hey there. live at the nasdaq in times square the guys here getting ready for a big show here is what is coming up. industrials, building games. but are they doing so on a weak foundation >> games only you can build. >> carter worth gets into the nuts and bolts of it then -- >> pick up the phone and start dialing! >> yep, it is iphone season. if you think apple has another hit in its pocket and trade war is working their way into the rearview, dan nathan has a strategy dialled in. and -- lululemon stock was off and running right after earnings. >> follow that rocket. >> keep your pants on. don't go chasing

mike khouw has a more balanced way to regain good positioning it is time to risk less and make more "options action" starts now. let's get right to it. check out the trills, krarnging higher after a summer slump, up 7% from the august low and less than 4% from all-time high, this despite looming trade and economic slowdown fears, but with more than half of the sector sitting in correction territory or worse, chart master says the sector may be gearing up for a big break down. carter is at the plasma to break it down. carter. >> this has been one of the area that has been a hope trade as they say, when you are hoping it is hopeless it is not a thesis, it is nothing. in fact, these lines, these charts will prove that this line here is the presidential election. what you see is this big bump up in industrials, and here is the relative performance that's the so-called trump bump. it happened in financials and industrials. what we know is actually that was the peak in the performance,

so that actually all of this has been a negative alpha proposition, meaning other choices one could have made were better so the issue is not only are we, well, at five-year relative lows, on an absolute basis we are back to a difficult level. let's move forward and look at what we've got here. here is the same chart each time on an absolute basis, holding aside how bad the reality is, we have gotten back to this line, we have failed i can put in the arrows and you will see it. but basically, repeatedly we hit this line and we have failed now, the question is are we going to fail yet again. we are starting to approach it again. that's my hunch. i don't think anything has changed. day-to-day strength, sort of news related or there's talk of a meeting, a meeting, talk, talk, talk, so let's see it is all about earnings and so forth. so here is the chart of the etf

you can trade, the xli, the spider what i see is the following. a see a clear break in trend there's no way to round that, it is not an opinion. that's the trend line. that's the trend line. that's the break in the trend line now after breaking, we have thrown back quite close to the underbelly of the line my bet is that you will start to falter here, and i want to be short xli. >> all right mike, carter is calling for a short. what is your trade >> yeah, taking a look at industrials i think it is kind of interesting here. dan was talking about it just about 20 minutes ago actually. peak earnings for the industrials took place pretty much in the first quarter of 2018 they're down about 6.6% since then, and if we take a look at price-to-earnings or enterprise value to ebitda valuation metric, we're close to the all-time high. that's a bit troubling when i'm trying to figure out what options trade to use, i'm

noticing due to the volatility we saw in august we were seeing some elevated options premiums i think it is one of the situations where you're not looking to short options, they're not quite that high, but we are looking to use a spread -- i was looking out to december 76/70, $6 widespread on xli, you could spent about $1.50 to get to the math we like, about a quarter of a distance between the spread, meaning if it declined to the lower strike you will see a pay-off of approximately three-to-one and you will be risking a relatively small amount of the xli in the meantime plus, that put you are short is going to decay and mitigate some of the effects in the meantime so if we should begin to see a recovery in earnings in industrial and change our thesis, we still have an opportunity to get out of this trade. >> flexible trade, dan >> i like the trade idea i think mike is giving himself a lot of time and i like the width of the spread and what he is paying for it and it is near the money here if you look at the chartsit ha been a good opportunity to kind

of short this thing. now that past report will be resistance to the upside as carter said, it is a bit of a hope trade that being said, it is not a group i feel like will turn on a dime some of the names heavily weighted in xli have some very idiosyncratic issues, boeing being one of them. so to me i think it sets up like a lot of other groups in the market that don't act well relative to mega caps driving a lot of the performance i think you sell rallies. >> interesting also, within transports, part of industrials, rails continue to act poorly on a price basis. but a data comes out, volumes are down, there are issues this is a dicey area of the market and an area that gets a lot of hope but it hasn't worked i don't know what changes that. >> in terms of the chart, carter, you -- we have seen sort of the approach back to the trend line are we at a point -- i mean you think it is going to bounce below the trend line eventually.

>> it broke below the trend line, now it has gotten to the underside of it. that's a critical juncture because strength here pushing above a downward trend line is impressive more often than not though, when you first approach a trend line having broken it, you falter at the trend line. >> mike, are you going to wait until you get a few earnings reports to decide what direction you want to take with this trade? >> well, i don't think we need to wait really, and here is the reason why you know, last time we saw earnings declines of approximately the same magnitude in industrials we are seeing right now were 2011 and 2015, i'm talking post-credit crisis both of those instances we saw a dip in the earnings and it preceded a weak period for the sector overall look at 2015, peak to you trouf, the draw down was 20%. i don't need to remind anyone what 2011 looked like. i think we are getting the signals we need to i think carter's technical analysis supports that from industrials to iphones, we will learn more about this year's models with apple's big

event kicking off on tuesday which means monday is the final day to trade the stock before the new products are revealed. lucky for us, dan nathan is here with a i what to plway to play t what do you have >> we preview the events because everyone is pining away to see if they are going to upgrade their super computer in their pocket what we are seeing is that the upgrades are being elongated and we walk away from the events less excited than we were when the company was innovating on a quicker scale. when i look at this event, i look at it the way the options market is looking at it, not too excited. they are about 2%, not particularly excited there's the chart of implied volatility over the last year, about 24%, at the lower end of the one-year range here. i'm telling you that short-dated option prices are cheap. what does it mean for you out there? if you are a long holder, you could think about buying options

to replace your existing stock or to buy puts there's a chart right there. i will let carter speak to it a little bit it had the nice uptrend from the lowe on january 2nd. it seems to have technical resistance at 215. where did it get to today? 214.5, zrodropped like a lug that high last september, about 233, gets to 215 you see you might have a straight shot back up there, but it has to happen on an earnings event and we won't get that until late october the way i think about the trade and the way i think about the trade war in general, apple has been volatile over the last year relating to the trade war. it has hit the name recently with a new round of consumer tariffs. think about it this way. you want to be constructive, to play for a breakout, you like the idea of the new phones, you like the idea of the trade war moderating a little bit but you want to define your risk, the options market says you can do that relatively cheaply by buying calls if you want to be constructive on the name

i would look to october. this week could be back fill on the event. maybe i want to play into the october trade talks, i would buy the october 215 call paying $6.15, breaking even at 221.50 that is right above the july 31st post-earnings high that it couldn't have held that time, but the way i think about this you are risking 3% to have near-the-money upside participation, playing for a breakout, playing for better news on the trade front. so to me i think this makes sense if you want to be constructive on apple. >> what did you think of the lines on dan's charts? >> let's get those lines back on there and talk about them. what we know is if you look at dan's chart and the an notatino he has, apple makes a he lo in the mark -- a low in the last day of january. apple bottoms on june 1 and here we are back at the may high. the market has exceeded its may high and to some extent what dan

is playing for is maybe this stock can do what the market has done, which is catch-up. i think in the context of that though it is basically a dullard. i think you are saying that by noting that the options indication is not a big move, and that's what we have here something that is basically a fair price. >> mike, what do you think of dan's trade given what carter said about the chart >> well, i mean i think there's reasons to use options here. let's just consider if we are bumping up against some form of resistance getting back to the prior highs and there's some risk that it fails, obviously owning calls is a better case. of course, if it rallies through, the fact that options aren't overly expensive given how much the stock is moving around make it a decent way to make a bullish bet if you look at the price of options and look at how the stock hasper formed a performedo the market, it makes a lot of sense. you know, these are the kind of trades you look to manage. if the stock breaks through the

level by a significant amount, you can look to roll it into a call spread or roll up and out to a higher strike or simply take profits i think that's how you would want to manage this trade if you see that. >> yes shall and, and i want toe last word on this one. the high, july 31st came after earnings investors were psyched about it. it was trading at 220. next day there was a tweet about consumer tariffs and the stock went about 193 why do you want to risk 6 1/2 to have mid turn participation, because make no mistake, it could be down. i see it risking about 3% -- i like the risk/reward if you want to be constructive with apple. >> while you are at cnbc.com, check out our super cool newsletter what are you waiting for here is what is next shares of lululemon stretching higher on the earnings this week if you missed out on the move,

take a deep breath because mike khouw is laying out a way to play the rally for less. plus, calling all "options action" fans reach into your pocket, grab your phone and tweet us your question @optionsaction. if it is nice we'll answer on air when "options action" returns. "options action" is sponsored by - ♪♪ ♪♪

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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". take a look at shares of lululemon, stretching higher after crushing it on earnings this week. lulu shares up 66% this year if you are looking for a way to play catch-up to the rally, mike khouw is laying out the call to action mike, take it away. >> yes, you know, so this is interesting many we saw some

unusual call activity in this name earlier this week we talked about it on "fast money", somebody was targeting about $200 after earnings, traded a 180/200 call spread that looked like a fairly good trade. what do you do if you like the stock but weren't in it when the good news took place we will look at trading a call spread risk reversal these are trades we look at when options are expensive, volatile stocks typically, and usually this is on or around catalysts now, this catalyst has already come and gone and the stock did gap higher, so what we're going to troo to tay to look at here y for you to participate if the stock continues higher but only give you the risk associated with having bought the stock at the price before the event took place. how does a trade like this work? we will be looking at the december 185/200/220 call spread risk reversal. sell the 185 put, buy the 200 calls and sell the 220 calls against it that whole trade will cost you knowing. basically the risk here is that

if the stock should fall back to 185 or lower you will own it at that level this, of course, is approximately where the stock was trading before they announced earnings if it continues higher, you will get about 10% participation to the upside, and i would point out this stock is moving around quite sharply. it moved a lot today so if the stock is lower on monday, you might even be able to adjust the strike of that lower strike, put that earlier today you could have done the 180/200/220 for even here. that's the objective, to avoid the down side but get the first 10% of upside. another point i would quickly make is this will capture november earnings. that's one of the reasons the options are slightly elevated here this stock is expensive on valuation. they're hitting on all cylinders essentially. where macy's is trading six times full 2021 earnings, this stock is trading full 2021 on sales. people are expecting a lot of

good things and getting them for now, but it is a way you can participate if you happened to miss this fairly good earnings result we saw earlier this week. >> you like the trade >> i like it this stock had a series of gaps after earnings this week and it is making new highs on multiple occasions on the gaps. i will mention this though it was doing the same thing in 2018 until it got into q4 and had a 35% peak-to-trough decline. the only warning i have is that after such a massive, massive rally year-to-date and this thing is at all-time highs, selling that 185 put is down 10% or a little less than current levels to me that means like material risk if this thing were to have a similar sort of q4 sell-off that might have nothing to do with their own fundamentals, which was pretty much the case last year. >> to dan's point, the most recent gap, a gap in april from 145 to 170 what happened thereafter, of course, is that the stock priced in all of what was coming by

that gap so it was fallow, didn't move may, june, july and so forth so the issue here is does the stock now -- is it discounting all that's coming and is it likely fallow. that's my hunch. i think you have price discovery here and a lot of the upside has already been exploited. >> mike, what would you say to that, the stock is fallow? >> actually, that's a good point. it actually also speaks to the structure. why is that true because actually if the stock just lingers here right around $200, which is the break-even at expiration, what is going to happen to the short put and the short call those are going to decay for the short term anyway, somewhat more rapidly than the at-the-money option is. it is actually possible if the stock were to track side ways and stick around the 203 level or thereabouts where we closed today, this trade actually could see fairly modest profits. maybe not the profits you would associate being long in the

stock at 185 had you be, but it is a situation if the stock lingers for the next 60 days you won't be hurt on this trade. >> all right up next, tech leading the market rally this week, and it is grade news for a trader. send your burning questions to our twitter handle @optionsaction and you might get your answer on air live at the nasdaq site in times square, much more "options action" right after this "options action" is sponsored by - ♪♪ ♪♪

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what do you look for 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. ♪ gains ahead for the s&p. >> we are now actually seeing options premiums as high as they might otherwise be give you some perspective, we've averaged just under 1.5 intraday move since the beginning of the month, the vix sitting around

20, probably should be 50% higher than that when you are seeing moves of that magnitude i was looking out to september you could buy the 295/300 call spread you would be spending about $1.20 to put the trade on. the pay-off will be better than three-to-one if we get a move up to 300 well, the s&p 500 etf is up more than 200% since the call. what do you do now with it, mike >> the call is now worth about $3.35. the risk/reward is not as attractive here. what i would suggest actually is you could take the profits that you made and just roll up and out, and if we do see the market continue higher you will get some participation but you can take some of the money off the table, still get some upside if it should continue to rally and the risk/reward will be more favorable for you. >> what's your take on the directional market at this point? >> yes, we simply recover the losses we saw at the beginning of the month and back to the same circumstance that, quote, the market, the s&p is believed

to be good but under the surface there's continued problems >> all right last week dan said microsoft could top the tech trade this fall i think about this company it is expected to have in this 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. i say to myself if i'm trying to be constructive and look into the fall and pick stocks that i think could break out, microsoft would have to be at the top of the list look at october expiration you could simply buy the october 140/150 call spread, paying about $2.65 for that >> microsoft is inching closer and closer to break even so, dan, how do you play this? >> it is interesting you know, carter mentioned some of the problems in the s&p i don't see this one as a problem. it did underperform the s&p week over week, only up about 1.25%, something like that, a little below the s&p, but, again, it is

still in the range it think it only looks poised to break out and holds in there it shows relative strengths on down days, one of the things i like about it. the trade that costs 2.65 or 2.70, worth about 3.10 on a move higher, i like it. you are playing this thing to get into it on the higher so i think you stick with it. >> what do you think >> better than its software peers though not exciting itself fallow comes to mind again too. >> i have to look up that word i don't know what it means. >> it means dormant. >> it is means sleeping, dormant. >> all of those things. >> mike, how do you feel about microsoft? >> i mean i like microsoft, and i like actually this is the way you want to make your bullish bets here. dan was talking about it earlier. when the market sort of inches higher but has big drawdowns, that's when you don't want to be either short puts or long stock necessarily. it is a situation where he is saying, okay, it could go a

little bit higher, but if it doesn't i'm risking little it that's the way to play this market. >> up next, we have your tweets and the final call "options action" is sponsored by thinkorswim by td ameritrade 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 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". we've got time to take one tweet. steve wants to know if it is too late to buy calls on target when it is trading at all-time highs. what do you tell steve, dan? >> i would say you, yes, it is it is up 80% from 52-week lows, up 27% in the last month i mean where do you think it is going? that being said, i don't mean to sound dismissive about it. if you have a much more bullish thesis, i would rather buy calls at this point than i would stock, up so much in a short period of time. >> time for final call mike khouw in san francisco. >> yes, if you missed e in lulu, look at call spread risk reversals as a way to make bullish bets there.

>> carter? >> bullish on industrials. i would say rethink that xli to the down side. >> dan nathan. >> these apple product events oftentimes sell the news if you want to be constructive into the fall and buy calls, do it after the event. >> that esdo it fo my mission is simple, to headac make you money i'm here to level the playing field for all investors. there is always a bull market somewhere and i promise to help you find it. "mad money" starts now hey, i'm cramer. welcome to "mad money. welcome to cramerica other people want to make friends, i'm trying to make you money. my job is to entertain, teach and put it in context. so-call me at 1800-743-cnbc or tweet me @jimcramer. can i get please, can i get one of these today the labor department re