place better than when i found it. i'm disappointed that i'm gonna miss the opportunity. lemonis: keep in touch, okay? jessica: thank you. lemonis: but sometimes it's better to get out while you're ahead. welcome to a special "options action. to end an astonishing week of. yesterday the dow plunged over 800 points all the investors rushed the exits of the crowded tech trade. we'll help you with that with us tonight carter braxton worth, tony zhang and mike khouw. we'll show you where you can o first you have to know where you have been. carter, where have we been >> well, we've been in a moment of speculative exces

that's been going on for a long time 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 we know 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 some 57% the precondition of excess, and then the next slide, divergence. as the market is making all-time highs, only 16% of the s&p constituents were making all-time highs index doing it 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, 46% of all stocks in the s&p 500 have no gains for two years. this is the precondition of die divergence and the precondition of excess. so the next slide, what we know is 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

first, this is the channel that the qqq has been living in you can see it 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 we're just now breaking below that up trend. final chart. if we were to simply check back to the january peak, which is exactly what the s&p has already done, you have another 11% to 12% to go for the qqq. >> wow >> we're not likely done >> 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 the suppressed volatility followed by this massive explosion in volatility.

this is due to short-term positioning we're seeing out of the money options that have seen an explosion of volume in the past couple of years if you look back the past 15 years, if you look at 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 ratio has been below 0.7, meaning calls have been outstripping calls by a substantial margin and not only that, more importantly 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. so that what means, the markers, when you have less liquidity,

you see selloffs like we saw here over the past couple of days now, if we look at the concentration in this short-dated out of the money callout which we can measure using call skews 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. while i don't have any hard da 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? well, you know, i think what's old is new again, really a lot of what we saw coming into this week reminded me a lot of what we saw in 1999 and 2000 what we saw was a lot of splat tif excess in e questionties 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 actually 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 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 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 then start focusing on other analogs. when we look at that, i get a little bit less rosy so i'm not really that optimistic is there a possibility that we get 10% upside between now and the end of the year? i think so that's obviously possible,

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. actually, something that has happened in this increase of volatility, others 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 when i was looking at that early this morning right after the opening, you could actually collect $6

let's take a look at what happens here if the market rallies, you still get exposure you would have hedged about 75% of those losses. you get asymmetric risk reward here and of course, if the market goes sideways, you're going to collect a yield of about 3.2%. three things can happen -- if the market rallies 10% to 11%, 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 two things can happen that are good one is certainly much less bad and that only sets up because of that elevated volatility we're seeing

those 305 calls, those were trading over $12 this morning the same price they were last friday with the market considerably higher. all of that is a function of the increase in options premiums >> tony, quick thoughts? >> 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 >> okay for more analysis and ideas, 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 re-inforce your portfolio cautiously plus, calling all options action fans. reach into your pocket, grab your phone and tweet us your

question @optionsaction. if it's nice we'll answer it on air. when "options action" returns. ♪ ♪ ♪

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♪ ♪ ♪ ♪ welcome back to "options action." 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, teradyne and catalent 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, 392, today's low was 372 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 that's important for hedging activity in the options market let's take another look at today's selloff which capped off a brutal couple of days for the market stocks careened off all-time highs. mike khouw, 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 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 believe it's going to be a bit of a grind. we just saw the market get shellacked there's another thing. we see a considerable difference of opinion general mills was thinking maybe kbe wasn't necessarily poised to take off, and then you had the possibility that citi could obviously do a little bit better there's a divergence of opinion. that suggests there's going to be a little bit of a grind 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 was taking a look at xlf, "the call" spread, selling the october 28th you could spend about $1 to do that trade the 28 strike obviously representing an increase of a little bit better than 10%. the way you can think about this - it's a little bit like using a hedged overwriting strategy. essentially, being protective because you're only buying a call there's a way we can play a potential rotation but being cognizant that we're in volatile times. >> let's get back to technology now. home of the most widely stock on the market, 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 is here to calm your

nerves tony, walk us through it >> my play on apple is really a continuation of our previous discussion about how i believe that this selloff is going to be contained here with the volatility we've seen over the past couple of days. now, 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 -- from a stock technical perspective, from 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. the apple implied volatility has actually 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 perhaps moves a little higher, i'm going to be able to profit from this the trade structure is go out to october and i'm looking to sell the 115, 105 put verticals 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 i'm only able to do this because of the extreme elevated volatility we're currently seeing in this particular name this strategy has a break even price of 110.85. there is still the possibility that this tech selloff is not

done, which is why i'm using this put vertical structure. that has limited risk. sao if this continues to ax 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 are three things about it people who are watching, 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 there's a difference between the strikes. 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 -- above where it was 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 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 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 that this stock has had

five 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 that 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. i currently have a vertical put october 16 $210. 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 do 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 the dow jones 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 this one obviously has to go to mike because he has an inside

track on this stock. >> lulu is one of my wife's favorite stores for sure she still loves the products 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 where the analysts over 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 >> it's hard to contend with but what we do know, 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 recently announcing that 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 there's limited upside here for lululemon. way to end the show. >> 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 zhang? >> 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 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 aome 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." 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.

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