welcome to friday and "options action. i'm melissa lee live at the nasdaq site at times square. we've got a big show under way here's what's on tap >> ended september by breaking a seven-month win streak when something like that happens, investors habitually jettison two types of stocks the first, their worst performers the second, let's leave that surprising one to carter worth then sometimes things just get so bad, they're good

tony hops back on a past favorite that's been taken for a rough ride and finally a promising new covid treatment has merck in the spotlight. but tonight it's also spotlight several important lessons about surprise market events and how you should treat them. professor khouw has the prescription it's time to risk less and make more "options action" starts right now. let's get right to it. stocks are rallying to kick off the first day of q4 following the market's worst first month of the year and the chart master says after a big flush like we had in september, investors habitually sell two types of stocks carter, what are they? >> sure. conceptually, not a type by sector or market cap or business, but by pattern, which is to say, stocks that are especially weak, preceding a

selloff, they go down the most often, because people know in a way they shouldn't have been there, they're not working anyway, they're like, what am i doing? i've known this is wrong for a while and now it's really getting worse, there's no bid. at the opposite end is a stock that's quite extended. the sentiment is, i've put a lot of money in this, i've made great gains, i know i've been overstaying my welcome that second circumstance we're seeing right now in a lot of high flyers like costco, certain financials take a look at blackstone, bx. look at this table blackstone, bx, was $33 on the pandemic low and it hit $136. that's the best single financial performer in the entire sector from a pandemic low. and on a five-year table that you see this, the numbers are straightforward, compared to a broker like morgan stanley or an asset manager like t. rowe or credit card company like american express best performing five-year. let's look at a few charts here is a standard two-year

chart. we have this as a log logarithmic scale. we have failed at the top of the upper channel, we're right at the midpoint second chart do we stop at the midpoint or is the 150-day moving average where we're likely headed? i think that is what you see there. and that is my objective so, third chart, remove the parallel lines and look at the chart of bx with just the 150. that comes into play at around $100 stock is down 17 already when financials in the sector are only down 3. finally, look at the fifth chart. it's the same chart. it's with the 150 average going back 10, 12 years. this is one of the longest stretches in terms of magnitude without a checkback and duration we think there's more downside >> all right

so mike, what's the trade on bx based on carter's charting >> yeah, so blackstone obviously one of the most well-known private equity companies founded by steve schwartzman and pete peterson, obviously one of the most successful financial startups we've ever seen they've been operating very well, we've seen their fee related income grow consistently while a lot of financial companies have seen pressure on fees, on fee margins more specifically, you know, this is a company due to the nature of their alternative investing end, of course their diversification, that isn't seeing quite as much exposure to that that said, this is a company that has benefitted from the accessibility of cheap debt, the increase in asset prices generally. and most importantly, it has benefitted from basically an increase in its valuation multiple its historical valuation multiple is closer to 22 times

earnings relative to the 27 it's trading at now that would put the stock right around $97 i think to play carter's technically bearish thesis right here, we could look out to december i was looking earlier at the 115, $97 put spread. that would put the stock around 97 bucks a share, i'm sort of targeting that on the downside that put spread would cost a little over 5, $5.15, mid- to mid-when i was looking at it earlier today, very close to 25% of the distance between the strikes which when we're looking at debit spreads, and this one is very tight, very close to at the money, the stock was under 116 bucks at the close, and we own the 115 put strike here. this is the way you can make a bearish bet. obviously if stocks get hit in between now and year's end, that would affect this. if we see rates rise, that of course is a fundamental headwind potentially for them

i think there are a lot of reasons why it would be hard to believe they're going to go back to the prior highs and we want to take advantage those of options to essentially make a downside bid on the name >> tony, what's your take on the trade? >> i agree with both, both on the technicals and the fundamentals if you look at the chart, we've broken through short term moving averages 50-day moving averages have been broken momentum is negative i think we're moving back to the 100 to 150-day moving average that carter referred to. fundamentally the business looks quite strong, we saw almost 20% growth in au last year they're pretty much on pace for similar type growth for aum this year the valuations are what's concerning we've seen that 15% drop in the stock price over the past two weeks. i think that also has to do with the fact that risen, and that's

headwind for this name when you look at the pullback we've seen here over the past two weeks, implied volatilities are extremely rich on blackstone that's why i think using a put spread like mike has going out to december make the most sense because he's able to use the put spread, the short 95 strike to offset some of the premium that he's paying for those at the money puts which are quite expensive and by going out to december he's also mitigating some of the short dated implied volatility we currently see here on blackstone. a news alert on rivian let's get to phil lebeau >> we have an initial public offering, melissa. the importance of this cannot be understated or overstated, i should say, importance because rivian is, when you look at the electric vehicle startups, it is considered to be the one company that potentially could grow from idea phase all the way through

to being a large automaker, at least as large as potentially what tesla is looking at nobody's saying that's actually going to happen but they have a number of strategic investors from amazon to ford and rj skiringe is widely viewed in the auto industry as one of the vision's in terms of the potential for electric vehicles. so this ipo filing, long expected, it has now happened. we don't have other details in terms of exactly what's going to be coming out through the ipo. but this has been expected and it has now been filed. now we get to see what rivian can do as a publicly traded company once this is completed >> we get to see more information about the company, phil i'm wondering from your standpoint what's the biggest question you think investors and analysts would have at this point when it comes to rivian. >> really the size of the market

potentially beyond we know that they are developing, building they've already started working on building electric delivery vans for amazon. and a lot of people say, that's great, that's your big backer there, and it should do well look, they have a couple of models coming up, the r1t, an electric truck, the r1s, an electric suv both of them, the people that i've talked with who have seen early versions of the r1t, give it very high marks and we will see first deliveries of those coming up later this year so i think the big question is going to be, okay, what do you see happening beyond the amazon customer relationship? and that's when you talk about the r1t and r1s and deliveries to the public. >> phil, thanks. phil lebeau with the news that rivian has filed for an ipo. mike, we had a screen up of

different ev makers or different companies that are trying to be ev makers. is this a case where tesla will be sort of the register, the source of funds for rivian investment >> i don't think it would have to be necessarily. we've seen a little bit of appreciation, first of all, in the big u.s. oems, gm and ford i'm kind of hoping as a ford backer that that doesn't necessarily happen but, you know, tesla has a lot more going on than just vehicles and in terms of the size of the market, phil was just talking, for example, about amazon delivery vans. the vehicle market for electronic vehicles in the united states is as big as the vehicle market itself, frankly, because i think we can all agree that whether it is a commercial vehicle, an suv, a sports car, whatever, chances are, within the next decade, they're all going to be electric it's a big market opportunity. but tesla's market opportunity is a little more than just the

things with wheels on them >> we've got a lot more ahead here on "options action. "options action" on cnbc.com, you can sign up for our newsletter there here's what's coming up next still to come, this morning merck surprised investors with a new kind of covid treatment. tonight, professor khouw explains how to treat such surprises. and the gang helps you decide what kind of investor you are. plus calling all "options action" fans reach into your pocket, grab your phone, and tweet us your question if it's nice, we'll 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.

♪ ♪ ♪ ♪ ♪

welcome back to "options action." as we discussed last half hour, merck bouncing today after surprising news of an effective covid treatment. the news also presents the opportunity for a special call to action on the action. professor khouw, why don't you explain. >> yeah, so we're going to take a look at selling covered calls. for people who haven't traded options, selling covered calls is the investment strategy and i'm making sure to call it an investment strategy rather than a trading strategy. it is very often the first option strategy that people will embark on. and that is selling calls against stock that you already own. and this is a situation where the stock's largely been moribund for the last two years. in fact was significantly higher this obviously created some significant upside we saw a big sharp upside move today. if you're selling covered calls against stock you own and you do this usually somewhat consistently to try to generate a little premium or additional

income against the shares you own, there's a couple of things you want to bear in mind one of them is you want to watch out for potential cat lifts because those are things that can move stocks around we had a cat light of about this treatment for covid, but of course they also have earnings coming up at the last week of october. that also can present an opportunity. this isn't a stock that typically moves that much on earnings but it can elevate options premium somewhat another thing to take a look at is that when you sell options, nearer dated options decay more rapidly than longer dated options do finally, remember what you're doing is you're trading yield for upside when you sell an upside call, you're giving somebody else the right to buy your shares from you, usually at a higher price so you want to make sure you're getting enough yield to justify giving away that upside. and also that the upside you're giving away is one you can live with you want to choose a strike

where you're comfortable selling your shares. i was looking out to the november 87.5 calls. the stock closed 81.5 today. those closed just under $1.40. that would offer a stand still yield of 15% if the stock did nothing and you consistently sold premium of about that during for about that amount you would collect about 15% of the current stock price over the course of the year in premium. of course it will never work out exactly that way but i usually try to make sure i'm collecting enough premium that it justifies taking some equity risk and still gives me some upside participation. usually a minimum of about 1% per month. >> carter, you say today's move in merck illustrates exactly how price discovery works inform in what way >> exactly, 100 million shares, largest day on record. how did that happen? because people took the matter casually no there are people who own it who

when the news is released think, wait a minute, should i add to this, should i double it wait a minute, this is no good, i need to dump this. thousands of man-hours, as the expression goes, have gone into figuring out what's the it worth markets are inefficient. but they're very efficient the day of a newsprint to get the stock to where it belongs. remember what happened on pfizer, when they announced their news, it gapped up like this and was dead flat, in fact sort of drifted for multiple sessions, weeks in fact, afterwards it went right to its 52-week high and stopped selling premium is the way to play >> all right we've got a news alert we want to get to out of d.c kayla tausche has the story. >> melissa, the biden administration's economic policy toward china will come into view

beginning on when the u.s. trade representative gives a speech outlining her views and the conclusions from her agency's top to bottom review of china. i learned from sources familiar with the matter that in that speech, the u.s. trade representative will declare that china is not in compliance with the phase 1 trade deal that was signed in january 2020 under that deal, china had two years to buy $200 billion in additional u.s. goods over the course of each of those years. and china's purchases have fallen well below that target. what is unclear, melissa, is how exactly ustr is going to respond to that. in the techxt of the deal, if oe of the parties is not in compliance, that will open it for additional tariffs taken by the other party. the ambassador has been calling for consultations with beijing directly and with allies over that it will be a critical speech to watch especially as we near the

end that have first two-year period,china will need to make good on those purchases and now we know the administration will say officially in the most forceful way yet, it has not, melissa. >> kayla, thank you. kayla tausche in washington for us up next, bringing a beat-up old favorite back into play, it's just like riding a bike we'll beig bk. rhtac there's software. and then there's industrial grade software, forged from decades of

industrial experience and insights. meet honeywell forge. analytical software that connects assets and people to deliver a cybersecure record of your entire operation. so that everyone, in your boardroom and beyond, speaks the same language. honeywell forge. industrial grade software.

when traders tell us how to make thinkorswim even better, we listen. like jack. he wanted a streamlined version

he could access anywhere, no download necessary. and kim. she wanted to execute a pre-set trade strategy in seconds. so we gave 'em thinkorswim web. because platforms this innovative, aren't just made for traders - they're made by them. thinkorswim trading. from td ameritrade.

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, 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 ♪

♪♪ visit tdameritrade.com/learn ♪♪ ♪♪

and facing the same challenges "mad money" starts right now my mission is simple to make you money. i am here to level the plain field for all investors there is always a bull market some where i promise to help you find it. "mad money" starts now hey, i am cramer, welcome to "mad money," welcome to cramer-merica. my job is not only to entertain you but to teach call me or tweet me @jim cramer. today's rall