hey there. it's 5:30 here at the nasdaq and that can only mean one thing it is time for "options action." here's what's coming up on the big show break out your flannel and pumpkin-spiced lattes because fall is around the corner. but if you think a september swoon is on the way, dan has one really cheap way to play it. he'll lay out his trade. then -- >> i'd like a room, please >> why do mike and carter say it's time to check out of this major hotel stock? they'll explain. and later -- >> we're raising the roof on the home improvement trade

that's simply nailing it it's time to risk less and make more "options action" starts right now. let's get right to it. with august coming to a close, it's going to soon be time to put away the sunblock, break out the sweaters the weather could put a chill on travel stocks. they've had a hot run so far this year, but the chart master says he is starting to have reservations carter worth is over at the plasma to break it down. take it away. >> it is more about the consumer, right? is the consumer in good shape or isn't it there's so many ways to make the case either way. but i thought we would focus on something we haven't done in a while which is hotels, resorts and cruises. this is actually an s&p 500 industry group, and these are the five names, and everybody knows those names, right big hotels, and then the three cruise liners. now, let's look at some charts and try to pull together the thesis what we have over the past decade is a pretty nice fit between this sub industry group, hotels, resorts, cruises, and the entire consumer discretionary sector

and yet what you can see here of late is that the boats, the hotels have stalled. that's the blue line rolled over let's zero in on this and take it a little closer so now this is the picture that is a little bit bothersome we know that these peaked quite some time ago, and while the market has made these slight new highs it is not the case for this particular sub industry group within the s&p that rolling over, that deterioration is an issue. in fact, i would show it to you a couple of ways we know, for instance, we're nowhere near these lows absolute, right? we're nowhere near, and yet we are right back to relative lows. so basically a place where money has gone to die and produce negative alpha, if you will. something is wrong a couple of charts to put in context. now, marriott, the big heavy player, the biggest of that group, you know, you can draw the line so many ways.

but one way, and it's not a judgment of opinion. sort of a structural fact. that's a double top. now, if i pull it back and try to figure out where on the trend line this could go going, i mean just were we to check back, check back, check back to trend, yes, that implies quite a bit lower from here. that's my thinking, that we've put in an important top. now, look at this long-term -- i mean, it's one of the biggest winners, and yet what bad setup. and so then the here and now marriott just the day-to-day chart, we know everything has tried to bounce since the august low and waffled at least, but there's not even any waffling here this thing has been unable to bounce what we know -- and let's end with this -- it's a well-defined trend, and it's a break in trend. this is a problem, and i think one wants to be very cautious on marriott >> all right so, carter, come back over mike, what's the trade here on marriott

>> yeah. so i think the key thing to think about here, number one, we are talking about discretionary sector if you take a look at previous, you know, basically economic downturns, these are stocks that could be highly sensitive to that this company also is increasingly seeing revenues coming internationally we are, of course, right now in a relatively strong dollar that is not going to help them there are some currency headwinds there as well. and if you take a look at how much the revenues have pulled back in some of these circumstances, you know, we've seen maybe 15%, 16% pullbacks back in the credit crisis. i'm not saying that's going to happen here. you couple it with a relatively high valuation, trading around 28 times earnings, it's hard for me to figure out how you can balance the risk/reward. there is possibly maybe 10% upside in the stock potentially, but there's substantially more downside so i think given the fact that although options prices are elevated a little bit, they really aren't as high as i think they ought to be given the risk factors and given how much equities have been moving around lately i was looking out to october,

the 125/115 put spread you could spend $2.65 for that that's a little more than the quarter we typically like to spend, and oftentimes when we structure these trades, carter and i try to work together we look at the 60- and 90-daytime frames. they don't have a november expiration, that's the reason i'm looking to october i think we're in a situation where many of the stocks don't have that much upside but they do have potential room to the downside for sharp moves that's what we should be keeping our eyes on. dan, what do you think of this trade >> i like it let's start with the chart i mean, i think there's two charts in this market right now. there are stocks that are above the up trends from the december lows and they're the ones like you just showed that are below that marriott is below. the whole space is rolling over. so if i'm thinking about sentiment and i'm thinking about just how these set up, they're broken charts. i love carter's setup. the way mike's doing it, the only way to do it, you just have to pick a spot and he's picking 115 to the downside. he said he likes to get usually

a quarter of a width of a spread, a directional put spread, a vertical like that, and you're not getting it. there's a lot of uncertainty and you're not getting it. the fundamental seems it's rolling over a bit, especially with the dollar making two-year highs today. if you look at mike's trade, i like the risk/reward he is risking one to make three. >> obviously it's a small sub industry group with five stocks, but you could look at them you could look up host you could look up hyatt. none acts well it is highly discretionary it is the most discretionary thing there is, not to mention this, trip doesn't act well, bookings doesn't act well, the online sites for travel. so many things, cross-currency, not a good place to be >> yes all right. let's move on to tech. if you caught last night's "fast money," you will know dan brought along what he calls one of the best-looking charts in the market take a listen. >> microsoft really stands out, not just because of the size of it, but look at that

consolidation. it has made above 130 since beginning of june. it held the up trend from december, and it really feels like it wants to break out >> so clearly dan likes the chart. what's the trade then? >> it's a really interesting setup. i mean, i think that was just the technical setup here, and that one fits on the right side of the up trend from december. i like the consolidation above 130 where it broke out in early june, but let's think about the fundamentals here. and what's interesting about this company relative to the last time we might have had a global recession is their model. it's just different. the recurring nature of so much of their revenue, new businesses in the cloud, that probably insulates them a little bit if we do have some sort of enterprise spending recession a little bit so i think about this company. it's expected to have in thi fiscal year 10% earnings growth, 10% sales growth it is trading about 26 times that's getting kind of expensive, but really not against some of its other fast-growing tech peers. and i say to myself if i'm trying to be constructive and i'm trying to look into the fall and pick some stocks i think could break out, microsoft has to be at the top of that list.

that chart right there, that's implied volatility, the price of options in motorcycles they're just relatively low. if you are thinking like i'm thinking that the whole macro situation is really murky, this thing has held up really well, definitely relative to -- the broad market's up 36%, two times that of the s&p 500 and much better than amazon, google, and apple, which are all about 10% from their highs, this thing is only about 2%. so to me i say let's be constructive let's try to do a defined risk, bullish trade into the fall, because if there's any good news anywhere, this is one of the ones that will drag the market up so today when the stock was trading at 137, you could look to october expiration, you could very simply buy the october 140/150 call spread, paying about $2.65 for that, buying one of the october 140 calls for $3.20, selling one of the october 150 calls at 55 cents. it costs you 2.6 $5. it breaks even at 1.42

you are risking 2% of the stock price to have a near-the-money bet that this thing has been consolidating and showing good relative strength. i know carter has different views on that. i think that's the way to play it with defined risk if you are looking to be constructive on mega cap tech. >> so everything dan said is correct. and as a technique, right, you do want to stay with what's safe and microsoft, over the course of time, one or two stocks will take on almost like a cult status ibm did it exxon has been in that category. ge, walmart. considered unto itself, has no competition, and microsoft is the most widely owned thing there is so while that's good, it is the musical chairs what we're seeing under th surface is stalling and rolling over in things like zen desk, twillo, paypal, workday, and crn. i'm just wondering whether at the end of the day, isn't this the final thing. there's the adage, they get the general's last

literally the generals hang out in the back, so they shoot the people in the front of the line. they go after the big ones last, and this is the ultimate big one. so the question is can it continue just to be its own thing? until it can't. >> so there's a lot, mike, that i want to get your take on first of all, whose side are you on in terms of the direction of microsoft? and how do you think dan's trade is structured? >> you know, i don't feel like the equities generally are behaving in a very healthy manner here, and i'm pretty anxious about it, i have to say. of course, if that's the case and you're inclined to make bullish bet despite that, this is a good way to do it and actually it's setting up in a way that's a little bit unusual. generally speaking, when you take a look at a very close call spread like the one dan's identified here in microsoft, it's not uncommon to see these things trading 30%, 35%, even 40% of the distance between the strikes. he's getting it for substantially less than that usually when we go to put spreads, we're looking for one-fourth of the distance between the strikes. on call spreads it is usually

hard to get that kind of math and here he is getting it. if you're inclined to make a bullish bet, this is the way to do it. here's the thing here. i'm not inclipped to make a bullish bet on microsoft or anything else. >> no, and i think you guys make a good point i mean, i think regular viewers of the program know i'm not particularly constructive about the setup of the market, but i feel if we were to get good news and the s&p is above 3,000, this stock is definitely above 140. probably close to my break-even on the trade, and mike makes a great point. really in june when the trade worries were at the heightened period of this whole year, this stock was $120 so $138 right now. so when you think about it, it has come a long way here, but another 10% in six weeks if we have incrementally better news, macro-wise, it will not be that hard in my opinion because the same reason why it is so crowded, there's no reason that should not continue but the point about a source of funds is a very important one. it is the only market cap with over a trillion dollars on the entire planet right now publicly

traded, and there's a lot of positive sentiment if the news were to go south but that's why you're risking 2% of the stock price for this spread >> for everything "options action," check out our poll site for everything else, check out our super cool newsletter. here is what is coming up next investors have been deep diving into junk bonds as trade tensions threaten to take down the market, one of our traders is laying out a cheap way to make bank on a breakdown. 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 on air when "options action" returns. >> announcer: "options action" is sponsored by thinkorswim by td ameritrade. ♪♪ ♪♪

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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. ♪ welcome back to "options action." we just closed the door on one roller-coaster month for the market, but the wild ride might not be over. september is historically one of the worst months for stocks. so if you're betting on even more pain ahead, dan nathan has a way to play it on the cheap. he's at the plasma. dan. >> in this time of market volatility a lot of traders are looking for opportunities to play for volatility, for cheap options that have the potential to pay out a lot if they get unexpected movement. and, you know, we talk about the s&p 500 all day long it's only down 3% from its all-time highs some might say it acts relatively well. there's some other pockets of opportunity, though, in the options market to make money if things kind of go haywire again.

and it could be away from equities, and one area that could be interesting is high-yield debt. and one of the reasons why we spend a lot of time talking about the yield-curve inversion, its treasuries, high-yield debt is levered to companies that basically, you know, have a harder time borrowing. they have worse credit then if we have some sort of earnings recession, these are companies that might struggle to pay back that debt and in those scenarios, you're going to see high-yield indices turn lower we have seen that time and time again over the last ten, fifteen years or so. let's talk about the hyg, the high-shares, high-yield etf that tracks a basket of high-yield debt here. and one of the reasons why you might want to buy a put spread in the hyg as we look into the fall, if you're expecting greater market olatility, is that what are small caps telling us right now let's just think about the russell 2000 in particular it's about 15% from the highs, in an earnings recession the last two quarters, it's seen

year-over-year declines within the russell 2000 so it's something to keep an eye on because we know a lot of the issuance in the debt market is in the high-yield market. the other point is oftentimes if you look back when we see the stock market go down precipitously, you see correlations of a lot of risk assets go to one there's really no place to high. ultimately even something like hyg, which held up pretty well, may go down fast with equities too. the last point about hyg is options are really cheap i will show you a few other charts to demonstrate why that's the case here. let's think about this this is the one-year chart of the hyg. this looks like nice a pretty nice consolidation. it's important to remember there was a 10% peak-to-trough decline when the stock market went down 20% in q4. that's telling you that obviously it can be very correlated to sharp drops in the equity market. the other point i want to make is this is large caps, the s&p

500 versus the russell 2000. the small caps, you see this the s&p is down about 3% from its all-time highs from last month. the russell 2000 has not made a new high since last year, down about 15%. i think that's reflective about investors' fear about the earnings recession that's going on with small caps okay now let's move over to that last point i made about option prices being really cheap this is the price of volatility. this is a 6% volume, implying less than a 1% move on a daily basis here you see, though, what happened to options prices last fall when the stockmarket started going down hyg more than doubled. it almost tripled there. that tells you the price of options there. that is telling the directional option trade can be very cheap in this name here is the other point i want to make. when things started to get dicey in the last couple of months, this is gld, the price of options, look how they shot up and, okay, and they shot up to at least 100% above where they were trading because traders were reaching for gold as a hedge against the market volatility

the last one, tlt, this is the 20-year treasury etf we know what's been happening there. yields have been going lower, bonds have been going higher, traders have been buying lots of options. the price of options has gone up materially again, option prices were really cheap before that spike. so here's the trade in the hyg i think you want to look out to november expiration. i think option prices are so cheap that if you're looking for risk assets that could go berserk in a market that's gone haywire, this is one of them so today when the hyg was trading -- what are we doing here we're buying a put spread. it was at $87 bucks you look at november expiration, 86.0 it costs about 80 cents, about 1% of the stock price breaks even down to 85.20 about 2% from where the etf was trading today and can make up to 5.20, between 85.20 and 80 bucks. why did i choose 80 to downside? that's not a great put-to-sell down there, but it was the low

from last december it's a level where it may find some support, but to me very simply risking 80 for about 2 1/2 months to possibly make 5.20 if the hyg goes back to the lows it was at in december >> carter? >> it's a great kind of trade to have on in a market like this where you can have a rapid, quick payout that's handsome it is what hedging is all about. i would say this for those of us who are not believers and who are bearish, it's annoying how well the hyg and jnk have held up >> all right dan, thanks for that come on over up next, check out shares of home depot hitting a fresh all-time high today. we'll tell you why it's grea news for one of our traders. live at the market site, much more "options action" right after this see that's funny, i thought you traded options. i'm not really a wall street guy. >> announcer: options action is sponsored by thinkorswim by td ameritrade 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

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 take a look back at a couple of our open trades. a couple of weeks ago mike said home depot could be building up to a breakout. >> of course, it's all about alpha. during the sell-off, this 9%, 10% selloff, this stock has been going, of course, straight up relative to the s&p.

i think it's a good place to be as a defensive name and to some extent as an offensive name. >> this is a duopoly basically with lowe's. they are the better of the two companies. i was looking at the september/january 210 call spread you could spend $5 for that. >> depot hit an all-time high today. carter first, how does the chart look right now >> right so to some extent the opportunity while not all gone has come and gone, playing for an event and playing for a breakout at this point, i would pull one's horns in >> mike, are your horns being pulled in? >> well, actually they are sort of automatically i mean, this stock actuall rallied through the 210 september options, which were short. time is on our side, if we hold onto this position once those decay away you can look at the 210 puts for that and roll the 210 puts short out to october and keep the long 210s on. >> all right well also earlier this month, dan laid out a way to play

salesforce earnings. >> if you look at the one-year, it has tremendous overhead resistance between 160 and 170 it is really under performing the nasdaq, which is up 19% of the year it's only up 5%. a collar strategy is something where when you own a stock and potentially you are into a volatile event like earnings in a potentially volatile period we are in right now, it makes sense sometimes to put a collar strategy on where you're protecting your stock. you can buy the october 130/160 collar, paying 70 cents for that. >> salesforce soaring on the back of its report, up nearly 10% since the call so, dan, what do you do now? >> this is basically you're overwriting your long stock. the stock was around 140 at the time, it went up as high at 158 after the report and you were selling the 160 call that's the risk to the downside. so here's the situation. you have until october expiration the stock closed at 156 today. you are short the 160 call if you want this stock to remain intact, then you do not want to be short that call if the stock is over 160.

so if you want to keep the stock position intact, you'd cover the short 160 call you'd sell the 130 put because it's lost most of the value. it has done what it was supposed to do for the earnings event i have to tell you the guidance of the gain was pretty good. it's another stock i would expect to make new highs above 160 if the market were to find footing because, again, you want to marry good fundamentals with poor sentiment and it did have poor sentiment heading into the print me, i would take the collar off. >> just for fun, would you rather microsoft or crm? >> oh, carter. >> i actually think microsoft because it has better valuation support here, and i think that crm sales-force has been a bit more volatile. >> certainly safer, but crm has ruled. up next, final call. >> announcer: "options action" is sponsored by thinkorswim by td ameritrade. ♪♪

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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. ♪ final call time. carter >> you know, i think one should be concerned if one falls and i'm a seller >> mike. >> yeah.

you want to use put spreads in october, 125, 115 put spread for marriott >> dan. >> puts are cheap to me, making a bearish bet into the fall. >> that does it for us see you next friday at 5:30. have a great long labor day weekend. don't go anywhere. "mad money" with jim cramer starts right now the following program is a paid commercial presentation for total gym fitness. [music] everybody work out. feel the energy. build a better body. the best you can be. another body easy as 123. oh. ahh. better body as easy as 123 with total gym. i