texas

instruments. this could be the catalyst i want this trade on early next week i want to bounce more on monday in the smh this could be a good hedge if you own nvidia or those up a lot. when the smh was at 97 bucks you could buy the november 95, 85 put spread paying $2 for it. that breaks even at 93 bucks you could make up to $8. your max risk is $2, about 2% of the stock price. again, this is a sector etf that's basically down a couple percent with a few large components holding it up if earnings season doesn't hold up for the big ones this thing is going lower. >> carter? what do you think? >> you can see the lines drawn it's a fairly textbook uptrend then a break in trend as dan described it one thing i would point out, of course, which is also part of that, not only do we have -- you see a two-panel chart here

not only do we have a break in trend, but we have deteriorating relative performance in many ways that's what alpha is -- the opportunity cost to be in one thing versus something else as depicted here, semis have been in range for the better part of 8 to 10 months they have not been in a range in terms of relative performance. you can see if i zoom it in, we have basically broken down on a relative basis i.e. performing worse than the market. the semiconductor, where the s&p is up about 3.5% absolute down, relative worse, it's never a good setup. >> mike, what do you think about the trade? >> i think using a put spread will make a lot of sense here. one reason is because the market rolled and we have seen an increase in implied volatility when you buy outrights typically

you like to do that when option. maybe you do it when you think the market may roll. once it started to do that two things happened. one you saw a portion of the decline. the second thing is you have seen the increase in options premium. the spreads make sense another reason to see the elevated options premiums is we are entering earnings season that's a period when generally you are going to see elevated options premiums anyway. combine it with the volatility of the week and look to spreads to make directional bets now. >> danny, i give you the final word. >> one last point. we had a rough week. there were a lot of groups that were beaten up today was a huge bounce day. it wasn't that impressive. it doesn't follow through on monday i think the market will have real problems. this is not something i want to press a short. a group that acted poorly and precedent the lows give it room let's see monday afternoon if it doesn't feel like a great two-day bounce you put the trade

on. >> good stuff. now from semis to streaming, netflix shares soaring after a brutal sell-off. the stock bouncing off key support after citigroup upgraded the streaming giant to a buy this morning despite today's move netflix shares still down nearly 20% from the june high how should you play it into earnings next week who has the answer but the chartmaster? break it down, carter. >> i'm not sure i have the answer i'm going to try to give an answer or an answer rather than the answer one thing i would say optically there is a risk is that this is something of a head and shoulders top. let's move forward to take a look at what netflix has done. it looks crowded here, but basically since the spring and summer of '16, over the past two years, you have had major

selloffs, 19%, 14, 13, 14, 13, 18, 19, 26 we just had another 18%. the question is, is this just a volatile stock of course. is it out of the woods on this next earnings? let me get rid of the circles and put in the trend line that effectively has been in play for the past two years the thinking here from my point of view is we are going to come back to trend, that the head and shoulders top is in effect it looks like nothing, but that's another 10, 12% to get down to that level i'm going to stop it there my hunch is there is more risk than there is opportunity. >> we'll see the trade then, michael. >> yeah. i was looking out to november. i was looking specifically at the 325, 275 put spread. you could spend $12 for that it's important two things here.

netflix typically moves sharply on earnings. we have seen sharp up and down moves. right now it's implying an 11% move something else to think about. in the month that follows earnings this stock typically moves 16.5%. that implies a range down to 280 or maybe slightly lower. obviously sharply higher i think if you are going to make a bearish bet considering the elevated options premiums we talked about with dan's trade earlier, this is definitely a place you want to use spreads as well same situation as we were looking at before. elevated options premiums. this could move a lot. this captures the range, by the way. notice that the down side put strike we are selling, 275 is just below the 16.5% move we have typically seen in the month after earnings >> yeah. let me just say -- >> it is a mover on earnings. >> no doubt about it for a company that has now 150 billion market cap or so, implied movement in the high

single digits is massive the target of the trade is interesting. it lines up well with carter's technical levels the low from april down about 275 or something like that, that seems like a level where if they miss and continue to go lower, that's probably the spot. >> that's exactly right. one of the reasons we identified this particular spread -- and it seems like a wide one. a $50 widespread it's because of the movement and targeting those levels i think this is definitely a situation where, number one, we want to use a spread because of elevated premiums. look to the levels carefully how far could it move and in what time frame? we are targeting a month after the earnings will be announced 280, if it moved the 16.5% it will hit right about the level of the other strike. >> you have heard it, level from dan and mike that's what it's about there is a key level and also a gap. we'll zoom in here

there is a gap left behind on an earnings beat. often gaps are filled. it doesn't have to be that way that would be exactly where this level comes into play. seems to me the risk is to the down side. >> for everything "options action" check out the website, optionsaction.cnbc.com while there sign upp for the oa newsletter here's what's next industrial stocks are burning investors. if you own any of the beaten names, mike has a way to limit losses plus, calling all "options action" fans reach into your pocket, grab your phone, and tweet your question @options action fit's nice, we'll put it on air. i don't know what's going on. i've done all sorts of research, read earnings reports, looked at chart patterns. -- if it's nice, we'll put it on air. 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. ♪ vojimmy (shouting): james!as been jimmy's longest. he's survived record rain and a supplier that went belly up. so while he's proud to have helped put a roof over the heads of hundreds of families, he's most proud of the one he's kept over his own. brand vo: get the most out of your money, whether you're using quickbooks smart invoicing to get paid twice as fast or automatically tracking your mileage. smarter business tools for the world's hardest workers. quickbooks. backing you.

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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 for more on that let's get to bob pisani at the new york stock exchange robert >> hi, scott industrials suffered more than most sectors with good reason. they are 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 they 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 a lot of the biggest names have had larger declines with dow components caterpillar and boeing down. 3-m down eaton, lock heheed martin. then cancelled flights due to hurricanes and worries about capacity have combined to make it a miserable year for airline investors, even as consumers travel more than ever. back to you. >> thank you, bob. if you own big industrial names

how do you protect yourself? let's go to mike >> i was taking a look at boeing we are seeing a set-up to do this kind of trade which we are 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 break down you create levels of resistance above where they currently trade. the other thing now is of course because of all this options have become more expensive. as we were saying in the first block also because of the upcoming earnings that adds to that and finally the reason we typically use covered calls is to collect premium petition you own stocks there is only a handful of ways to make money. stock goes higher or collect dividends. but when you use options you have testimony opportunihe oppo premiums i was looking at the calls you can collect ten bucks at

those. the stock at the time was trading around 358 the idea is you are basically going to collect the $10 if the stock rallies up to the 375 strike, you keep the premium. above that you could have the stock called away from you net of the $10 you collected you are going to net about 385 on the stock. i don't think there is a really good chance the stock will blow through those levels between now and december expiration. if the stock sits here and goes sideways or slightly lower, you are going to buffer the downside somewhat with the premium you are collecting i typically like to collect 1% a month or more. that's basically what justifies taking the risk to begin with. this is about 2.6% of the current stock price in 70 days. >> the most important point here is this was a low vol name boeing implied volatility, the price of options was about 20% a month and a half ago now it's about 30% mike is taking advantage of the fact that options premiums have

gotten higher as the stock declined 8%. now he's looking at the resistance saying this is a stock that spent most of 2018 after an early ramp in a consolidation. it broke out, failed now he's targeting a level where he's willing to get called away up at 385. i think this makes a lot of sense -- this trade idea he's taking it about 2.5% over two and a half months or so. >> typically after earnings this stock moves about 6.5% in the month following. it's going to have to move more than 7.5% to the upside before the trade looks like a fail. the only place it looks like a fail if you own the stock is if it rallies significantly through that 375 strike. >> mike said you would be called away at 375. take that $10 in premium and that's $385. if you got to a level above the short call strike you don't have to have the stock called away. you would cover the short call,

take a loss, but keep the stock position in place if you don't want to be called away. >> carter? >> well, really the same set-up as semis but also with a twist boeing, as you can see here, basically over the past three years has effectively gone from 100 to 400 mitt a high around 395 it's been consolidating for 11 months which is a bullish set-up you have a big run-up and consolidate to assert yourself again. while it was consolidating it's been a market performer. and then bull trap you have a lot of people buying because, quote, it's breaking out. whether it's chartists or fundamental individuals. the relative performance never confirmed the absolute breakout. i think you've got people

trapped here having purchased it for the breakout only to have to reverse themselves it's not the greatest set-up at all. industrials themselves just moving forward here is the xli. of course it's optically clear, isn't it a well defined uptrend and a break in trend this is the worst part if you 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 then you see closely here it was an epic double top no thanks. >> mike, you want to comment on it >> yeah. it's interesting right before we came on the air, we were talking to mark lehman of j & p securities. one of the comments he made is there are sellers higher it felt that way to me today every time we caught a bid we had ample sellers coming in. it makes me feel we have a lid on prices at this point. maybe in this stock, industrials

generally and the broad market that's a reason why a strategy we haven't talked about lately is one i'm more comfortable here look to sell covered calls against stocks you own as a way to take in additional premium. you may not see a lot of appreciation between now and the end of the year. >> interesting still ahead, banks under pressure earnings are under way one name in the group could see a bigger breakdown we'll tell you what it is. plus, got a question for a trader you're in luck we are taking your tweets later in the show. as you know, we are live tonight from the nasdaq in times square. more "options action" 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. ♪

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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 at open trades. last week dan said wells fargo could be in for trouble going into earnings. >> if we don't see good die guidance f -- good guidance, when you look at this 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. buying one of the october puts for a dollar selling one at 50 cents. >> the stock was up today, but down 2% since the time of the trade. dan, what do you do with wells here >> i think you give it a couple more days, scott obviously it had a little bounce it's still down week over week the price action in jpmorgan is the one to focus on. the fact it couldn't rally, you see more weakness in the bank. if you think wells fargo is going back to 50, you're going to need to roll this thing out a little bit keep it on a short leash what i would do is early next week, if this thing goes unchanged from the 80-cent purchase price you blow it out and think about rolling the view out. >> all right let's move on to what mike and carter said last week that tech's rally was coming to a screeching halt. >> what we know is that we have bounced beautifully 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%. then what if -- and i think 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 and selling the 70s against it for 50 cents >> boy, they were right. the xlk down 5% since the time of the trade mike, what's next for tech >> yeah. first of all, we were targeting a 5% down move we got it faster than expected it ran right to the short strike i still have a bearish view on the space now. my inclination because there isn't much left here is to roll it down. you talk about rolling down and out. i don't think we have to go out in time. this expires in november, fine sell this by the 70s and sell the 65 puts against it.

>> what do you got >> that's dead right we had a break and a rally back. in a way there are new opportunities now on the short side because there is complacency. people bought in believing maybe the lows are in. looks to me like it's headed slower still. >> we'll come back with final calls next >> announcer: "options action" sponsored by think or swim by td ameritrade 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. ♪ time for some fwetweets jeff asks what's the general rule for exiting a spread that's going against you? >> great question, jeff. everyone has rules mine is 50% of the purchase price of a long premium spread that makes sense to me cut your losses there. >> good stuff. thank you very much. thanks for the question. carter, final call >> netflix it's been a great trade. stumbled of late a bit more stumble to come >> even with a big upgrade from citi today michael? >> use put spreads in netflix.

325, 375 are the strikes. >> danny-boy >> we have to give a shout out to nancy primavera from fast money, "options action." she's fab, taking time off to have a baby. good luck! >> have a great weekend. "options action" next friday don't go anywhere. "mad money" starts now (announcer) you work hard to give your children something to build on. i was always trying to think "how am i gonna get her through college?" i wanna have a mechanism in place to make sure that my daughters are well taken care of. i hope to leave my children with something to help them get set up. (announcer) don't let it get eaten away by unexpected fees and legal expenses. my husband did not have a will and everything went away. when my father passed away, he did not have a will or a trust.