certainly not number one-- nobody planned that. you know, a lot of people will say, "oh, you did that, that was a stunt"-- no, it wasn't. but, that's what can happen when anything goes. so, anyway, stay tuned, and watch for the new season. welcome to a special "options action. an astonishing week of trading yesterday the dow plunged over 800 marks. all the investors rushed the exits of the crowded tech trade. today the investors caught their breath but are still asking what now. we'll help you with that with us tonight carter braxton worth, tony zang and mike khouw. carter, where have we been >> we've been in a moment of speculative excess that has gone on for a long

time that, in fact, was going on in january and february, and 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 we know the s&p is up 42% on a 5-month basis and th nasdaq up 57%. the precondition of excess the next slide, divergence as the market is making all-time highs you see here, of course, that only 16% of the s&p squint constituents were making 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. and then finally, basically, you

see the number there, 46%, half, after all stocks in the s&p 500 have no gains for two years. this is the precondition of divergence and the precondition of excess. the next slide, take a look. we have a very rare circumstance where the nasdaq 100 drops 10% in a two-day period. it's only happened 17 times in the 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 now, 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 and as we were to simply check back to the january peak, which is exactly what the s&p has already done, you have another 11, 12% to go for the qqq. >> wow >> the thought, we're not done >> yeah. 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 massive violent explosion in

volatility this is in my opinion the positioning we're seeing in the short dated options that have seen an explosion in volatility over the past couple of months 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 the year 2020, 34% of trading days, the 20 day put call ratio has been below 0.7, meaning calls have been outstripping calls by a substantial margin not only that, what's more important is the fact that 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. what that mean is that market makers trying to delta head their exposure can sometimes go from buying a lot of stock to

substantially selling that stock in a short amount of time. when you have less liquidity, you see selloffs like we saw here over the past couple of days if you look at the concentration in the short dated out of the money call option, it is contained to a few names, predominantly the faang names we've seen so i think the sell off is fairly contained and as carter said, as you can see in the small caps they did not participate in the rally they also didn't participate as much in the decline as well. from my perspective, i do think that the sell off is is it fairly contained i think the lesson for retail investors is to generally stay away from these short dated out of the money call options. while i don't have any hard data to back this up, 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, just quickly, in terms of what you made of this selloff this week, what stood out to you? >> i think what's old is new again, really. you know, a lot of what we saw coming into this week reminded me a lot of what we saw in 1999 and early 2000 what we saw was a lot of speculative and excess 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.

and, of course, then you get something like what we had 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 a couple of circumstances, like the credit crisis, the tech wreck, the u.s. credit downgrade, things like this what happened thereafter and what's interesting to me i 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. so we have to sort of eliminate those among the possibilities and then start focussing 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's -- 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. but actually, something that has happened, because of this big increase in volatility is different opportunities have actually presented themselves. i was looking out to november, the 260-230 put spread and then selling the 305 calls against it 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 when i was looking at that early this morning, right after the open, you could put that trade on and actually collect about $6.60. that represents about 2.3% of

where the qs were trading at the time let's take a look at what happens. you still get exposure, up 10, 11% or so. if the market declines, if the qs fell to 230, that would be a decline of about 18% from where we closed the day today, you would have hedged about 75% of those losses. so you get definite asymmetric risk reward here if the market goes sideways, you're going to collect the premium you would have to begin with, that's a yield of about 3.2% a few things can happen. 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 losses of the broad market on an 18% decline or so. two things can happen that are good one is certainly much less bad that only sets up because of that elevated volatility here's something to think about, those 305 calls i'm talking

about right now, those were trading over $12 this morning. that's the same price they were last friday with the market higher all of that is a function of the increase in options premiums. >> tony? quick thoughts >> the fact that mike is able to take advantage of the elevated premium is what makes this tragicive. the ability of the market to stay 2%, and if you do get tha 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 while you're there, sign up for our newsletter 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 cautiously plus, calling all options action fans. reach into your pocket, grab your phone and tweet us your

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♪ ♪ ♪ ♪ welcome back to "options action". we've got a news alert on tesla. take a look there. 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. by the way, we saw heroic rebound in today's session in

these shares >> that might be the key point is what you said if you think about where it's indicated right now around 391, 392. 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 capped, i would say. that's important it's important if one wants to stay long for hedging action in the market >> let's take another look at today's selloff which capped off a brutal couple of days for the market obviously big tech took the beating. if you're wondering how to protect other parts of your portfolio, we have a way to do it thanks to mike. mike, take it away >> 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 tony was actually talking about that in morgan stanley last week 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. there's a couple of reasons for that for one thing, obviously we just saw the market get shellacked when you see that that's going to create reluctance on the part of the investors to do i have in and the other thing there's a difference of opinion. consider what general mills was saying at the end of the last show, saying that 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,

a die nagonal 26, 28. buying the november 26, selling the october 28th you could spend about $1 to do that trade the 28 strike obviously representing an increase of a little bit than 10%. the way to think about this, it's a little bit like using a hedged overwriting strategy. being protected because you're trying to take a call and then selling. i think this is a way to play potential rotation but being cognizant that we're in volatile times. >> let's get back to technology now, which is the home of the most widely held stock in the market, which is apple, which 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. tony, walk us through it

>> 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. if we look at apple -- 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. this chart -- so from a technical perspective, a fundamental perspective, i like it and i like the fact that 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 mike laid out about the vix and the s&p 500. is that the apple implied volatility, the front month 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, i'm going to be able to profit from this. so the trade structure i'm looking to use here is to go out to october and i'm looking to sell the 115, 105 put vertical here, collecting about $8.60 for that 115 put, paying about $4.45 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 now, i'm only able to do this because of the extreme stress or the extreme elevated volatility we're currently seeing in this particular name. this strategy has a break even price of 110.85. which happens to correspond with the intraday low that apple put in here today. as carter and mike laid out, there is still the possibility this tech selloff is not done

which is why i'm using this put vertical structure that has limited risk. so even if this continues to accelerate to the downside i'm only risking 5% of the underlying stock price to take this bullish view. >> mike, what do you think of this trade >> there's three things about it first of all, i think selling credit spreads, if people watching 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 on your side the other thing is how much he's collecting with the strike that's obviously very good what i'm less excited about is apple itself apple right now is trading about 37 times forward earnings. this is peak valuations for a stock that's trading well above where it was before we saw the covid draw downs this is not the material draw

down we saw has brought us back to entry rates we saw before f very, very far from it 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. to me, i absolutely 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 opal here. >> how does apple look, carter it was another stock that had a great rebound in today's session. >> it did. look, it's beloved we started by saying it's the most owned, all of this segment. 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 that this stock has had

five 35% plus draw downs over the past decade. 1% 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. stay tuned i have an idea for a trade. 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. ♪

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action". time to take your tweets our first viewer asks any thoughts on fedex. it has held up strongly the last couple of days i currently have a vertical put spread tony, what do you tell matthew >> i like fedex. as he said, it's held up pretty well as to whether or not he should hold onto that trade, 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 you still have 40 days left to go if you haven't reached tha 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 waiting in dow jones transports 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 this one obviously has to go to

mike, because he has an inside track on this stock. >> lulu is on the holly index, one of my wife's favorite stores for sure she still loves the product. do i love the stock with the current price? not so much. it's close to all-time highs i think your perspective is the right one. right now we have elevated implied volatility look to sell upside call spreads. i think that's the way to make the play here. >> what do you think of the chart, carter? we had that call on lulu today the analyst at citi went to a neutral on 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 >> right but raised the price target. it's all hard to contend with. what we do know is 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 rich

or 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 do think that there is -- there's limited upside her for lululemon. >> three bears on lulu way to end the show. time for the final call. carter braxton >> 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 a name like apple i'm selling put vertical credit spreads on apple. >> mike khouw? has holly reduced her spending

at lulu 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 i will say this, 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. >> all right that does it for us here on "options action" we'll be back next friday at 5:30 p.m. eastern time have a great long weekend. do not go anywhere 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. and it learns with you, so as you become smarter,

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