welcome to "options action," everybody. we have a very important show lined up for you tonight following an incredible, historic, and wild week on wall stre street here's what's on deck. >> this week has witnessed a market selloff of historic proportions, without precedent in its witness and holy indiscriminate some investors see continued pain ahead others see opportunity whichever you may see, tonight we'll help you know your options. a special "options action" starts right now >> yeah, and that is where we

begin. welcome, everybody, good to have you here with us on "options action." obviously escalating coronavirus fears ripping through the markets all this week. 96% of the s&p 500 now in correction territory or worse meaning down more than 10% from its highs. all three major indexes handing in their worst week since the financial crisis in 2008 the dow shedded around 3,600 points, more than 10%. all sectors of the s&p 500 down more than 10% from their 52-week highs. but it was energy and financials the largest victims of the selloff. both sectors down more than 13% in the past week so if you are wondering how to protect your portfolio and who isn't, amid this market madness, our team of options traders are here to break it down for you. with us for the next half hour, tony worth, tony zhang and mike khouw. mike, in any way was it historic for the options market

>> yeah, anything that's going to be a historic move for equities is going to be a historic move for options on those same equities, and this certainly was one of those cases. we had the vix get almost up to 60 that obviously is a very unusual set of circumstances in a situation like this, you have to ask yourself a couple of things number one, is it overdone number two is there any fundamental rationale for what we're seeing when we go into investment committee meetings, one of the things we're asked to do make a bull case. make a bear case what's your case so let's start with what the bear case is obviously a lot of the coronavirus news we already know that there's another thing we have, which is if the market was reasonably priced before, does that mean it's cheap now the answer to that we got from a couple of banks throughout the course of the week several banks were lowering their growth estimates for earnings in the s&p 500 as a group of stocks to zero. let's think about that

if we're originally forecasting $173 in earnings for the s&p and now we're looking at 150, the s&p peaked out at 3390 you put the same turn on $151 of earnings, where does that get you? 2956 where did we close today right around 2950. what that tells you is if that new earnings estimate is correct, we're actually valued in exactly the same place. winers a winners and losers, you have said this a couple of times. energy space is a very risky place to be and we saw a lot of indications in the options markets of how risky that is we saw bearish put spreads put on in west texas intermediate in good size. big spread trades betting that the price of west texas intermediate relative to brent is going to widen. that's disastrous for e and p companies and that creates credit problems, financials might fall i do also believe that some

stocks actually are overdone when the vix starts approaching 50, when you see these big volumes, and then you see a sudden bounce back, what that suggests to me is that maybe at least in the near-term it might be slightly overdone. >> the 1950 is interesting, it is where the support is, but i think when this is all written in the history books, it will not be missed that as more and more people got bullish and we went higher and higher, the transportation were never confi confirming, the btx index never confirming, energy was never confirming we had greatdy v diedivergence >> do you believe it was then a semifal false rally that had to correct at some point and coronavirus. >> is the black swan. >> was the the spark, was the

fuse >> the bond market and the fact that we've been led by utilities ask all of those things, and yet the equity party continued what's so really negative about this week is that they finally started to sell utilities and they sold gold and silver got smoked that's when it's getting aggressive. >> we've been talking about the disconnect between rates and equities for quite some time the coronavirus is really what's driven this pullback here. and from my perspective the fact that vix almost hit 50 today but closed a the around 40 is certainly encouraging for this selloff. this is the first day we didn't see weakness going into the close. if we look at the coronavirus, a lot of the fear this week is due to the acceleration in cases outside of the u.s., but in the context in the big picture, you only have about 5,000 cases in the grand scheme of china you have 80,000 confirmed cases. >> but it's really not about the cases. it's about behavior associated

with the day-to-day goings on that can change. >> that's what we talked about in "fast money" with the airlines and everything else if you're wondering how to navigate this market meltdown using options, mike khouw is going to give you a little portfolio protection as he saunters over to the plasma. mike. >> yeah, so most of rus in the long-term we're investors, and when we're trading options we're doing it against a long equity portfolio. one of the things we just mentioned is that although we've had a significant pullback, the market isn't particularly cheap. let's keep our eye on the long-term prize, which is that we're going to be long-term equity investors as we also pointed out, if you're just requestigoing to go selectively stock picking right now, be aware that some names like energy names might be more expensive now than they were a week or two ago. but some names are actually considerably cheaper, names like microsoft spring to mind the other thing is that options premiums are certainly elevated but we can see that in a market

environment like this they might be justified if you want to hang onto your stocks or if you have cash that you're ready deploy to possibly purchase more, you may want to put some hedges on we do have to acknowledge two things because options premiums are elevated, they're more expensive, we're going to look for ways to spread that. there's something else, too, because we've already seen such a sharp pullback carter was talking about the largest magnitude moves we've seen, you have to consider how much further it could go from here in the near-term. this is one of the reasons we should be taking a look at using a put spread against your long equity portfolio i was looking at spy out to april. the 280, 260 put spread you could spend $5 for that. many times on this show we try to look for situations where you're getting a decent payoff the payoff in this case would be 3 to 1, and you're not spending a considerable amount relative to the value of s&p. this is a way you can mute some of the downside risk after we've

already had a downside move without spending too much and give yourself the latitude to selectively deploy more capital if you're going to begin the play for a bounce next week. >> all right, mike, why don't you come on back to the desk so carter, do you like the trade? if you don't, tell us why. if you do, how much? also talk about some of the technicals if you don't mind. >> we tried to address that to some extent in "fast". this is a moment for everyone there's every case to be made. clients, lots of people saying, listen, this is such a bullish thing to get a reset like this to have a basic huge relief with crude that goes right to the consumer's pocket, that the fed will accommodate you could get a v type recovery. there's every reason to make the case that the damage done is so substantial that it often is the beginning and we'll look back and think what a peak it was how could so many people have been so naive. >> one of the things we think about when we're looking at equity prices is you know we get

some kind of dislocation big earnings might hit a stock for example or the market overall. here we have a situation where we've got a lot of unknowns. more shoes could drop next week or nothing could happen. no news definitely will be good news if we have no news next week if we go two weeks and we have no additional news, no additional coronavirus cases, we don't have additional quarantines and things like that, that obviously is going to give some people a sense of ease you can't put people into hotel rooms that remained empty, planes that didn't go filled can't subsequently be filled that's lost and gone zbre zbregs nar spending. >> restaurants you can't go back -- >> you wish you could, right >> mike mabskes a lot of sense the risk still is skewed to the downside things can happen. i think the number of cases worldwide are still going to continue to climb, and that's

going to put fear back in investors. so the fact that you're using a put spread here is the only way to really play a hedge here. i will say the only thing about this particular trade is that if things do improve, the premiums on this put spread are going to evaporate quickly. it's important you cut your losses quickly you're paying about $5 for this put spread if this put spread goes down to 250, 2 bucks it's time to get out. >> you're doing this against a long equity portfolio, though. you might be willing to pay that premium just to you can maintain your positions in the interests of disclosure, i had some put spreads in the s&p this week. i sold some monday, i sold some tuesday, i sold some wednesday: i sold the balance of them yesterday morning. i am actually pairing back on some of thohedges. >> we probably have a lot of viewers that may not be regular viewers to "options action." every major news organization is leading with the markets and the

virus. what you said is your trade is basically a way for people to buy a little downside protection but not sell any of the stocks that's the whole point. >> correct >> where you might have tax hits, whatever it is. >> that kind of reactionary trading is never good for long-term investing. if you decide every time you stee a 12 to 15% drawdown that now is the time to sell, that's going to damage your performance over time very badly indeed. it wasn't just stocks that took a hit this week if uchbyou haven't been paying attention, you have got to see the yield on the 10-year treasury note. i mean a new all time low like going back 150 years type low. as people sold stocks, they flooded into bond market which they've been doing even before the selloff. the market may be looking to the federal reserve for answers or help tony zhang is taking a look.

>> i want to shift our attention here to the treasuries because we've seen some are pretty incredible mooves over the last few days and i think we can utilize options to play this what i want to take a look at is the charts let's zoom out and take a look at a 10-year chart on treasuries what we've seen is tlt has moved 40% from the december 2018 lows and this has happened consistently a couple of times over the last decade every time that's happened we've seen either a consolidation or a pullback after that 40% move if we zoom in a little looking at a one-year chart, tlt is up about 15% year-to-date it's currently reading fairly over bought. couple that with the fact that we see some negative divergence, there's a relatively high probability of a pullback or at least a consolidation here in tlt. the long-term and short-term charts line up really well what's interesting here, if we look at the futures, the

probability currently of a single rate cut in march increase rd fred from 11% to 70 the last week. if we look at the april cut tworks ratwo rate cuts, a jump from 3% to 63%. i think that's a pretty incredible shift considering the fact we've only seen about 5,000 new cases in the coronavirus even though this is globally now over the last couple of weeks the way i want to play this is i don't necessarily want to bet against a rate cut here. what i'm looking to do is i'm actually looking to bet that tlt is not going to continue moving higher i'm going to use a call credit spread here to trade tlt by going out to the april 9th, i'm collecting about $3.98 to sell the 155 calls and paying about 228 to buy the 160 calls my break even price on this particular stock is around 157.20 betting that tlt won't go

much higher than that. i'm using a call spread to define my risk a lot can happen here and i want to make sure i reduce my risk to just $2.80 per share. we've got news breaking on united airlines. >> united airlines is postponin its analyst/investor day which was scheduled for next week here in chicago united saying the uncertainty due to the coronavirus, the impact that it's having on bookings near term and enti intermediate has the company saying we really can't give guidance we've already pulled guidance for 2020 why are we holding an analysts day. they're postponing, likely going to happen in the summer, early fall that's another indication that for the airlines they just don't have a whole lot of clarity right now in terms of the overall impact of the coronavirus. >> but to be clear, they're not not holding it because they're afraid of people getting infected it sounds like they're just saying -- >> no, it's about their business. >> we don't have anything to say

anyway. >> correct they pulled their guidance this week what are they going to tell analysts don't have a whole lot of answers in terms of bookings it's a smarter move just to postpone it. >> phil, thank you very much. speaking of airlines, coming up, we're going to talk travel stocks some of them in the green today. we're going to break down what might be behind that move there. plus, you've got questions we have got options. send them over to our twitter handle @optionsaction where we will answer them later in the show live from the nasdaq market site in times square. we're back after this. ♪ ♪

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maybe a couple throw pillows would help. get a strategy gut check from our trade desk. ♪ . welcome back to "options action." obviously coronavirus fears rocking the markets all week long the three major indexes closing out their worst week since the financial crisis, and now sitting in correction territory, more than 10% below their highs. this week's selloff wiping nearly 4 trillion in market cap out of the markets but as bad as things were, there were actually a couple of bright spots today. a number of travel stocks actually staying afloat amid the market meltdown. what gives carter worth at the plasma >> interestingly on the week things that were very strong closed well today, semis,

software, and then the things that are the worst i mean, this is the ground zero. literally boats where people are stuck on with the flu. this is the third worst counter week of all time for this particular sub industry group, hotels, resorts and cruise ships. you see the statistics here. let's keep moving. what we know, look at the chart. it is literally a perfect double top, and the next screen, it is a perfect double bottom. we have literally gone right back to where we were. this event over the past two years, this was a 30% decline, 31, this was 30, and we found that low, so literally right into a range, and i think we're going to get -- and they were green today as you just saw there, reactionary bounce. take rcl down almost 50% plunging through the bottom of its thing. my thought here is that we will

come back to the underbelly of the break, and that is a nice 7, 8, 9, 10:00% move. rcl for a bounce having dropped basically 50% in a month. >> yeah, absolutely brutal chart. come on back to the desk carter. what do you think of the trade what's the best trade around rcl? >> this is the second time based on this news that we have tried to play for a bounce in one of the cruises, norwegian was the first. for those who were watching at the time, we risked $0.65 a share to make that bullish bet the idea here when you're trying to catch the falling knife, if you think you're going to get a v bottom is to risk a relatively small amount it is harder to do that now because options premiums are elevated, so we need to use a spread that's a little bit more complica complicated, but it isn't really all that tough what we're doing is looking out to april i was looking at the april 85,

95, 100 call butterfly what i'm doing is buying one of the 85 calls, selling two of the 95 calls and buying one of the 100s the idea here is that by selling a couple of those options, i'm selling some of that elevated premium. the idea is it runs up to that 95 strike or thereabouts we're risking about $2.15 to do that on an $80 stock if the stock continued to fall, you know, we're risking a relatively small amount of the current price. because the premiums are elevated we're trying to sell the premium. unlike conventional butterflies, this will make money even if it impo goes through that 100 strike price. this is a way you can basically try to make this play with a little bit of a good playoff if it lands right where you're targeting, april expiration, we don't think that's the highest probability but you have an opportunity to make a couple times your money. >> go back to what was said earlier. it's not random that of the 158 sub industry groups in the s&p

the top four performers were things that were historically bottomed out number one is cruise ships, hotel, and number two was oil and gas e and p. people went after the most bombed out things and they closed up well the exact opposite the next two systems software and semis favoring relative strength or so bad catch the falling knife, not random. >> energy and some of these travel related stocks might have a little bit of leverage on them going out and buying the equity could be a risky thing to do spending a little bit of money on an options trade isn't quite as risky. >> risking only about 2.5% to use a broken wing butterfly here the only question that i have here is are consumers going to be comfortable enough to get back on a cruise ship? >> no. >> and because out of the travel stocks that have been hit the most between hotels, airlines, cruise ships, i actually think the play in the bounce using a butterfly is a great trade i just think that i would

prioritize hotels and perhaps even airlines before i would the cruise ships. >> you know things like expedient booking were up as well having dropped 50%, let's say they don't have earnings for a year maybe two, a lot is priced in tactical bounce. >> good stuff there on a hotly debated name and sector. for more on this week's historic selloff, besure to stay tuned for cnbc's special all right, 7:00 p.m. eastern time up next, you've got questions and we have got answers and options. your traders standing with by with what you want to know at home about protecting your portfolio in these pretty insane times. we're back after this. ♪ ♪

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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 final call, carter. >> cruise ships play rcl.

>> take a deep breath, use put spreads to protect your equity portfolio. >> tony. >> tlt, we've gotten to a top sell call credit spreads. >> great job tonight, very macro night as well, but it's appropriate. that's it for us full coverage of the selloff continues, we've got "mad money" with jim and a wild week have a great weekend we'll see you next week. take care. - [announcer] the following program is a paid advertisement for the nuwave brio digital air fryer, sponsored by nuwave. live well for less. we all love fried foods, (crunching) but yuck! (sizzling) that means scoops of grease, blobs of butter, or gallons of oil, just to fry. this adds up to a lot of unhealthy fat in your diet, year after year. stop! (slamming) now, you can cut out all the added fat, and still keep all the flavor with the new brio digital air fryer by nuwave, the world's first digital air fryer with flavor infusion technology. coming up next, you'll see how brio's compact design

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