with the entrepreneurial spirit in this space. this is real business with real money with real innovation that isn't going to be stopped anytime soon. [rock music] ♪ ♪ welcome to a special edition of options action. i am brian sullivan in for melissa tonight. well, it has been an astounding week to say the least. discord and dislocation in the marketplace. whether it's old hat or new to options. if you're new with us here you're looking for smart and substantive insight. we'll do our best to provide that certainly with us is carter, mike and tony our collective mission tonight, gentlemen, if you are ready to strip away sound and the fury, the names and of course the blame we're going to explain the

mechanics of what happened, the different ways to resolve and how to proceed from here i know each of you have very specific thoughts, so mike, i'm just going to throw it up there. a big old fat softball team my friend, what do you make of this week because options were a -- single week options were a big part of this story >> yeah, they certainly were this week was certainly extraordinary on a couple of fronts one of the things we definitely saw was extraordinary options volumes. some of these most volatile stocks that we haven't mentioned yet but are on the tip of everybody's tonge, certainly on everybody's radar, lik gamestop, macy's, fossil, nokia, blackberry all these stocks that had some short interest, suddenly we saw a big uptick in interest what we saw was a lot of people buying the stocks and a lot of people buying the options. a lot of the names that i just

mentioned traded well over a million contracts a day. and to put things into perspective for those who are new, each options contract typically represents 100 shares. so that would be 100 million worth of options trading each day. whenever you have a lot of buyers, retail, institutional, someone staying at home and click trading from their basement, it could be a hedge fund but when they go and buy call options, they are buying them from a market maker. the market maker has to buy stock to hedge typically you will see volume build on itself this way the higher it goes, the more they have to buy to hedge their positions. so -- >> that's a huge part of the story, is it not >> tony, i mean -- >> yes, it is, absolutely. >> yeah, you look out and i know our friend larry mcdonald posted this out and said there was, i think some of these gamestop options were so out of the money that they're looking for

basically an $800 price on the equity to get to where these calls were bought. people are placing just some incredible bets on gme >> yeah, brian as you said, we have to admi that these traders exploited a mechanism of the market, which is that the fact that market makers continue to buy that. this is caused a leveraged feedback loop and caused this crazy amount of volatility we're seeing in the markets, some of which we can debate for hours whether this is good for the market but the bigger picture here, i think we need to take a step back if you spend any time here on wall street bets, there's a lot of anger fueling behind this a lot of it stems from the rising inequality we see that continues to grow since the financial crisis and the pandemic hasn't made it any

worse. i think it's important that we look at not only treating the symptoms but the cause as well at least from our perspective, we want to make sure that we have a stable capital market here there are a few things i think we need to discuss regarding our capital markets. should we be enhancing our clearing and margin services so brokerage firms are not chooses between going under and potentially restricting trading for their clients, which is certainly not something we want to see also, just this feedback move that we're talking about that comes with the gamma risk. perhaps option volatility models need to be updated like we did after '87 during the crash i'm proud to be a part of this shao that has been advocating to take advantage of opportunities here in the market and being able to do so with limited risk, that's a big part of what we do here on the show, but we also have to take a step back and look at what are we doing to

ensure a safe market for all participants and take a look at how we can reverse a quarter how we can reverse inequality here >> i'm not going to ask you to jump into robin hood or make any assumptions. but a brokerage in a clearing house, when you've got one of those, limiting purchases to one share for a number of hotly traded or even big-name stocks like amd, does that tell you something bigger about what's going on, the situation as it is now? >> sure. it says a lot about trying to manage the risk of this kind of hyper activity just before we look at two charts -- and i think they're worth while -- it's important to say there's be this thought there's smart money on wall street and that's for a few select individuals or funds that's a good thing but it is an offensive phrase after that if we know that 90% have

underperformed the index in the last 15 years, that last year for the fifth year in a row more hedge fund closures than launches the retail investor is smart his own way. it's not randomly picked consumer names, amc, gamestop, bed bath & beyond. express. to go after important -- and confined to largely that area of the market let's look at two charts that are important. this is the goldman sachs most shorted index. you can see the range it was trading in before it plunged during the pandemic. to put that plunge in perspective, it dropped to 51% to its marlowe, february-marceloff where the s&p only dropped 35. the ricochet back is such an incredible instance of recovery. the market from it's s&p is up 70%. this is up 330 most shorting is done at the institutional level.

not a retail phenomenon. it's not just this recent period shorts have been getting murdered since the marlowe, which is to say retail has been performing, in many ways, better the second chart, and this is remarkable, this is that same index, the goldman sachs most shorted index juxtaposed against spider, retail etf, xrt. they're a direct overlay it means you can't even capture this kind of thing by trading xrt. >> mike khouw, that's a heck of a chart. lot of correlation there but what might it tell you and tell us >> yeah. so, you know, it's kind of interesting. i think carter actually touched on this. i think a lot of this has been positioned as big money against small money. institutional against retail if you look at the holdings of some of these stocks, there were a lot of big firms that were on the long side. there were a lot of big market

making firms that held shares, so obviously as the cost to borrow rose, they were beneficiaries of this. it isn't really retail against hedge funds. it's much more longs versus shorts and over the long report, shorting stocks is a very difficult game it's a difficult game for two primary reasons. one of the reasons is over the course of the time, generally speaking, stocks will rise the other reason, and we definitely witnessed that over the course of the last two weeks, that if you buy a stock, your risks are known if you buy a stock for a hundred dollars, you can lose it at a hundred dollars. if you short a stock at $100, your risk is potentially unlimited. because those shares don't have any potential cap. when we saw that gamestop go to $500 if you had shorted at 100, you lost well more than the $100 of capital you put in initially you lost four times that amount. so i think one of the things that this demonstrates and one of the things we definitely have

seen that retail participants, that you're seeing a situation it's almost inconceivable to me in the 1990s that retail market participants might have been considering looking at potential stock for a short squeeze, and the reason is, number one, you would need to identify stocks that had that possibility, and number two, of course, the rest of the market needs to sort of come around to your point of view, with the ability to communicate, with the ability to essentially, we'll call it collaboration, if you will, but for small investors to group together and become an institution, that's what i think is a little unique here. but the dynamics we saw. so short squeezes are not new. trading restrictions are not new. restrictions on access to margin are not new. limiting trading to closing only all of us who have been in the business for more than 20 years have seen this, this happens all the time what's new, i think, is the retail participants in all of this

i think that's a good thing. obviously, i think hopefully their education is keeping up with their activity in the market >> well, we did have a little bit in the late 90s. not quite the same thing but the yahoo message boards and trading commissions were coming down but your point, nobody can blame these guys, nobody will go after a wounded helping fund more than other hedge funds. so these retail investors are doing what wall street has done to itself for 100 years. a little blood in the water. oh, bears having some problems oh, lehman brothers over here? bill akman, let's go get them. check out our website. while you're there, sign up forecaster newsletter. in the meantime, here's what's coming up next >> speculation aside, there is still investment work to be done we're still in the thick of earnings season, with big tech names on deck. we'll get you prepared

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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♪ ♪ ♪ ♪ ♪ all right. welcome back to "options action".

while we spent the first part of the show dissecting some of the speculative action, there's still some investment work to be done probably why you're here we're still in the middle of earnings season with big tech names about to report numbers next week. a little deliver cancer company called amazon among them what should we be watching for with amazon? >> well, we have three simple charts but before we get to it, it is really the same setup as we saw for apple and microsoft. meaning great winners off the marlowe but then -- march low but then stalled in september. underperformed that have largely come back to life and are holding up better than the market the first chart is a simple one-year-plus chart with a 150-day moving average what we know is that amazon's performance off the march low, up to its september peak that's double the bargain. when you get ahead of yourself like that, you need to rest.

a little too much -- too far too fast, pend cher of energy. the past five, six, seven months has been a textbook instance of resting. to put that in context, from the september 2nd peak, same day apple peaked before it pushed higher this week, amazon is down almost 10% 1300 base points of underperformance in a marquee name look at the exact same chart i've drawn the lines, so to speak. this is what my eye sees we're working into the apex. whether you call it a wedge or a triangle, it doesn't matter. it typically maps. it typically happens equilibrium. buyers and sellers are matched off before something occurs. many would say yeah, it's going to break out that's not my bet. i think it's going to break out to the up side final channel. this is a two-panel chart. amazon on the top. now you're looking at on the bottom relative performance to the xrt.

in many ways, the most shorted basket, as you say, lays over with the goldman sachs basket identically. since, let's say, the stall period, right, when amazon has rested, down nine, 10% since september 2nd. the xrt is up 72 the relative performance line which has gone straight down is right on trend and we think it bounces right here amazon long into earnings. >> amazon long into earnings mike khouw, would you agree with that is there an options trade here what do you make of carter's analysis >> yeah. so there's a couple things number one, do we think there's still potential up side in a company as large as amazon that's the first questio on making a long bet secondly, is there an options trade. one might hope so, given how much each share of stock might cost we've got earnings coming up typically over the last eight quarters

it has has moved 4% higher or lower over the couple of days. right now the options market is implying a move of about 6.6%, higher or lower by the end of next week when they report that's a larger than average move maybe we can take advantage of the fact that prices are elevated let's take a look. their growth merchandise value, let's talk about it and think about how much in there actions they're going to do at the end of 2021. right now, the forecast is that they're going to do about 900 billion by the end of 2024, 2025 so doubling that number. what else have we got going? we've got aws, their cloud services business. that's probably around that same time going to be doing a hundred billion in revenue and what we're talking about, just to put things in perspective, a fair live astonishing number but that represents about 13.5% of global merchandise value in

terms of sales in just four years. so that's quite remarkable i think it is safe to say that amazon is going to continue to grow and of course they're also pushing into pharmacy. the thing is if you're going to buy a single share of stock would cost you right now one round lot, a hundred shares, would be 320,000 so one thing we could do is look to buy a call option on a like amount of shares instead, and then look to sell some of the elevated options premium in the more near dated options. i was looking at specifically the june 3300 call you could pay $274 per share for those. you have to multiple that by 100 and sell the february 2550 calls against it for $37.50. obviously, much less than the 3200 or so where the stock currently closed

the idea is that you're going to capitalize if the stock trades sideways, you're going to capitalize on that by seeing the decay of that near dated options. of course, if the stock rallies, you have some potential up side. you have some cap, of course so the down side, your limit of risk is going to be how much you spent on the total trade i would point out, again, this is an expensive stock. so the options are expensive you need to have sufficient capital in your account to do this trade, if this is something you're interested in it's not for somebody with $2,000 in their account, obviously. >> yeah. pretty sophisticated stuff there. thank you very much. from amazon to another technology name reporting next week and that is snap, the parent of snapchat due out with results this thursday. tony zhang is all over that one and a possible way to make money off it tony >> yeah, so i think this is a stock that analysts still continue to misunderstands i covered this last quarter and the stock jumped significantly on earnings.

i think there's further upside for earnings here for snapchat if we look at the chart itself, it broke out that $30 resistance louisville level. it's finding an above $48 base so this stock rallied significantly since last quarter's earnings but if you look at it, it's continuing to outperform the technology sector, that's the type of relative strength that i like to see going into an earnings event predominantly my thesis last quarter was based on the fact that they had strong user growth from a download's perspective. this quarter we had seen that over 100 million downloads happened in q4, which is the highest they've ever seen since the ipo. so we continue to see acceleration for user growth for snapchat for those reasons, i think this stock is continuing higher here. but if you look at the earnings itself, the market is implying about a 17.5% move versus about

13 -- 17.3 average over the past quarter. this stock moves quite a bit the fact that the stock has rallied so much over the last quarter and implied volatilities are so high, the trade structure i want to use reflects this, the fact that it's risen so high and the implied volatilities are so high i'm using a put credit spread here i'm going out to march 5th weekly expiration and selling the $51 puts for $5.80 and buying back the 44 puts for about $2.66. net-net, $3.20, which is 45% of the width of the vertical here, so i'm collecting a large percentage of the width, risking only 55% of that width so i'm collecting 6% of the stock price by sell the credit spread so even if the stock doesn't move substantially higher ow just stays where it is, i'm still able to profit here on

this particular trade. >> all right, mike what do you think? >> yeah, i mean, there's three things that can happen the stock can go higher, it can go sideways or it could go lower. two are good for this trade. one is less bad that buying the stock. certainly it's better than buying the stock that's if it has a decline if the stock stays put, you collect the premium. if the stock goes higher, you collect the premium. if the stock goes lower, at worst you're going to risk the difference between the strikes and the premium you collected. if the stock dropped 20%, for example, you could be risking $10 a share. by selling this credit spread, you're risking far less than that it is implied volatility i think that's a positive. we have a stock that's had a big run. difficult to make bullish bets and effectively chase stocks that have already had such a good run and think this is an

intelligent way to do it >> all right, thank you very much all right. still to come. we know that you have questions about this week and next week. we're going to answer some of those questions which came over the twitter. that's next. we'll be right back on "options action". turn on my tv and boom, it's got all my favorite shows right there. 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. ♪♪

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>> all right welcome back that's next. we've got a news alert interactive brokers saying it is lifting all trading restrictions on its platform for options. mike, your take on this breaking news >> yeah. i'm not surprised. we had a situation where they were trying to digest that obviously they were trying to die best make sure that they could participate in maintaining an orderly mark, that they wouldn't jeopardize clearing or themselves or their customers and i think they've gotten to a point where they feel comfortable with this. this is a common thing for people who are new to this sometimes when you have volatile markets, it is necessary t increase margin, impose some trading restrictions and once they figure out how to make it work, they do. >> this is on options on interactive brokers. robin hood still a big story guys, thank you very much.

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