and it showed me i could do it. and so, thank you, thank you, and have me on again! we'll find some more cars and do this again. this is a blast. works for me. thanks again. (mark) thank you, jay. unbelievable. good evening, everybody it's friday, that means it's time for "options action". here is what's on tap. one by one, two by two, three by three, investors have bailed from the ark innovation fund if you're staring into the abyss and think you may want to jump, too, we'll help you do it safely with an options life raft. then the energy sector is at new highs, but tony zhang has a

way to win, even if that trend runs out of steam. >> it doesn't matter if retail sales are horrible people still need under wear tonight a name we have never covered by that's because it's a secret it's time to risk less to make more, "optioning action" starts more "options action" starts right now. we know the tech sector has taken a beating lately the poster child on the way up was cathie wood's ark innovation etf. but it's turned into a poster child on the way down. so much damage done. is still more to come? >> the key was tesla and their paths have diverged. let's look at a handful of charts, they're all the same time frame

these are weekly bar charts going back three years the first on the screen has no judgments or annotations, it's just the arkk chart. the second chart, you'll see this quite clearly, is breaking down from the wedge or channel that persisted and this then, you're starting to collapse essentially four months ago what do we know? the peak was 160, that's almost a year ago that's the problem february 16, 2020 -- 2021. here we are january '22. so it's not as though this is new. this has been topping and failing for the better part of a year and there is no real support until you get to the 60 level. the 60 level is the pre-covid high

let's put this in context. ark drops 45 from its pre-covid peak, 45% to the covid low, but now, having almost tripled down from that level, it's down 50% >> mike, what is the pay here? carter has laid out the performance of the stock >> carter pointed out that tesla was the highest hold in ark, but actually, there's a lot of etfs that have relative consequence trailed holdings the conversations are even bigger, but i think the big problem you have here is that cathie wood's strategy of buying the growing highest multiple, most exciting companies is a risky strategy in a market environment when you begin to see a focus on real earnings. i believe that's, essentially, the market that we find ourselves in when you have high valuation businesses as part of your portfolio, you would think maybe

after a decline of almost 50%, that some of these things are cheap, but they really aren't. what we have seen is aggressive valuations that basically push people into higher risk. the thing is shorting something like ark carries unlimited risk as shorting any stock does we certainly wouldn't recommend that buying puts is a way to get some downside exposure but it's expensive. the implied volatility is approximately 50%. that's roughly double what the current implied volatility in the qqq is so i think what you want to do, if you're interested in buying options, is looking for some to sell against it. i was looking at a put diagonal, specifically buying the may 78 puts when i was looking at those, those cost a little over $8, or more than 10% of the strike, or the current value of the arkk etf, demonstrating how expensive those are. and then selling much nearer dated, february 18th, 64 spot, two, two puts against it, collecting about 1.25. the idea here is you're go ing allow the faster decay to help

you finance the decay that buying such expensive options has without taking unlimited risks to the upside. >> so, tony, your reaction here, is this ark worth touching in any sense? >> no. i don't think so i think if you look at the chart, as carter's charts show you, this is pointing in one direction, that's the did you know side. especially if you look at the ark, it tested back in late december and was rejected at that level you echo carter's targets here to the down side about $60 that's what i'm expecting arkk

to be trading at the next few months it bounced higher above that 170 basis point level. i think we're headed up to 2, and i think it will put downside pressure on the higher names in the ark fund when you look at mike's trade here, options are really expensive. there's two reasons i like mike's trade he mentioned by going out to maybe may the puts he's selling against that are trading at about 58% implied volatility so he is buying low, selling high that's going to offset some of the expensiveness of the options. yet it's still 10% of the etf. the other thing is he's only spending about $7.50 for a diagonal spread. so even if you see the etf blow lower to the downside, he doesn't see any losses as you typically may do with a diagonal >> i'm sitting here thinking, carter, your company is called worth charting, and maybe we put this in the basket of not worth charting >> fair enough energy on a tear, many companies hitting new 52-week highs.

you are looking at one in particular in case there's a power outage, so to speak. what is it and why >> i want to take a look at kinder morgan. because i myself have been bullish on energy going into 2022 but i think kinder morgan stands out as one of the weaker names going into earnings next week. if we look at the chart, what you see is a stock that has roughly doubled from october of last year to about the middle of this year. since then, it's been trading lower. what we see is a series of lower lows and lower highs and what's important, specifically, about earnings here is that, as kinder morgan is trading lower, what we see here is that the sector itself, xle continues to trade higher. higher highs and higher lows what we see is that kinder morgan is making a new three-year relative low to its sector

this is the signal that leads me to believe that kinder morgan may disappoint on earnings next week so if we talk a look at the options market here right now. the markets are implying about a 3.1% move going into earnings, which is roughly in line with what we've seen over the last eight quarters with exactly 1.38%. so the trade structure that i want to use is in the money put spreads here i'm going out to march and buying the 18 by 16 put spread, paying about $1.08 before the may puts, and collecting about 25 cents for the puts. this is an in the money put option i'm doing that for the time decay of the trade if i see the move to the down side, i'm seeing slightly under two to one risk/reward ratio trading the bottom end of the trade end i saw on kinder morgan >> mike, any reaction? >> yeah, i've been bullish on a energy for some time

viewers know that i'm a long time holder of halliburton that too has seen a really it is interesting to note that this week we saw some of the bigger bearish trades that i've seen, including some trades in halliburton. they're not exactly the same thing, but some institutions do, at the very least, seem to be interested in either pairing their positions or hedging against a down side move i think what he's doing here with this particular trade makes sense. relative to where the stock was at the time, there's virtually no time decay in this trade at

all, and, of course, you do limit the upside risk in the event you get the direction incorrect going into earnings. >> carter any thoughts on tony's trade or kinder morgan more broadly? >> pipelines like this don't have the beta or torque that you would get in a commodity related stock such as a driller or mp name the dividend is twice that, but the main thing, if you're looking at relative performance, which is a factor in history, it's relative performance, it's terrible, and tony has made that clear. >> we'll take a quick break. for everything "options action," check out our website. while you're there, sign up for our newsletter here's what's coming up next still to come, one retailer that seemingly has the secret to surviving dismal consumer spending plus calling all "options action" fans, reach into your pocket, grab your phone, tweet us your question if it's nice, we'll answer it on air, when "options action" returns. thinkorswim® by td ameritrade is more than a trading platform. it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective.

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♪ ♪ welcome back to "options action." last week cart erand mike looked to get ahead of weakness in consumer spending using the xrt etf. >> we have a break in trend and we have very poor relative performance to the s&p, to tech, to financials, to almost everything don't like it. want to be underweight, want to sell it short. >> i was looking out to march, essentially buying the at the money 87 strike put selling the 77 strike put against it when i was looking at that earlier today, that was going to cost a little over a quarter of the distance between the strikes now we are seeing slightly elevated options premiums in a couple of areas and those paying attention to the market probably understand why that is

that sort downside put will help offset the decay of the one that we own it's also going to increase the break even level in other words, xrt is not going to need to fall quite as far before we start seeing profits at expiration. >> since then, it has already made some profits as the xrt has declined but we have before expiration. mike, should we adjust this, let it stay as it is

what >> so, as of the dead lows that we saw today, this thing has declined approximately 50% week on week. this thing was about 50% in the money. in fact if you had taken your 87 strike options rolled them down to the 80s you could collect about $3.50 for that that's more than we spent for the initial trade originally you would have actually made some profits and you would still have exposure 25rg9ing the still have exposure to the down side

if it were to decline further. it's hard for me to imagine, though you'll have to check with carter on this that they would believe that xrt will actually outperform his downside target. >> carter, any reaction there? and then we'll get to your next find. >> the pressure is on. the macro data came out this week, sales very weak in ago ge grat and the individual companies saying very sort of unhappy things i think the way forward is lower. >> a point you made last half

hour on "fast money. your next find is in the consumer sector, bucking the trend. bonus it's a name we've never covered before on "options action". don't know why that is but take us through the charts, carter >> sure. so victoria's secret, v.s.c.o., let's look at the charts, so get right to it. they're all the same time frame. the first one, this is important. it's showing the very bullish price volume correlation on the lower panel these. they heavy bottom-up thrusts, that's where accumulation is and the low volume accumulation. this appears in november and december if keep that same construct, look at the second chart, you see we're breaking above a down trend line that's been in effect sill since the new iteration, remember victoria's secret used to exist and this is another class of stock now look at the third chart, with all these cups and handles, it's what a reversal looks like, something that's bottoming we have a cup-and-handle bottom. and we have impressive bullish price line correlation

final chart. this is very important this is the relative strength of victoria's secret to the xrt what we knows is, even as victoria's secret was making new lows three weeks ago, its relative performance, you can see that, was already basing and bottom we think you can get 65 out of this, and the stock closed at $56.33 >> carter has laid out the charts mike, how do we trade? >> one of the reasons we haven't talked about victoria's secret specifically in the past is because it was part of a larger company. this was part of l brands. now bath and body works. and we have, essentially, a recent i.p.o. here what's interesting this has been a very distressed area, but the

company is trying to transition to a more inclusive model. i think that's important i think it's also important that it trades at a discount to its peers. and i'm talking about specialty retail when i'm talking about its peers. how much discount to the market? it's trading between seven and eight times 23 estimated earnings i think that essentially gives us a buffer to the down side it's fair to say that mall-based retail is challenging, but i think they have closed 250 stores to date. >> wow. >> possibly have another 150 or so that they could sell of the 830 that i think they're currently still operating in north america. of course, given the sector, given the market, it's unsurprising that these options are also fairly expensive. i was thinking one could use a call spread risk reversal. specifically, i was looking out to march, the 50, 60, 65 call spread risk reversal spending about $3.70, and selling the 65 calls, and the 50 strike puts for about 3.10 net-net you actually collect $1.75 in premium in worst case, it would decline below that strike price that you are short, and you'd be forced to buy it there. and of course you also collected the 17 -- 17 -- $1.75. so your effective could be also they about 1.75 over the course of two months, not a terrible return to a standstill basis

of course, if it goes higher, you can collect the full distance, so $5, your total profit could ultimately be $6.75. if it rises to that strike price that carter was targeting. >> tony, you can talk about the trade that mike just laud out or about victoria's secret more broadly. >> yeah, so let's first talk about the trade itself the risk reversal may sound intimidating for some viewers, but you can think of it as two strategies put together, and a short put and a call debit spread both strategies we speak about quite frequently here on the show by collecting on this, about 1.75 not only is the strategy going to be profitable even if victoria's secret declines, you now have the option of owning the stock. if you go back to the valuation metrics that mike was referring that, that's owning it about seven times next year's earnings i think that's a comfortable price to potentially own the stock, if you do see this trade back near its relative peer's multiples. and at the same time you have the call debit spread, which gives you that upside exposure that you typically don't see if you sell a short put so it marries the two strategies together and gives you the best of both worlds victoria's secret has been on this transformation. what we have seen here on the chart itself, the chart doesn't look particularly interesting.

it's been stuck between 48 and 58 since october, but that stealth rotation, the last chart that carter was showing you, that's the important part. not only is victoria's secret outperforming the xrt, the retail etf, but also outperforming the broad discretionary sector, so that's the key i'm looking for that points us to victoria's secret breaking out huer here and perhaps trading at a more natural valuation for this type of company >> tony, thank you very much up next we'll take your tweets and answer your questions. we'll be right back. it's time for our lowest prices of the season on the sleep number 360 smart bed. what if i sleep hot? ...or cold? no problem, the sleep number 360 smart bed is temperature balancing so you both sleep just right. and it senses your movements and automatically

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♪ welcome back to "options action." time to take your tweets our first viewer asking what are your thoughts on high end retail like rh, farfetched, et cetera carter, your thoughts? >> well, these are very interesting. high-end retail, you know, you're talking about a 41% decline in nrh fetch is down 65%. at some point they're due for bounces, but buying things that are just plunging, i'd be inclined not to do that. >> tony? >> i certainly agree with that. >> that's about as simple an answer as you could ever ask for.

thank you tony >> our next viewer asks, i notice you folks seem to enter vertical spreads with the short long leg being at around the .50 delta. this doesn't seem to allow a lot of room for error as to where to open the position. how does one choose the entry points accurately? tony, break it down for us >> strike selection is about choosing with probably and risk/reward. the higher deltas do perform better but just to break that down, when you're using a higher strike spread, you're going to have a lower probability of success but a very strong risk/reward ratio. i think what you're alluding to is potentially using something with a lower delta

there's nothing wrong with that. you have to understand the trade off is a much worse risk/reward for that particular trade. >> mike, a technical question. take it apart for us. >> yeah, i mean, i would agree with tony on this one. the thing is, i often try to, when i'm looking at debit spreads think about essentially, the payoff we're often looking for payoffs of 3 to 1, or better meaning you would spend about 25% of the distance between the strikes. however, when i'm looking at credit spreads, that situation can seem somewhat less attractive that would mean you would actually want to increase the delta of the option that you're selling, essentially to get more of the total possible premium between the strikes. so, you know, this is the kind of trade-off you're dealing with but if you're going to sell credit spreads against, for example, a long position, then the lower delta is definitely the way to go. >> let's go to our final calls, carter, you first. >> well, victoria's secret it's a great place to be. >> all right that sounds good tony, you? >> kinder morgan earnings buy a

put vertical spread. >> all right and mike >> yeah, you know, when you look at victoria's secret, the high options premiums combined with the low valuation, i think a call spread risk reversal is the way to play carter's play. >> that does it for us see you next friday. don't go anywhere, "fast money's" special edition is right now. it's a thirteen-hour flight, that's not a weekend trip. fifteen minutes until we board. oh yeah, we gotta take off. you downloaded the td ameritrade mobile app so you can quickly check the markets? yeah, actually i'm taking one last look at my dashboard before we board. excellent. and you have thinkorswim mobile- -so i can finish analyzing the risk on this position. you two are all set. have a great flight. thanks. we'll see ya. ah, they're getting so smart. choose the app that fits your investing style. ♪♪ welcome to silversneakers. are you ready to get moving? (throws punch) our new virtual classes were designed for you and millions of seniors like you. you can now choose from thousands of live virtual classes every week.

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