. happy friday, everybody. it's time for "options action. we have a great show liened up for you. >> keep your receipts. carter worth isn't buying the bounce in retail sales data. in fact, he's drawing up signs to guide you to the returns aisle right now. >> there's a lot of upside here. >> it's still a party in other areas of the market. you bring the chips. and new to "options action". >> that sounds like the perfect question for professor khouw.

>> welcome you're not alone as individual investor interest grows, so too is the options marketplace. professor mike khouw explains how that could benefit everyone with more diverse product, well, options. it's time to risk less and make more "options action" starts right now. let's get right to it. a slew of retailers on deck to report quarterly results next week despite today's big pop in monthly sales data, our chart master says the recent retail wreckage isn't quite over yet. carter, what are you seeing in the charts >> we did get data, as you mentioned. retail sales today reported that the total value are now higher than covid that's in a way bullish. but the stocks reflect it in aggregate. the first is a comparative chart. you're looking at xrt, that's the equal weight retail etf.

it's 88 stocks, it's $3 trillion versus the s&p what we know is this index is double the performance of the s&p, up 36% versus the s&p up 18 so the question is how much is priced in? second chart, this is a two panel chart. it's another way to look at the circumstance in question what's right here is that the xrt on top going back to its inception with its 150 day moving average on the bottom is a calculation it's showing how far above or below the xrt as gotten. we are now just as exactly as high as we were coming off the 2009 crash and ricochet. overbought comes to mind as a phrase the third chart is a comparative chart, two-panel in this case xrt on the top and now you're looking at xrt equal

weighted retail index versus the actual this counter trend move on the bottom panel is relative outperformance period. every time we've gotten to the trend line, it has failed. you can see those arrows drawn there annotated the chart. the bet here is it's going to fail again as a relative outperformer and start to falter finally the chart of xrt itself, you have this incredible move from the plunge low in march right back to a well-defined prior top. in principle before exceeding a high, a stock will contend with the high, which is to say back in full or back away we've just now approached the high the thought would be to trim before someone does its for you. >> mike, what is the trade out of this?

>> so it's interesting when you're talking about equal weight which is cap weighted indices and that's the situation we have here, one of the do downsides is that you're heavily dependent on the winners of course that's also one of the good things too. whoever wins as they go up, they increase their weight to the index and of course the ones underperforming have a smaller and smaller impact what's interesting here is you take a look at something like rent-a-center, that's the same weight as amazon in this particular index that's hard to imagine there's something like 15 auto parts or car dealerships in this you have to understand given the economic environment we're in, some of these big durable goods exposures have to be in significant jeopardy if you take a look through a volume tatilely perspective, wee

started to see volatility in the broad markets come in very much here too we often do see increases in volatility after we get through labor day. looking ahead to that rather than trying to involve myself in some kind of a spread, i was looking out to the october put weekly you might wonder why i chose that particular expiration usually when i'm trying to follow carter's technical setups i'm looking for 60-90 days the idea here is i'm trying to be able to carry through labor day, through september, sometimes an uptick in volume t volatility they obviously could be exposed if we start to see some significant consumer weakness. >> tony, what do you think >> so i really like carter's chart work here, but i will want to warn investors it's typically

quite hard to shorten this particular market. ifhe constituents of this etf, a lot of them have rallied into earnings reports but have now stalled or started to reverse lower i like the opportunistic play of a short here a lot of these stocks have started to stall their momentum and started to move lower. i think the key is to limit your risk as small as possible. i think that's exactly what mike is doing using a put here. for investors that want to maybe even limit their risk a little further, you could spread this and trade a put spread >> why not a put spread, mike? >> i think there's two reasons for this a lot of the names and some of the ones tony just mentioned are treading at heady valuations you start to see some kind of valuation, multiple contraction

here combined with general market weakness that could hit this pretty hard i'm not opposed to spreads i love spreads, but this is a situation where if we start to see the market roll of, you're going to want to work your way into that spread wait until it starts to roll over and then look for your opportunity to sell downside strikes or roll this one we're still looking at less than 4% of the current level of xrt by putting this on it's a lot less risk than shorting xrt would be. >> carter, are there retailers whose charts you actually like >> sure. i think walmart is quite good, target's quite good. we heard about overstock of the 88 stocks, overstock is the biggest weighting in xrt. it's 5%. the next closest is 2. overstock is basically priced for bankruptcy before the covid

hit. it was trading at $2 it's now at 100. if you look at all stocks in the russell 3000, the number one performing stock of all stocks listed is overstock.com and it is the biggest weighting in this equal weighted etf >> that's staggering it's not just retailers set to report next week we're also getting reports out of the semiconductor space nvidia, tony >> the stock is incredible it's driven predominantly off of two major sectors which is gaming and cloud computing nvidia has dominated even before covid. since covid we're poured fuel on the fire we expect q-2 earnings here to be fairly strong because you see gaming and sec conductku semisu

e-mar covid. predominantly gaming i expect to be very strong you have an xbox launching in the fall that generally triggers gamers to upgrade their tech. i think that's going to offset some of the softness out of the cloud computing space. if we look at the chart, the stock is not a whole lot to say other than just incredible strength it recently broke out above the 430 resistance level, it's now starting to move higher. that's the type of setup that i typically like to look for going into an earnings event the options are implying a sizable move here. but there's no hiding behind the fact that nvidia trades at a

rich valuation, a very large premium to its peers at about 56 times next year's earnings as optimistic as i might be on this particular stock, i do think it's thefairly valued and there's somewhat limited upside. i'm going out to september and i'm selling the 450-415 put spread collecting about $22.60 selling the september 450s and paying about $10.60 on the september 415 put. net-net i'm collecting about a $12 credit on this $35 wide credit spread which is about a third of the width here. that's about $12 out of the money. my break even price is 438 i'm only risking 5%. so in the unlikely event that nvidia blows out earnings, i'm

risking only 5% of the stock trade to take this bet. >> i definitely like the trade structure. it's almost impossible to short a stock that's this expensive and is definitely going straight up the street is pretty overwhelmingly bullish on the name but the stock has gotten well ahead of the average analyst price target sometimes that's a sign that investors know something that the analysts don't or at least haven't gotten around to eling telling us yet >> do you agree with the direction of this trade, carter? >> you heard the word incredible twice from tony. it is an incredible up trend but you also heard from mike that the street is bullish 34 buys only two sells of those 34 analysts their price target 12 months from now is $415 the stock is at 462.

are they bullish the street's just had this thing wrong. >> check out optionsaction.cbs.com. coming up, you've got options and you're getting even more of them professor khouw explains why new product slices could grow the pie for everyone plus, calling all options action fans. reach into your pocket and tweet us your question @options action if it's nice, we'll answer it on air. ♪ ♪

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we've been tackling the explosion in options volume for a while now. as you all know, you can't talk about options without talking volatility especially when it comes to the year's best performing index that would be the nasdaq 100 up a whopping 27% there's a brand new way to track its volatility professor khouw is here with the call to action >> i mean, this is really pretty exciting news. it's not out yet but it will be soon we're talking about the nasdaq 100 volatility index they're going to be offering futures on this subsequent to that there's going to be options trading on them. even if you don't happen to trade these products, the contracts multiplier on these futures is going to be about a thousand this matters a lot

as you pointed out, the nasdaq 100 is the year's best performing index the volumes of options have essentially been exploding we can take a look at the history of options volumes traded on the list of exchanges in the united states it's gone up 50% over the course of the last three years. there's also been a big increase in the interest in trading in volatility strategies. volatility strategies, it's easy enough for people who buy and sell stocks to see how much the market is moving around. these volatility products tell us how much the options market anticipate that it will move around the way money is made and lost is the difference between those two. i see this as a good complement to the vix this is broadly known as a fear index which tracks volatility on the fpx. the vix can be a little bit obscure for people to understand in order to calculate it you have to take a look at a

weighted strip of options that expires 30 days from now the way most traders take a look is they take a look at options that are at the money. this will continuously be looking at options 30 days from the day you're looking at them the first two out of the money call strikes, the first two out of the money put strikes essentially are the way to look at this. in intuitively i think that's going to make a lot of sense to people it's probably going to be a win on pricing, it's going to be a win on transparency and price discovery in the marketplace of course it's a big increase in investor choice. i think this is a positive development. >> tony, do you think this will be useful? >> yeah, absolutely. arguably these days when you

look at an investor's portfolio it is likely to look more and more like the nasdaq 100 index rather than the s&p 500 index. it's important to have an index that tracks your portfolio the calculations here are different from the vix so that is important because the volq index is more closely aligned with what a traders actually use for their calculations the volq calculation is much more in line with those calculations that investors use. they're going to be calculating a call deck and a put deck so you have a good understanding of skew between the call and put side these are all advantages to the volq index that i think is going to be quite interesting to look at as they launch here on october 5th. >> carter? >> in principle the more the

merri merrier, so more vehicles, more ways to participate is a good thing, not a bad thing in terms of the explosion, you think about what happened in slv, options never traded more than a million contracts in the past ten sessions you have six days where that's happened this is all to the point of more investor interest and more opportunities to do very well but also to hurt oneself >> the more specific you can be about the things that you want to bet on or believe in the marketplace and the more tailored you can make your bets, the better off you're gone to be that's another positive way to take a look at this. there might be opportunities to trade this product against the vix. >> up next, a cisco slide. we are breaking down how the

tech stock's fallout on earnings this week is shaking out for one of our traders plus, send us your questions @options daction i'm searching for info on options trading, and look, it feels like i'm just wasting time. that's why td ameritrade designed a first-of-its-kind, personalized education center. oh. their award-winning content is tailored to fit your investing goals and interests. and it learns with you, so as you become smarter, so do its recommendations. so it's like my streaming service. well except now you're binge learning. see how you can become a smarter investor with a personalized education from td ameritrade. visit tdameritrade.com/learn ♪

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it's got all my favorite shows turn oright there.boom, i wish my trading platform worked like that. well have you tried thinkorswim? this is totally customizable, so you focus only on what you want. okay, it's got screeners and watchlists. and you can even see how your predictions might affect the value of the stocks you're interested in. now this is what i'm talking about. yeah, it'll free up more time for your... uh, true crime shows? british baking competitions. hm. didn't peg you for a crumpet guy. focus on what matters to you with thinkorswim. ♪ time to take a look back at a couple of our open trades. just last week tony laid out a bullish way to play cisco into earnings. >> cisco is the backbone of the

internet hardware business it currently trades at a reasonable valuation just like john deere it's recently made some strategic acquisitions here in the cloud security business. i think that 2020 is going to be a turnaround year for cisco. the trade i'm looking to do is use a september 47.5-52.5 call spread paying about $1.85 for that 47.5 call collecting about 35 cents on that 52.5 call. >> as we all know, cisco's reports disappointed what are you doing now, tony >> cisco reported earnings, beat on both earnings and revenue but the company guided lower we saw about a 9% drop in the underlying stock price this is why we use call spreads, to limit the amount of risk we're taking stock is down 9%

only lost about 2.5% of the underlying stock price you were able to mitigate a lot of the downside risk compared to buying the stock this is a prime example of how you can utilize options to limit your risk on a trade like this. >> khouw and carter laid out a way to play the soft commodity space for cold, hard gains. >> everyone knows what a breakout is. do they always work? of course not. but this is the setup that we look for and then we look for the catalyst we know we have earnings coming up in the next two weeks john deere closed out at 183.50 and i think is going to 200. >> i'm going to buy the september 185 calls. those are about $6.75. sell the august 195 calls. net-net i'm spending $5.65 that's a little over 3% of the current stock price. >> john deere jumped about 5 .this wee5 .%

this week. what do you do >> this is one of those situations where you go to a store and it says act now that's c what you needed to do monday morning. midweek it hit our target of 195. obviously this has worked in our favor. some of you may have gotten in fairly close to the price we were talking about it is still working the way we want it to i think we're going to start seeing some decay in that 195 strike this is a trend you stay with. >> carter? >> very good action continues this week john deere obviously having a big week but the earnings are still coming next friday up next, we have your tweets and the fil llnaca what do you look for when you trade? i want free access to research. yep, td ameritrade's got that. free access to every platform.

mhm, 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. now offering zero commissions on online trades. we charge you less so you have more to invest. ♪

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yeah, actually i'm taking one last look at my dashboard before we board. excellent. and you have thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪ welcome back if you caught up at the top of the hour you heard warren buffett took a new stake in barrick gold we have a tweet on gold. one viewer asks i have gold september 20 215 call. should i sell it for a loss or hold it? >> i think you sell it for a loss we know gold has just pulled off nine consecutive weeks in a row up that's only happened three other times in history, 1980, 2003 and

2006 and looking forward those other times gold moved down consistently one month, three months, six months gold got a little hot. i'd take the loss and move on. >> spy, march 290 puts, what do you think? >> i like owning puts. obviously it's consistent with our xrt trade. that's a little bit far out and a little bit far down. >> it's time for the final call. the last word. carter braxton worth >> xrt is a way to bet against consumer retail. we like it on the short side >> tony zhang? >> i'm looking for a continuation in the surge in gaming selling a put vertical spread in nvidia. >> mike khouw. >> it looks really exciting. i'm looking forward to it.

october 2 nlnd xrt 50 strike put >> that does it for us here on "options action. we'll be back next friday. meantime, do not go anywhere summer school is back in session. good evening i'm frank holland for those of you tuning in for jim cramer "mad money," don't worry, he'll be back money. we're taking your questions. this week's report card is just in for the major industries. the dow up and s&p and russell and nasdaq i want to welcome cnbc contributor and wealth management josh brown, known as my financial counsel