all right. hello and welcome everybody to a special edition of "options action." tonight it is a fullhouse. i'm brian sullivan joined by carter worth mike khouw out west. appear bonwin and tony zhang we are seeing things unfathomable a couple days ago what could could be next. >> tonight we follow an old adage to know where you're going look where you've been to quote the great kenny rogers know when to hold and know when to fold them

consider the trade on the tlt. >> what we have seen this stock -- tlt moved about 40% from the december 2018 lows. and this is happening consistently a couple of times over the last decade every time that's happened, we have seen either a consolidation or a pullback after that 40% move and if we zoom in a little looking at a 1-year chart, the tlt is up 15% year to date and currently reading fairly overbought if you look at momentum indicators such as rsi. >> well so now due to seismic shifts in everything that trade has not gone our way which is why we always preach appropriate position sizing as it is known. first off do something a bit different. we want to talk about the lessons maybe we learned this week and what we see carter what act -- a little more macrothan usual, given the week it's appropriate. >> if you think about -- we did two things very specific and yet the identical last week. we were saying that tlt had after a great run had gone too

far. what we were trying to do is buck the trend, go against momentum we also said that cruise ships and we picked one, were going straight down had gone down too far we were going to buck the trend and make the call both went up. both are disaster. cruise ships got a lot worse and tlt better each one of the biggest weeks against us in years. the buoyant is sometimes it's important to be contrarian and sometimes you get your head handed to you and that happened to us. >> more importantly using the trades, utilizing options to limit the risk we get trades wrong or right it's important on the trades you get wrong you're not blowing out the entire account risking $2.80 op the trade which was 1.8% of the underlaying lying etf even if it went to 1,000 i only risk 1.8% of the price. >> and going to something that's overbought and gets more

overbaugt. >> what are we seeing bonwin in the markets? do we see any indication of how things are going because everybody is nervous. >> i would agree as the tend end of the day we are trading options because we want the convexity the same holds true in technical analysis you want to ride the trend up or down picking bottoms can be a profitable strategy. you're taking advantage of amplified bond levels but you have to make sure you are riding the trends. >> we ended the week effectively where we began, almost exactly flat despite multiple thousand point moves either way is there a trend right now. >> you know, karen was talking about this and obviously if you just put a blindfold on, saw where we closed last friday, saw where we closed this friday, you might not think a lot is going on. what is going on is an explosion in correlation that's essentially what we've been seeing this week. stocks are tracking together

it's completely risk on or risk off. to illustrate this i think we have a chart of the implied correlation in the s&p right now, which we can see blew out at one point reaching actually 75 today now to put the numbers in context, zero would mean that stocks were not at all correlated 100 would mean they were perfectly correlated reaching a number like 75 is essentially like saying one stock is any stock is the same as all stocks. essentially people are either buying or selling futures, buying or selling indices, buying orr selling etfs. if they hold individual stocks they're in the discriminating about whether some are winners or losers. they are saying it's safe to buy i will add or unsafe to own them or sell them all that's the reason you see this volatility. >> carter, tony, everyone jump in i'm out of questions and i'm tired. i mean, are people

indiscriminately selling which means there will be opportunities somewhere. >> absolutely. ious to add to that, i think the risks are skewed to the downside i think we are revisiting the 285 low on s&p maybe overshoot. but we have the high implied volatility but we shouldn't fight the fed here buying puts i think is really expenseo spence expensive. i prefer selling the call spreads. i'll show trades here later today as far as why i think kjelo selling call spreads is the right way if you have the bearish view. >> it's bad once you show the hand and everyone else at the table says yeah that's all you got. not the best action for the fed after doing what they did to watch the market. >> all right, if the wild market swings, the chart master says here could defense could be the best offense carter head back to the plasma to break down what we are talking about. because we need a little defense right now. >> not like staples and

utilities that's not the point of this segment. literally talking about aerospace. and look at lockheed martin, lmt, a 1-year chart here we have the low at 285 and we made a peak with the market just two weeks plus ago at 439. what we also know and see the following, that that advance from low to high is a gain of about $154 a share and then how much did we give back look at this next chart. we gave back 77. 77 times two is 154. this is exactly a 50% retracement. not only that watch where lockheed stops, stops exactly at its october low. so having retraced 50% of the one-year move and finding support, i think this is one that we would want to play for a bounce let me make it -- a case that

will support that. look at this, same one-year chart and now what we have is relative performance to its sector which is to say yes this sold off but what we know it's outperforming the sector and today -- and at the close this at the close made a new relative high. this is the kind of thing that's defensive in many ways. >> carter come on back over here mike, what's the trade on this because i can think of one sector doesn't seem it should be supposed at all to the virus might be defense. >> this is really interesting. because carter and i were talking about midday today and trying to figure out, you know, what we thought might be a place you could dip your toe in the market we arrived actually at lockheed martin independently through our two different techniques my approach when looking at this was exactly what you are talking about, which is this is not a discretionary stock. close to 73% of the company's revenues come from the u.s. government and the uk

government and a good portion of the balance of the revenues come from other defense contractors this is not discretionary spending they don't have exposure in the same way that many other businesses do. we're not trying to figure out whether demand for the f-35 and the 3,000 planes they are delivering, the only stealth bomber basically the forces are going to have in the near future and the replacement for the f-16 is suddenly affected by this over the course of the next 5 to 10 years this is looking well ahead besides which this is a company trading at a attractive multiple at 14.5 times earnings not the cheapest in the last five years but it's not far off of it if we look at the price of options obviously in a market like this options prices are exploding. i'm trying to look for a structure that takes advantage of that. the trade that i did was the may 335/385, 425 call risk reversal. i would point out the stock was lower than where it was today. i got it for about even, selling that 335 put, buying the 385

call and then selling the 425 call against it -- by the way that lower strike that i was selling is a level where "i" comfortable getting the stock, that's below that level that carter indicated on the chart and probably would meet the next area of resistance and actually would represent essentially the cheapest multiple that this stock has seen in five years and those wing options if all should come in for whatever reason would decay more quickly than the call on a i'm buying i'm not overly bullish but that doesn't mean they don't represent better value they were certainly better than recently this is the situation where if we have the stock put to us it's down at 335 that's a good discount from the 385 or so where the stock closed today. >> so you pointed out two things it's important to take into consideration. one that put strike which you sold you're comfortable owning the stock at that level. that's a critical distinction that i think you made. additionally i will say is another thing is in this market we have to try to hit singles.

your strikes -- the spreads between the strikes are probably going to be tight because as we indicatesed option prices are stroo extremely high right now you're going to have to be willing to kind of grind this thing out. and actively trade your positions. >> so i like the stock if you are trying to you know pick a stock to buy i think lockheed martin certainly at the top of my list. you have strong fundamentals, you mentioned valuations are relative inexpense pef the trade i like simpler than this is simply sell a march put. looking at the at the money 380 puts you can collect $12 on this allow you to own the stock at 368 just below the 370 level that carter pointed out. that's a simple trade i think you could use to own the stock. >> good stuff, guys. well from defense to a group like many finding itself playing defense this year which is technology stocks, the s&p 500 technology sector slammed. and if you think there is more pain ahead, tony has a way to triage some technology

>> so i want to look at technology which was one of the weaker sectors trading today now if we look at a 1-year chart, the stock pulled back 18% from the all-time high down to about the 200 day moving average, traced about 50% back and trading lower. this stock could get back down to the $84 support level around the 200-day moving average if we look at holdings of xlk the lion smar is microsoft and apple of which both are higher than the 200 day average there is room for both names to pull back look at veesa and master card i think these names slow down as consumer and corporate travel slows. and intel, i don't see a strong case for a bounce here on semiconductors i think there is a bit of technical downside for xlk but what i liked about the trade even more is actually the options. there is a rare opportunity for us to take advantage of the current skew looking at the skew of the april call options as you can see the at the money call options are trading at a substantially

higher elevated implied volatility versus the out of the money call options which is a great opportunity to sell call credit spreads the trade structure i'm looking here is out to april and sell the 88.95 call spread collecting $5 if it 20 on the april 88 call and pay bag $17.79 for the $95 call net-net collecting 3.41, which is almost half the which hadding of a $$7 credit spread this has the break even price in this case of 91.41 giving me about a 60% probability of profitable on this trade with a one to one payout. those are the odds i like to take on a trade like this. >> all right hold on, guys sorry to interrupt but we have breaking news right now. let's get a live look at the white house where vice president mike pence who is also the head of the coronvirus task force is holding a briefing on the outbreak we're monitoring it. and of course as always we bring you any headlines as they

develop whether pertaining to the economy, companies or what they're doing what they think is going to happen. certainly so vice president mike pence is talking right now at the white house. let's quickly just get back to the trade on technology, tony because -- i'm sorry i was focused a bit on the headlines crossing on this as you were talking. you think it looks apple and microsoft are going to drop more >> a little bit. not substantially. but i think there is room for pullback i'm not looking for a big move down that's why i'm selling a credit spread. >> what helps you on the way up can hurt on the way down we know this is dominated by apple, microsoft, visa master card intel if you look at the sector equal weight and nef indices that do pap the peak to trough is less than the actual sector the thing driving the market is what's. >> i have talked about it por months i'm not picking on etfs. but do you think the etfs has

contributed to the size of the moves. >> you are can sell on your phone. >> you can sell everything. >> correlation. >> you like it on the way up. >> speaking up the way up. >> go ahead. >> speaking of the way up. >> the i have to jump in here on apple, because, you know, as tony was pointing out apple is one of the largest constituents of xlk if you look at december 31st, the day the coronvirus was first announced. apple is essentially trading unchanged from that level. all right. i think it closed that day around 293 we closed today at 289 if you had the opportunity to sell it before all of this blew up, you would take that opportunity. it's trading 23 times earnings you had that opportunity that's where we were right now it has opportunity i think to go a lot lower. >> a lot lower wow. >> all right make khouw in san francisco. thank you very much. all right still a bit more to do on "options action." here is what's coming up next.

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shipstation. the #1 choice oh yeah, you going to place it? not until i'm sure. why don't you call td ameritrade for a strategy gut check? what's that? you run it by an expert, you talk about the risk and potential profit and loss. could've used that before i hired my interior decorator. voila! maybe a couple throw pillows would help. get a strategy gut check from our trade desk. ♪ all right welcome back, everybody. certainly a wild week for the markets. escalating economic fears sparked by the coronvirus, pointing to 1,000 point swings in the dow pretty much every day. but amid volatility there was a

bright spot. look at gold posting the best week since 2016 investors turned to the buolen for safety but if you missed out on the move carter worth is laying out maybe another opportunity for you at the plasma take it away. >> gold is great by all situations plenty higher but i wanted to look at the ratio between gold and silver. this chart is just that, gold over silver trying to zero in on when that spikes and what happens to silver silver there after. let's go back to 1970. look at the circles on here. those are all spikes in the gold-silver ratio. guess what happened each single time that the ratio is spiked as it's spiking now what's happened going forward a and you see this in the table. silver's absolute performance -- independent of gold, one week later, one month later, is very robust almost no exceptions to any of knows instances. i want a simple catch-up trade gold we love gold.

but silver has the potential as a catch-up trade on its own. now zero in on the near-term chart. here again and what the gold-silver ratio would typically do is go down. that doesn't mean that gold goes down it means silver goes up more than gold. and we with thinking we are at that juncture right now. so very interesting moment in terms of the slv we know it spikes and peaked in 2011 we know you can draw the lines many waist but you can trau it like this we have come out of the important formation and think how much room it could run so long slv, long silver, long gold, watch the gold-silver ratio. >> the burl ives trade. >> you're not anti-that bonwin but you have a different way to play in lekts of the contract. >> correct pretty much if you look at the stock chart of jld you can see it's volatile the last two or three weeks.

a step further, if you look at the term structure of implied volatility, what we're seeing is in this panic, keep in mind that gold is thought of as a store of wealth nb, in this panic we see short term trading to trading at a preemie longer dated options the last thing, look at the smile surface or vol surface most stocks trade with a skew. meaning things fall faster than they rally unless it's gold. you have a skew to the downside. it's the compact opposite with gold to the upside the last thing i want to point out on the chart is that is that you can see the march smile is much steeper than the june smile. the trade i'm laying out to take advantage of that is selling the gld march straddle to buy the june gld 157 straddle. you'll sell the same strike in march, sell it at $6 you're then going to get optionality you will all the way until june for $12

so two weeks ever ongslety you sell at half the cost of what you are buying for 3 1/2 month option we mentioned earlier about continuing to make sure you have holding positions and you have trading positions. in definitely qualifies as the latter once this march rolls off, you can see here from the p and o standpoint above the break evens, 151 and 163, you start to make money but this situation gives you an opportunity to continue to trade it after march xre. if this inverted structure continues you roll into the next month and continue to pick up premium. >> you like the strategy. >> i'm actually surprised how much premium you can pick up in two weeks in march that makes a lot of sense buying the optionality by you're picking up almost half the premium of the jun option which is 114 days out and able to do that in 14 days. it makes sense

i would try to sell another call or straddle possibly once the march ones expire and hold the call or put depending on the direction you think gld heads. >> totally agree. >> well, and then it is this one could say why both are -- in the ratio instance by why both are to be so cute? are you saying short gold and long silver in the pure world that's the gold-silver ratio is. but in a world where it's possible rates is to zero. gold to infinity if and as that continues to happen you want to make sure you got silver too. >> gold and silver guys. a a little bit of breaking news by the way coming out of the coronvirus brechg from vice president pence. reporting 21 people have tested positive for the coronvirus on the grand princess cruise ship, that's the one effectively stranded off the coast of california off the 21 who have tested positive, 19 of them are crew members. again that cruise ship which is off the coast of skra, 21

positive tests of those 19 crew members that coming out of the press conference with vice president pence moments ago. we'll goat you more as we have it we'll be right back after this ♪ "options action" is sponsored by think or swim by td ameritrade ♪ ♪ ♪

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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 all right. time now for the final call. mike khouw out west. >> you know, as a defensive play, i like defense, specifically lockheed martin use the risk reversal and looking at the slv trade i would calm the backward dated calls. >> speak for me. lnt, slv. >> taking advantage of the

inverted term structure structure and buying the march 157 straddles. >> technology grinds lower, selling call credit spreads. >> selling call credit spreads. >> we did a little different but big week incredible week that's it for us see you next us. "mad money" with jim cramer starts right now. hey, i'm c kraichler i'm trying to make you money my job is not just to entertain but teach. call me or tweet me. this is one tough market dow is down before rallying to