they just make bad decisions. - kelly: but, man, did they have a good time. you live like a king or queen for two, three good months, and then it all comes toppling down. fans, i'm leslie picker in for melissa lee. we have a big show on deck here is what is coming up. >> announcer: stocks soar to all-time highs but will rising risks derail the rally? if you think we're in for a september sell-off, mike khouw lays out a way to take some protection plus a tale of two charts in the cloud. chart master carter worth sees the best of times and the worst of times for two big names reporting earnings next week and later, chew on this.

tony zhang is finding bi opportunity in this $37 billion company on deck with results we'll lay out the trade. it is time to risk less and make more "options action" starts right now. >> all right, let's get right to it we start with a record finish to the trading week on wall street. the s&p 500 and nasdaq closing at new all-time highs. but mike khouw said beware, there are three risks rising risks that could derail the record run mike, kick us off. >> yeah, so i mean obviously here we are at all-time highs. i think it's pretty clear that one of the reasons that we are at all-time highs is because o powell's comments that a lot of people were trying to digest today. those seemed fairly dovish but i think it's important for investors to remember that, of course,'s he not going to sort of lay shocks on the market. we have a big fomc meeting coming in up in september. we are essentially getting

prepared for tapering. but of course the tapering, this is a really significant issue. because the fed has been purchasing about $120 billion worth of bonds every single month. about $80 billion worth of treasuries and $40 billion worth of mortgage securities now the degree of that tapering, if inflation risks persist, is definitely a headline risk for the market we saw that in the last taper tantrum in 2018. and another risk i think is certainly that we are going to be passing labor day that may not seem like a really seminole event necessarily for the markets to essentially say the end to summer, but the truth is that actually we're entering a volatile period for the market a lot of people consider october to be a volatile period, but september tends to be two of the most volatile months that we typically see. so i think that obviously presents a risk. and then of course we got a little bit of a taste of geopolitical risk this week. but i think the important thing to remember is that we always have geopolitical risks.

we always have macro risks, but it's when you have those in conjunction with a relativel complacent market, an uncorrected market, a market at all-time highs and has valuations close to those that we saw in 2000 because obviously we had a significant pull back in tech stocks i think all three of those things put us in a precarious spot. >> tony, what is your take what do you make of those three risks and what it means for the markets? >> so when you take a look at jackson hole and the price action from the market here today, largely it hasn't changed the base case here but as mike said, we've reached new all-time highs here in equities and we start to see signs of slowdown in the second half due to the delta variant. we see more geopolitical risks now with afghanistan it is prudent in my opinion to start looking at buying some protection however the challenge here is the fact that the implied volatility of the market has not moved down significantly here over the past couple of months so buying protection here is

actually a little bit expensive. so this is really where i think it makes sense to take a look at certain spreads to potentially lower the cost of buying these puts potentially on the market >> carter, what do you make? tony said the p word, protection do you agree >> yeah, let me just throw out something that we just worked on team technicals at cornerstone from a statistician. consider the following in the month of august we've made ten new intraday highs in the s&p. that has not happened since august of 1987 and the record number of intraday highs in the front of august is 11 and that was in 1929 do analogs always play out and does this have to be 1987 or 1929, of course not. but these are the things that start to register when you're having a conversation about the p word protection, how to take measures in the event of a market draw down seasonally this is the worst

period of year we do know that the august, september, october, three month period of all rolling three month periods is the only one that is negative 1928 to present. >> wow well, i am no financial historian, but you know what happened in 1929 and 1987. so if you think another p word, pull back is coming, mike has a way to use options to take some cover. mike >> yeah, so i think one way that one could consider hedging some of your exposure and really what i'm talking about is hedging a potential correction correction is usually defined as a pull back of about 10% or more is to take a look at buyin put spreads on spy now spy is the etf that tracks the s&p 500 so it is a good proxy for many equity portfolios i was looking out to november, of course that is going to capture that three-month perio or at least the second two months of it that carter was just talking about

the 440, 400 put spread, when i looked at this today, you spend about $9.70 for the 440 put and sell the 400s for abou $3.95 and spending $5 to buy some protection. now you notice that that lower strike, that 400 strike that i'm selling is about a 10% pull back from where the market is right now. and we're selling that put to mitigate the slightly elevated implied volatility that tony was just talking about but i will say with these risk factors and given the fact that we have had such a run here, i actually think that the prices for these options is justified >> good to know. as the market grapples with rising risks to the rally, one of our traders said there is still big opportunity out there especially as we head into the final days of earnings season. tony, what name are you watching heading into next week >> yeah, leslie, i want to take a look at chewy. this company has seen incredible growth during the pandemic but i think for investors going into earnings next week, i think

the opportunity here is as it starts to focus on profitability in 2021. if you look at the chart itself here of chewy, the stock had a very incredible run to start off the year, but that quickly faded and it's spent the better half of this year trying to get back up to the 87 1/2 level where it roughly started the year on. and since over the past month or so it has been building a bit of a base above that level and i think going into earnings next week is what carries it a little higher here. and if you look at the business itself, valuations are quite stretched here for this particular business. but if you look at the business, they've been able to sustain multiple quarters of 40% plus of year-over-year revenue growth. so i think these rich valuations are somewhat justified if you look at the earnings itself, the market is implied about a 9% move, but over the past eight quarters the stock has only moved on average of about 6% so when you take into account that the stock is trading at

fairly rich valuations which means upside may be limited and the fact the implied voluntarily tilts are so elevated, the trade structure that i prefer to use going into earnings is to sell a put spread so i'm going out to the october 1st weekly options and i'm selling the $90, $83 put vertical earlier today when i was looking at this i was able to sell the october 90s for about $6.20 and pa $3.20 for the october 1st 83 puts net-net here i'm collecting about $3 or shy of 40% of the vertical width but because the stock is down a couple of bucks here today i do think for investors who are looking at this trade on monday, you might want to adjust the strikes down by about $2 or so. the 88, 80 on monday morning when you place this trade. >> i was hoping for purely options pun purposes you were going to say a collar option, but that's okay. mike, what's your take on tony's

trade? >> i think that obviously in situations where you have catalysts like this we often will see after the news comes out something we call vol suck that means that th premium of the options comes out once that catalyst has passed and if you could take advantage of that along as the view as tony has done, that is a good trade. in fact, this is one of the higher probability trades that somebody can enter into when you're using options when you sell options three things can happen, two of them are good if the stock stays where it is or if it goes in your chosen direction, your profitable and since he's using a spread and not selling puts naked, this is a situation where he won't face unlimited down side risk either. >> we're just getting started. as a remainder for everything "options action" check out our website optionsaction.cnbc.com and sign up for our newsletter here is what is coming up next. >> announcer: up next, it is cloudy with a chance of profits.

two big cloud names report results next week. how you could play one for a breakout and the other for a breakdown. >> plus, calling all "options action" fans reach into your pocket and grab your phone and tweet us your question @optionsaction. if it's nice we will answer it on air, when "options action" returns. trading isn't just a hobby. it's your future. so you don't lose sight of the big picture, even when you're focused on what's happening right now. and thinkorswim trading™ is right there with you. to help you become a smarter investor. with an innovative trading platform full of customizable tools. dedicated trade desk pros and a passionate trader community sharing strategies right on the platform. because we take trading as seriously as you do. thinkorswim trading™ from td ameritrade. we're carvana, the company because we take trading as seriously as you do. who invented car vending machines and buying a car 100% online. now we've created a brand-new way for you to sell your car.

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♪ ♪ ♪ ♪ ♪ welcome back to "options action." call it a tale of two cloud stocks

the chart master says it could be the best of times and the worst of times for two big names reporting results next week. carter, let's take one of these, let's take these one by one starting with zoom what is the set up into earnings >> well so that is the worst of times one if we're starting with the bad one which is fine. so the issue with zoom, i have two charts we could jump right in the first chart you could see where we are we're at a major inflection point. you call the apex of a wedge or a triangle, it is a standoff but the key is that we know that that great run up, obviously pandemic related, essentially zoom goes from 50 to 600 more than a ten bagger drops 50% and now here it sits in the apex of these converging lines. how does it get resolved you see i've drawn on arrow to the down side. look at the next chart this is what i'm keying off of what we know is that the bottom panel here is relative performance to the i shares tech

and software etf igv and on a reg testify bases it's already broken down through the lower line, the converging line we've already breached so the thinking which is a very weak stock stays weak and does not do anything but something unhappy in response to earnings >> so bad news first so if this stock is zooming lower, how do you play it? >> mike, you have one way to do it >> so i'm not 100% sure if it is going to zoom lower but i do think there are significant headwinds and i don't see it zooming higher and one of the things is, zoom is a product i think we all use it, i use it every single day. but of course they do see increasing competition from the likes of teams, which is microsoft product, slack has introduced some calling and conferencing functions and they obviously are heavily used, and, of course, one of the important things about this earnings season is that we've seen many high valuation stocks struggle even off of fairly good results, and i'm not sure that the

results we're going to get are going to be beat relatively high expectations here. so the trade i was looking at was going to take advantage of the fact tha and i think there are headwinds and options prices are elevated. i was looking at selling the sent 350, 360 call spread. when i looked tattooed you could collect close to 13 dps for the 350 calls and spend about $9.50 on the 360 net-net you're collecting about 3.5 bucks on this. i think that trade the price of it may have been adjusted very slightly as the close app approached but the idea is very similar to the type of trade that tony was taking a look at, trying to take advantage of elevated options premium, trying to get a trade that has a relatively high profit and picking a direction or at least be neutral on the the stock and i think that is what we're doing here. >> tony, what is your take on zoom >> if you look at the chart, the 345 level is key the fact that we recently broke below that this week, i think, is a suggestion of what's to come especially if you think about the under-performance of zoom relative to its sector and

relative to even high beta which has been a relative underperformer here for the market so unfortunately i think zoom is heading lower and the credit spread that mike is using, very similar to the trade that i'm using in chewy makes a lot of sense with this bearish view especially for the 345 level his break even price on the credit spread is about 353, just slightly above the resistance level. so as long as it stays below 345 or even moves a little bit higher, this strategy will be profitable going into earnings >> crowd strike also reporting results next week. carter, i'm guessing this is the best of the times when you look at the charts? >> it certainly is good times. and let's look at the chart. two charts the first is just what you see it is. it's a steady up trend and every time the stock has come down to trend you could see the arrows, it is bounced to the penny earnings coming, we gapped up earlier in the week. very bullish price volume correlation, the presumption is

more to come and now look at the relative same relative circumstance in terms of what we're plotting it against, as opposed to zoom, look at the relative performance of crowd strike to, again, the i shares tech, software and the etf igv. that is a coiled spring. meaning it hasn't made any relative progress since december but that is the setup for the breakout and we think it is going to do it in response to earnings. >> mike, how are you treating crowd strike >> yeah, so one of the things that carter just said, coiled spring what he's talking about is not that the stock has a level of support but that is it is going to advance and that is one of the reasons i'm looking at using a debit call spread here now i would quickly point out that we saw a lot of bullish activity in crowd strike options earlier this week as people were looking to play earnings on the upside i'm looking out further than most of that activity which was concentrated in the options that expire a week from today the weeklies i'm instead looking out to

october. the 290, 330 call spread when i looked at that you could spend about $16 for the lower 290 strike and sell the higher strike for about 5.5 bucks, maybe a little bit less. net-net your spending under $11 to make this bullish bet that's very close, by the way, to sort of the risk-reward payoff profile that we like when we use debit spreads which is typically a payoff of three to one. so we're spending a little bit of a quarter of the distance between the strikes and giving ourself more time to play out when we're using debit spreads than we are for the credit spreads. >> tony, what is your take on mike's trade >> yeah, so i quite like this trade because the debit spread gives you a very efficient way to take a directional view he's only risking about 3.5% of the stock's value to get about a three to one payoff here on crowd strike and this is a stock that i was bearish on last week when it broke below 245. big turn around here this week and not only is it outperforming th

sector that carter is pointing out, it's outperforming the market, outperforming tech and cybersecurity sector and all of these look good going into earnings. >> we'll keep an eye on that next week. up next, we're taking your tweets we're back right after this.

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thinkorswim trading. from td ameritrade. ♪ welcome back to "options action." time to take your tweets one viewer asks, they say volume adds weight to price and that is not happening with salesforce which gapped up on more than four times average daily volume only to be struggling on a strong tape today. i was long september 3rd, 280 calls in front of the print and they're now down 80% roll out our walk away tony, what do you say? >> yeah, so i think you're view here on the chart is absolutely correct. volume does add weight to the chart. however, what i think is a little bit concerning here is the time frame that you're using

the options for that particular view because when we think about this type of chart pattern, a breakaway here, usually you need quite a few weeks in order for that to establish and to continue higher here so this is part of why on our salesforce trade last week we used an october expiration and the call spread is up about 35% since we've entered this particular trade so buy yourself a little bit more time, but your chart views are absolutely correct. >> carter, what do you make of the chart views? >> well, so here is the thing. it was -- it lent a lot of weight to price. there was a huge heavy volume up thrust and gap and it was news related, earnings. this is a normal reaction. we almost have filled the gap. it is an aggressive buy, and buy more yes, your time frame is a little tough, you've only got a few days, bu very bullish circumstance. >> mike, what do you say, roll out or walk away here? >> yeah, i mean obviously rolling out would correct basically the situation that

both carter and tony have identified with only a week to go, you definitely want to give yourself more time when you are taking on long options plays unless they're just related to the catalyst but it sounds like you have a view that goes on a little bit beyond that. >> our next viewer asks, thoughts on the slv silver etf, will it tag 30 by the end of the year time to buy some call options? mike, what is your thought >> yeah, so fundamentally i rather like silver although obviously but if you've been taken a look at how it is behaving, it would seem that 30 is a long way off from where we are right now. i actually would expect even if we d get a rally it is probably going to run into a little bit of trouble up around the 26 level so the trade that i would probably use for something like this would be a lower or zero cost call spread, risk reversal selling some perhaps 10% out of the money puts and using those proceeds to finance the purchase of an upside call spread maybe the 24, 26 or the 23, 26

call spread. that would cost close to zero at this point and basically give you a down side buffer of about 10% but give you participation up to an anticipated level of resistance. >> tony, what is your take how do you trade this? >> so i like silver from a charting perspective you have a nice range between 22 and 27 and mike read my mind i think buying calls makes a lot of sense but i also like selling puts as well at the same time to fund the purchase ofthose calls. so that's exactly how i would play it. >> carter, how do you look at this chart from a technical stand point? >> sure. i think just in terms of adjusting the 30, the odds of hitting 30 by end of the year are close to zero. that being said, there is no reason that you can't get 25, 26 and that is where the overhead supply is. i would be long and play for those levels. >> our next viewer asks will the gap in amazon be filled. carter, what do you think? >> you bet you

so amazon, think of what happened similar to netflix, a big winner, but then goe into a range for almost a year and rather than breaking out on its earnings it broke down gapped down. but the damage is contained, just as it was in netflix and just as you see neat friction climbing back now, amazon, too, is likely to fill that gap but break out and make new highs if you're long you stay. >> mike, what do you think >> yeah, i mean, fundamentally it is really hard to bet against this company i mean, they basically execute in many areas and we continue to see good growth. i think they're getting decent margins at long last, people forever were asking when is this company going to see profits, and, of course, now we are beginning to see them. they've invested in the business and done so very wisely and i do look like amazon long term >> good stuff. thank you so much for being here that does it for us here on "options action. we'll be back next friday at

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