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's i phone 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's time to risk less and make more "options action" starts now. let's get right to it. check out the industrials cranking higher after a summer slump, now up 7% from the august lows and less than 4% from the all-time highs, this despite looming trade and economic slowdown fears, bu 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. >> all right so this has been one of the areas that has been a hope trade. as they say, when you are hoping, p 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. so let's move forward and take look at what we've got here. so here's the same chart, and 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've hit this line and we've 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.

now here's 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 so, mike, carter's calling for a short. what's your trade? >> yeah. taking a look at industrials, i think it's 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 priced 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 this is one of those 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 spend 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 payoff of approximately 3-1, 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 and if you look at the charts, it's been a good opportunity to kind of short this thing now that past report will be resistance to the upside as carter said, it's a bit of a hope trade that being said, it's not 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, which are big heavy weights, continue to act poorly on a price basis, but also, data keeps coming 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's 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. >> okay. so, mike, are you going to wait until you get a few earnings reports before you 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 e and 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-trough, the drawdown 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 way to play that. dan, what have you got >> interesting name. we often preview these events because everyone is pining away if they're going to upgrade their super compute never their pocket, and what we're seeing in the past few years is the cyclings are elongated, and we walk away from these events less excited than we were whe 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%. that's 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 either replace your existing stock or 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 a lot of technical resistance at 215. where did it get to today? 214.5, dropped like a lug. that high last september, about 233, gets to 215 you see you might have a straight shot back up there, but that's going to have to happen on an earnings event, and we won't get that until late october. so the way i think about the trade and the trade war in general, apple has been volatile over the last year relating to the trade war. it's just hit the name recentl 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 risks, 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 backfill 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 do you think of all of those lines on dan's chart >> 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 annotations he has, apple makes a low in the last day of january. apple peaks and then 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 mark 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 that a decent way to make a bullish bet. i think basically if you take a look at the price of options and look at how the stock has performed relative to the market, it makes a lot of sense. dan has said this, and i support it

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. >> yeah. and i want to be just the 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 you saw the uptrend on the chart. that's about 190, 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 risking it at 3% with a 10% downside so i like the risk/reward if you want to be constructive with apple. >> while you're 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's nice, we'll answer it on air when "options action" returns. returns. tterns. >> announcer: "options action" is sponsored by thing or swim, by td ameritrade 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. ♪

because there's always another team looking to punch one in. a spectacular touchdown grab

with nfl redzone from nfl network on xfinity, you get every touchdown from every game on sunday afternoons, all season long. watch every breakout star, every heart-pounding running attack, and every big time defensive stop. sundays were made for football on xfinity. that's simple, easy, awesome. add the sports entertainment package for nfl redzone. click, call, or visit a store today to learn more. 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 so if you're looking for a way to play catchup to the yaly, mike khouw is laying out the call to action mike, take it away. >> yes, you know, so this is interesting. 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 lsh 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 try to look at here is a way 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. so how does a trade like this work we're going to 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 low eric 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 really our objective here, to avoid the downside 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. i mean, 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. so this is really quite an expensive stock. people are expecting a lot of good things and they're getting them for now, but this is a way to 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 those gapes 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. so the ohm 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 selloff 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 and what happened thereafter, of course, is the stock had already 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 chl >> 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's going to happen to the short put and short call, those are going to decay to the short term anyway

somewhat more rapidly than the at-the-money option is it is actually possible if the stock were to track sideways 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 been, 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's great 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 thinkorswim by td ameritrade they don't have any o. 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. ♪

♪♪ ♪♪ ♪♪ welcome back to "options action." time to take a look back at a couple of our open trades. back in august mike spied big 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 3-1 if we get a move up to 300 well, the s&p 500 etf is up more than 2% since the call. so what you do do with that, mike >> the call is now worth about $3.35. the risk/reward isn't as attractive here. what i would suggest is you take the profits that you made and just roll it 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 i 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 well, last week dan said microsoft could top the tech trade this fall. i think about this company it's expected to have in this fiscal year 10% earnings growth, 10% sales growth it's 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 some 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's 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

blow the s&p, but, again, it's 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 2 dollar 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. >> again, wow. >> i have to look up that word i don't know what it means. >> it means dormant. >> it means sleeping, door management, from dormier >> 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's a situation where he' saying, okay, it could go a little bit higher, but if it doesn't i'm risking little. that's the way to play this market. all right. up next, we have your tweets and the final call "options action" is sponsored by thinkorswim by 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's too late to buy calls on target when it's trading at all-time highs what do you tell steve, dan? >> i would say to you, yes, it is p it's up 80% from 52-week lows, up 27% in the last month i mean, where do you think it's 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 does it for us have a terrific weekend. "mad money" with jim cramer is up next. - [narrator] the following program is a paid advertisement for the nuwave bravo xl sponsored by nuwave, live well for less. is all the clutter in your kitchen starting to look like an old junkyard? sick of spending hours cooking, only to serve mediocre meals lacking in flavor? wish your family would spend less time whining and more time dining? well, now they can! with the new bravo xl, the world's first digital smart oven with flavor infusion technology. it's a breakthrough in culinary creations! coming up next, you'll see how bravo's compact design