welcome to a special "options action. yesterday the dow plunged over 800 marks. all the investors rushed the exits of the crowded tech trade. with us tonight carter braxton worth, tony zang and mike khouw. carter, where have we been

>> we've been in a momen speculative excess that was going on in fact in january and february, then the plunge and the ricochet. let's look at a few slides to try to prove it, so to speak the precondition of excess you see these bullet points here basically s&p 500 before this selloff this week at an all-time high the price to sales, a fundamental on measuring the valuation, at an all-time high the s&p 500 is up 42% and the nasdaq up 57%. the precondition of excess the next slide, divergence as the market is making oe inine highs only 16% of the s&p constituents were making ofe ii all-time highs the average stock in the s&p is 28% below its all-time high.

that's not now that's on monday before we sold off. finally, 46% of all stocks in the s&p 500 have no gains for two years. this is the precondition of die j v divergence and the precondition of excess. we have a very rare circumstance where the nasdaq 100 drops 10% in a two-day period. it's only happened 17 times in history of the index going back to 1984. so a very low probability. and yet, finally consider this what about of those 17 times where the nasdaq was up as much as 50% in the preceding five months before dropping like this, 10% in a two-day period. that's only happened one other time before. it was april 14th of the year 2000, near the dotcom peak

a few charts this is the channel that the qqq has been living in you can see there it's well-defined ascending up into the right sort of affair take a look at the same chart pulled back for one year, putting in perspective the move qqq and just now breaking below that up trend. final chart. if we were to simply check back to the january peak, which is what the s&p has already done, you have another 11-12% to go for the qqq. >> wow >> a lot of people are making the point that there is tremendous call activity here. it seems like there might have been clues in the options pits. >> unfortunately, what we saw this week i think is the new normal, where we have longer and

longer periods of suppressed volatility followed by this mass i ha ive explosion in volatility. if you look back the past 15 years, the 20-day put call ratio has never been below .7. meaning calls have never outpaced puts a significant amount for a long period of time but for 2020, 34% of trading days the ratio has been below 0 .7, meaning calls have been outstripping calls by a substantial margin 75% of single stock options volume is now traded in options that expire in less than two weeks. short dated options like that

have a high amount of gamma. when you have less liquidity, you see selloffs like we saw here over the past couple of days in the small caps they did not participate in the rally they also didn't participate as much in the decline. from my perspective, i do think that the selling is fairly contained. i think the lesson for retail investors is to generally stay away from these short dated out of the money call options. i'm willing to bet over the last ten-plus years of options action there probably have been very

few trades that have been traded that are one to two weeks out that are relatively far out of the money. >> mike's been here the whole time so have i. mike, in terms of what you made of this selloff this week, what stood out to you >> a lot of what we saw coming into this week reminded me a lot of what we saw in 1999 and 2000. we saw a lot of excess if she can speculative in equities. we highlighted this a little bit last week and we talked about it a little bit this week too when you're about to see a blow-off top, one of the things that often accompanies that is as you hit new all-time highs, volatility starts to rise as well that's an unusual circumstance, because normally we associate steadily rising markets with

declining volatility i think that usually signals that greater level of uncertainty and speculation, fear and greed battling each other out right there. as carter pointed out, what we saw yesterday was quite extraordinary. he was talking about the tech sector i was looking at it from the perspective of the s&p which is largely what we tend to trade. there too is a very unusual set of circumstances if we're looking for analogs in history, you have the credit crisis, the tech wreck, the u.s. credit downgrade, things like this what happened thereafter and what's interesting to me is that if we take a look at situations where the market rocketed higher after a steep decline, they were usually associated with near term 52-week lows that's not what happened here. we have to sort of eliminate those among the possibilities and start focusing on other analogs. when we look at that, i get a little bit less rosy i'm not really that optimistic

is there a possibility we get 10% upside between now and the end of the year? i think so but i also think it's possible that we're not done. >> if you caught the show last week you might remember mike said it was time to hedge and he offered up a way with the qqq. instead of looking back on that open trade, we're going to look ahead to how the market could affect your position next. mike, we'll go back to you on this. >> one of the things that happened in a situation like this, you might feel, gee, last week mike was talking about a hedge, now i've missed my opportunity. i was looking out to november, the 260-230 put spread this is what we call a put spread caller, doing this trade, buying the 260 puts, selling the 230 puts and selling the 305 strike calls

you could actually collect $6. let's take a look at what happens. you would have hedged about 75% of those losses. you get asymmetric risk reward here if the market goes sideways, you're going to collect a yield of about 3.2%. the market rallies, you're going to keep those gains. if it goes sideways, you're going to yield 3.2%. if it declines you're only going to suffer about 25% of the market losses. two things can happen that are good

one is certainly much less bad that only settings s up because that elevated volatility all of that is a function of the increase in options premiums. >> tony? >> if you do get that acceleration of the downside, your hedge almost 75% of your losses to the downside i think this is a really smart move. >> check out our website optionsaction.cnbc.com here's what's still ahead. still to come, the trauma is over but the triage begins more ways to rebuild and reenforce your portfolio

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♪ ♪ ♪ ♪ we've got a news alert on tesla. shares are down by 6% after hours possibly as a result of not getting added to the s&p 500. the index just announcing that etsy, paradigm and catalyst would be added to the index. but the notion it would be added to the index is one key driver

in this tremendous rally, carter, that we have seen. we saw a heroic rebound in today's session into these shares. >> that might be the key point if you think about where it's indicated right now around 391, today's low was 272. even with this post close setback, it hasn't undercut today's low from which that violent rebound occurred the real issue as always is what is the upside. the upside is caps that's important >> let's take another look at today's selloff which capped off a brutal couple of days for the market >> i was taking a look

i think many of us were at those sectors that might actually create some measure of outperformance if we continue to see weakness in tech we had begun to see some green shoots in terms of rotation into financials over the past couple of weeks the thing is even though there's good valuation story here and even though i think the momentum is starting to turn in financials favor, i also think it's going to be a bit of a grind. we just saw the market get shellacked general mills was thinking maybe kbe wasn't necessarily poised to take off then you had the possibility that citi could obviously do a little bit better. there's a divergence of opinion. another thing to consider, of course, options premiums are

elevated if we're trying to look for a hedged way to make a bullish bet, we have to find a way to mitigate that. i would take a look at xlf, buying the november 26, selling the october 28th you could spend about $1 to do that trade the 28 strike obviously representing an increase it's a little bit like using a hedged overwriting strategy. there's a way we can play a potential rotation but being cognizant that we're in volatile times. >> apple is down more than 5% this week alone. if you think the bottom is about to fall out of the tech trade,

don't panic. >> my play on apple is really a continuation of our previous discussion about how i believe this selloff is going to be contained here with the volatility we've seen over the past couple of days. we're using apple as a proxy here for the nasdaq 100. if we look at the chart, there's no question about the strength of this particular chart relative to the technology sector, relative to the market and arguably one of the stronger fundamental outlooks within the tech sector. from a technical perspective i like it and i like the fact it got back below the 20-day moving average. that's the opportunity i see for a potential long opportunity what's interesting is something that make laike laid out about x and the s&p 500. the apple implied volatility has

increased over the past couple of weeks as the stock has reached all-time highs we have this elevated implied volatility that's what i'm looking to take advantage of of selling some premium and collecting some volatility so even if apple stays sideways or moves higher, kn from this. the trade structure is go out to october and look to sell the 115, 105 put verticals collecting about $8.60 for that 115 put, paying about $4 for that 105 put net net i'm collecting $4.15 on a credit spread that's $10 wide. i'm collecting 41% of the width on a credit spread that's a few bucks out of the money i'm able to do this because of the extreme elevated volatility we're seeing in this particular name this strategy has a break even price of 110.85.

there is still the possibility this tech selloff is not done which is why i'm using this peit vertical structure i'm only risking 5 prn% of the underlying stock price to take this bullish view. >> mike? >> people are thinking about dipping their toe into the options market these might be the best strategies you could contemplate as a way to get started because you limit your risk and the probability of profit is generally on your side the other thing is how much he's collecting that's obviously very good apple right now is trading about 37 times forward earnings. this is peak valuations for a stock that's trading well point

of view where it wabove where is before the covid drawdowns when you consider the stock was about $80 on this post split basis before we saw the pandemic pullup that's a significant discount to where the stock is trading right now. i love the strategy. i like the math on the spreads obviously this is going to depend a little bit on your view on apple, but i'm not bullish on apple. >> how does apple look, carter it was another stock that had a great rebound in today's session. >> it's beloved. it's the most owned. here's the thing, if you can drop 19% in two days, it's safety that it's perceived to be is just in the eye of the holder, meaning, it is until it isn't.

so the real question is just knowing this stock has had 35% plus drawdowns over the past decade, 19% in two days aggressive, i think you do have to have an options strategy because there's always the potential there's another down. up next, you still have more questions and we still have at least some of the answers. your tweets and the final trade. 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. ♪

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time to take your tweets our first viewer asks any thoughts on fedex. i currently have a vertical put spread tony, what do you tell matthew >> i like fedex. it's held up pretty well it really depends on your cost basis. if you've already collected more than 50% of the max profit, it's time to take profits if you haven't reached that level, i think it's worthwhile to potentially hold it through earnings because your break even is pretty far away from where the stock is trading now. >> carter, what do you think of fedex's strength >> it is the number one constituent in transport transport's had a very big day up i like fedex. >> our next viewer asks if i'm neutral to bearish on lululemon

going into next week's earnings, what is a good way to play it with options >> lulu is one of my wife's favorite stores for sure do i love the stock with the current price? not so much. it's close to all-time highs right now we have elevated implied volatility look to sell upside call spreads. >> what do you think of the chart, carter? we had that call on lulu today it raised the price target and basically said i can't probably recommend it at a buy right now because i can't recommend a lot of upside from 400 >> it's hard to contend with it dropped 50% during the pandemic selloff that's considerably more than the overall market

obviously it's recovered considerably more. by all accounts the word full comes to mind. the stock is full. i would say trim, take measures. >> tony, would you also agree that the stock is full this is one that is beloved, obviously. people wearing yoga pants all over the place, especially during quarantine. >> absolutely, especially with peloton announcing they're going to come out with a new bike and a new treadmill and competing with lululemon on the mirror side i think there's limited upside for lululemon. >> three bears on lulu time for the final call. carter braxton worth >> there is an expression, first loss, best loss. we're sellers of the qqq. >> tony zang >> i don't think this is the end of technology. i still have faith in apple.

i'm selling put vertical credit spreads on apple. >> mike khouw? has holly reduced her spending during the pandemic? >> no, she hasn't actually she actually bought a big rowing machine which she uses almost every single day so good for her. i haven't been so good about things where one opportunity is lost, another is gained. elevated implied volatility makes put spread callers on the qqq in a way you can still hedge come of the gains we've seen and you still have some gains to be hedged. >> we'll be back this friday at 5:30 p.m. eastern time have a great long weekend. do not go anheywre a special cnbc summer school is in session right after this. 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.

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