>> the one thing that remains with me most in this is the victims, the elderly retirees who lost their life savings, and it's all gone, and that's not who lost their life savings, and it's all gone, and that's not gonna come back. welcome to a special edition of "options action." i am brian sullivan in for melissa. it has been an astounding week to say the least discord and dislocation gripping outlying corners of marketplace. whether it's old hat or you're new to options, if you're here with us now you're looking at for smart and substantive insight. we'll do our best to provide with us carter word, mike khouw, tony zhang our collective mission if you are ready, to strip away the sound and the fury, the names and the blame. we're going to explain the

mechanics of what happened, the different ways it could resolve, how to proceed from here carter, tony, mike, i know you have specific thoughts mike khouw, i'm going to throw it up there, a big, fat softball to you, my friend. what do you make of this week? options, single stock, single week options were a big part of this story. >> yeah, they certainly were this week was certainly extraordinary on a cup 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 i think are probably on the tip of everybody's tongue, certainly on everybody's radar, gamestop, macy's, fossil, express, nokia, blackberry, all these stocks that had some short interest and things like that, 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 those names i just

mentioned traded well over a million contracts a day. to put things in perspective, each options contract typically represents 100 shares. that would be 100 million shares worth of options trading each day. those are extraordinary volumes. of course, whenever you have a lot of buyers, it could be retail buyers, it could be institutional buyers, it could be someone staying at home and click trading from their basement, it could be a hedge fund when they go and buy call options, they're buying from a market maker what happens next, the market maker has to buy stock to hedge. typically you're going to see volume build on itself in this way. the higher the stock goes, the more stock those market makers have to buy to hedge their position so - >> that's a huge part of the story, is it not >> certainly is, absolutely. our friend larry mcdonald posted this out, said there was -- i think some of these gamestop

options were so out of the money, they're looking for basically an $800 price on the equity to get to where these calls were bought. people are placing some just incredible bets on gme >> yeah, brian as you said, we have to admit this these traders exploited a mechanism of the market which is the fact that out of the money call options have gamma exposure which causes market makers to continue to buy that this has caused a leveraged feedback loop. it's caused this crazy amount of volatility we're currently seeing, some of which we can debate whether this is good or not for the markets. the bigger picture, think i we need to take a step back if you spend time on wall street bets, there's a lot of anger fueling behind this. a lot of it stems from the rising inequality we have seen and the wage gap that continues to grow since the financial crisis and the pandemic hasn't

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

back, looking at what are we doing to ensure a safe market for all participants and take a look at how we can reverse enequality here. >> carter worth, i'm not going to ask you to dive into robinhood necessarily or make assumptions, but when you've got one of the biggest stock trading platform which is also a brokerage and clearinghouse, 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 hyperactivity. but just before we look at two charts, i think they're worthwhile, it's important to say there's always been this thought that there's smart money on wall street for a few select individuals or funds, that's the case, but it's an offensive phrase after that if we know that 90% of large cap mutual funds have underperformed

the index 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 in his own way. it's not random. they picked consumer names -- bed bath and beyond, game stop, amc, express -- to go after. important thing. confined largely to that area of the market two charts that i think 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 51% to its march low, february-march sell-off the s&p dropped only 35. so down more but the ricochet back is such an incredible instance of a recovery the market, from its moerch s&p, 70%, up 330. most shorting is not institutional level. not a retail nphenomenon

shorts have been getting murdered since the march low, which is to say, retail has been performing in many ways better the second chart, this is remarkable, this is that same index, the goldman sack most shorted index, just that posted against the spider etf stocks xrt, direct overlay. it means you can even capture this kind of thing by trading xrt. >> mike khouw, that's a heck of a chart. a lot of correlation what does it or what might it tell you and tell us >> yeah, so you know, it's kind of interesting i think carter touched on this a little bit i think a lot of this has been positioned as big money against small money, institutional against retail actually, if you look at the holdings of some of these stocks, there were a lot of big firms on the long side

a lot of big market-making firms that held shares as the cost to borrow rose, they were beneficiaries of this this isn't really retail against hedge funds, it's how much more of longs versus shorts over the long run, shorting stocks is a very difficult game. it's a difficult game for two primary reasons. one of the reasons is that over the course of time, generally speaking, stocks will rise the other reason, and what we definitely witnessed over the course of the last two weeks, is that if you buy a stock, your risks are known. you buy a share for $100, the most you lose is the $100 you spent. if you short a stock at $100, your risk is potentially unlimited. because those shares don't have any potential cap. we saw that game stock went to $ $500 if you shorted it $100, you lost well more than the $100 you put to the trade initially, you lost four times that amount i think one of the things this demonstrates and one of the things we definitely have seen,

retail participants -- i think it speaks to the democratization of information and access to markets 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 stocks for a short squeeze. the reason is because, number one, you'd need to identify stocks that had that possibility. 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, essentially, an institution. that's i think what's a little unique here. but the dynamics we saw, of course, short squeezes are not new. trading restrictions are not new. restrictions on access to margin are not new. limiting trading to closing only i mean, all of us who have been in the business more than 50 ye - 20 years, 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. hopefully their education is keeping up with their activity in the market. >> we did have a little bit in the late '90s. the yahoo! mess. not quite the same thing, but the yahoo! message boards, trading commissions were coming down to your point, nobody can blame these guys, nobody will go after a wounded hedge fund more than other hedge funds. these retail investors are just doing what wall street has done to itself for 100 years. a little blood in the water, oh, lehman brothers over here, let's get 'em. check out our website, optionsaction.cnbc.com sign up for the 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.

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the show dissecting some of the speculative action, there is still some investment work to be done it's probably why you're here. we're still in the middle of earnings season with big tech names about to report their results next week, most notably a little delivery company called amazon carter worth, what should we be watching for with amazon >> well, we've got three simple charts before we get to it, it is really the same setup as we saw for apple and microsoft, meaning great winners off the march low, then stalled in september, underperformed, and have largely come back to life and are holding up better than the market the first chart is a simple one-year plus chart, 100-day moving average what we know, amazon's performance off the march low up 120% to its september peak that's double the market s&p goes up 60, goes up 120. when you get ahead of yourself like that, you need to rest.

a little too much -- too far, too fast, expenditure 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 was able to push high they are week a bit, amazon's down almost 10%. s&p's up 3%. talking about 1,300 basis points of underperformance in a marquee name look at the next chart it's the exact same chart but no moving average 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 triangle, doesn't matter it typically happens, equilibrium. buyers and sellers are matched off before something occurs. many would say, yeah, carter, on it's going to break out down through the bottom i think it's going to break out to the upside. final chart. this is a two-panel chart. you're looking at 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 saw, year lays with the goldman sachs basket identically. so let's say since the stall period, when amazon has rested, down 9%, 10%, the xrt is up 72 that relative performance line which has gone straight down is right on trend we think it bounces right here amazon long and earnings >> amazon long and earnings. mike khouw, would you agree with that is there an options trade here what do you make of carter's analysis >> yeah, so a couple things. number one, do we think that there is still potential upside in a company as large as amazon? first question on making a long bet. secondly, there is an options trade? one might hope so, given how much each share of stock costs let's take a look at earnings first of all so we've got earnings coming up. typically the last eight quarters this stock has moved

about 4% higher or lower over the couple of days following towards the end of that week right now the options market is implying a move of 6.6% higher or lower by the end of next week after they report. so that's a much larger than average move maybe we can take advantage of the fact that options prices are slightly elevated. from a fundamental standpoint, taking a look atup intra, let's take a look. their gross merchandise value. let's talk about it and think about how much in transactions they're going to do by the end of 2021. forecasted about $450 billion. right now, the forecast is they're going to do about $900 billion by the end of 2024-2025. doubling that number what else have we got going? aws, their cloud services business that's probably going to, around that same time, be doing about $100 billion in revenue. what we're talking about, to put things in perspective, a fairly astonishing number, but that represents about 13.5% of global merchandise value in terms of sales in 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 out to buy a single share of stock would cost you about $32, one round lot $320,000 we could 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 specifically at the june 3,300 calls you could pay about $274 per share for those. obviously much less than a share of stock remember, every call option represents 100 shares. multiply that by 100 then sell the february 2550 calls against it for $37.50. net-net spending the equivalent of $236.50 per share obviously much less than the 3,200 or so where the stock currently closed

the idea is capitalize on the elevated short dated options premium. if the stock trades sideways you'll capitalize by seeing the decay of near dated options. if the stock rallies you have potential upside, although you do have some cap, you're selling the upside call. downside, your limit of risk is 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 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, but a great trade, thank you very much. from amazon to another technology name reporting next week, snap the parents of snapchat due out with results 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 misunderstand. i covered this last quarter and the stock jumped significantly

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

versus 17.3% average the past eight quarters volatile, it moves quite a bit but the fact that the stock has valued so much over the past quarter and the implied volatilities are so high, it's actually currently trading at 58% tile in terms of implied volatility, 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 the march 5th weekly expiration. i'm selling the $51 puts for about $5.80. i'm buying back the $44 puts for about $2.60. net-net i'm collecting about $3.20, which is 45% of the width of the vertical here i'm collecting a large percentage of the width, risking only 55% on that width i'm collecting almost 6% of the stock price by selling this credit spread. so even if the stock doesn't move substantially higher or stays where it is, i'm still

able to profit on this particular trade >> mike, what do you think >> yeah, i mean, there's three things that can happen the stock can go higher, sideways, or lower of the three things, two of them are good for this trade, one of them is less bad than buying the stock. certainly less bad than buying the stock if the stock is going to have a big decline. why? if the stock stays put, you collect premium. if the stock goes higher, you collect premium. if the stock goes lower, even substantially lower, the difference between the strikes and the premium that you collected -- if the stock dropped 20%, you could be risking $10 a share. by selling this credit spread, you're risking far less. he's taking advantage of higher than average implied volatility. i think that's a positive. of course, we have a stock that's had a big run, always very difficult to make bullish bets and effectively chase stocks that have already had such a good run. i think this is an intelligent way to do it >> all right, mike, tony,

carter, thank you very much. still to come, we know that all of you out there probably still have more questions about this week ask next week. we're going to answer some of those questions which came over the twitter. that's next. 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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welcome back we've got a news alert in the options market interactive brokers saying it is lifting all trading restrictions on its platform for options. mike khouw, your take on this breaking news? >> yeah, i'm not surprised i think we had a situation where they obviously were trying to digest tom was talking about this earlier in the week, that obviously they were trying to make sure they could participate in maintaining an orderly market that they wouldn't jeopardize clearing or themselves or their customers. and i think they've finally gotten to a point they feel comfortable with this. this is a common thing, for people new to this, sometimes when you have volatile markets it is necessary to increase margin, impose some trading restrictions once everybody figures out how to make it work, they do. >> we want to be clear, that is options on interactive brokers robinhood still a big story. thank you very much, great stuff as always.

that wraps us up here on "options action. yes, we'll be back next friday at 5:30, but do not go anywhere because the show is not over a cnbc special report on the reddit rebellion 6:00 p.m. eastern, just two minutes, see you there. 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 ♪ (vo) we live in a world of fees. visit tdameritrade.com/learn airlines, hotels, food delivery, and especially car dealers all charge excessive, last-minute fees.

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