it is friday and that means it is time for "options action." i'm melissa lee. here is what is on tap. >> two roads ditverge in a sell-off and they split up and took both. first up carter worth tackles google and if it could continue. and then find out why tony is selecting microsoft as a long-term winner that could endure plus, professor ciao with a teaching moment on how to catch up when sudden and swift changes catch you on guard

it is time to list less to make more "options action" tarts right now. >> and let's get right to it tech taking another beating today. the nasdaq dropping more than 2.5% now down more than 7% for the week and as we gear up for big tech earnings next week, carter worth said one name could be in for more pain. take it away. >> certainly more than one could be in for pain but let's look at google a couple of charts, comparative absolute relative. so the first one this is simply looking at a google versus the qqq, versus the spy, basically in the days leading up to covid, the plunge and the ricochet and we know that spies and the market is up 34% and google is up 80. and okay, that is great. but google is starting to lose ground the next two charts are identical. the first with the actual trend line, the second with the automates.

the first one google has broken trend. the line is straight, not manipulated by me and we're below trend. the next chart it is using the smoothing mechanism, the 150 day moving average which is the trend line, not the 200 day moving arth. we have just broken the 150 day. so, where might this be headed let's zero in and get tight and up close and personal. the next one is google and this is just over the past year so we have a topping formation that is clear. and we have a break in trend, that is clear. but where we are right now, this closed today at 2607 is right just below that october 4th close. so to highlight that, look at the the final chart. those levels, we're hovering at well defined intermediate lows where the pros presbpects of br to new lows. the break out is a breakdown and google has all of the elements for a sharp drop and break.

>> mike, what is the trade then? >> so this is an interesting one. alphabet, because i think this would probably be one of my favorite stocks under normal circumstances for the full year. i mean, this thing is trading at less than 23 times full year estimated earnings, cheaper than the market if you look at it x cash, it is probably about 21 times. and you compare it to other tocks that other people seem to like although that are performing very weakly like amazon. and which is a comparably valued company that is probably going to make about 80% less in terms of the earnings and over the course of the next five years or so, maybe 260 belillion versus 0 billion in the aggregate over the next five years for alphabet over amazon. so about 80% more than amazon. but obviously nothing seems to be performing all that well in this environment so if you own this stock, if you're concerned, one thing you could do is consider a hedge

and the hedge i was looking at, because implied volatility is for almost everything have gone up because of basically what we're seeing you could put on a put spread. i looked at the march 2600, 2330 put spread when i was looking at that, that would cost you a littler $70, that is a $270 foot spread and when we are looking at debit spreads but there are viewers who don't own alphabet right now might be inclined to take carter's technically bearish view on the stock right now. but aren't interested in the taking the unlimited risk that the short would involve or perhaps buying a put spread as expensive as that one andfor those i would say, one of the things you could do as an options trader is look at a tighter spries spread looking out to the march expiration, consider the 2500, 2450 put

spread, that in attturn would c about $12.80 so about half of the price of a share of stock when you take a look at the hundred multiple for options involved and that is a way for you you don't want to hedge it that is another way to potentially participate. >> tony, what do you think >> yeah, so this is one where i really like the trade but i'm quite conflicted because i like the business just like mike. especially if you look at the search and the youtube monetization pathway that they have, there is not a lot to hate about this particular stock. but the charts are clear as carter shows you remember this was a thousand dollar stock just two years agoch an since it broke out above the 2600 level in june it is completing the topping formation and you're at risk of breaking that. and i think downsize here is risk of about $2,000, so 25% down side risk so for investors in this stock, looking at a

hedge, makes a lot of sense. you're taking about 2.3% of the stock's value to protect yourself about 25% downside. that makes sense for speculators, if you're trying to bet on a directional bet here, the fak that mike is able to take a trade on google or alphabet, that only cost you half a share that type of trade that you want to use options for to leverage your capital so you could take a speculative bet. but the stock is trading at 21 times next year's earnings when you look at cash it is cheap relative to itself and sector so it is reasonable for shareholders to hold on to this stock and look for a hedge. >> mike, last word on the trade? >> yeah. i mean this is one of those difficult situations i mean there is wisdom in crowds, in price, and when we take a look at the financials, it is hard for us to figure out what that is because if your simply taking a look at how this company is performing and how it looks to perform, i think over the next few years it looks like one of

the better long side investments that you could make. but right now the market doesn't seem to like many things and it doesn't seem to like alphabet. >> let's take a technology microsoft is gearing up to deliver earnings on tuesday. tony is laying out a way to play the name for a bounce back so tony, take it away. >> yeah, so i want to take a look at microsoft. because along with the tech sell-off, i think microsoft similar to alphabet is a fairly bulletproof business and think there is any opportunity going into earnings next week. if we look at the chart of microsoft, this stock broke out almost a year ago from the $230 level and since it has been a strong uptrend and since the peak it has pulled back about 15% back to the trend and i think now is the opportunity to see a bounce, especially if you look at the earnings announcement next week as the catalyst and if you look at relative chart of microsoft to its sector, it is t has underperformed since november but we started to see some

strength over the past couple of weeks and that is what i like to look for going into an earnings announcement showing this tock may outperform this sector or the market going into the earnings so if we look at the business, two-thirds of the revenue is generated from a cloud based business and especially if you factor into the 17 to 18% revenue growth that we're till expecting from this stock over the next two to three years, i think the fact that it is tra trading about 26 times next year's earnings, this is a cheap time for microsoft at the moment so when we look at the earnings announcement, the marks are implying a large move. 5.2% versus 2.6% so the markets think that this stock could move quite a bit so the trade structure that i want to use is going out to march, similar to the trade structure that mike is using for alphabet i'm using an out of the money

call vertical, a bullish call vertical if you look at the close, the is trading around $7 for a $30 wide debit spread so this is an out of the money debit spread that is risking less than 3% of the tock's value to play for a significant move here to the upside on microsoft earnings next week >> mike, what is your take on the trade? >> you know, i think dan nathan said this week, why would you want to be long any tech stock at this point going into earnings and of course i kind of agree with that. given what we're seeing. but if you are inclined to do it, one of the things that we have access to of course are options and when you get into a debit spread like this, where the reward is a multiple, of the risk that you're taking that is the time that it might actually make some sense. whenever we see market prices falling as we did today, there is always that temptation to try to catch the falling knife that is a risky thing to do. but if you think earnings could be the catalyst that gets

microsoft to bounce here, i think a debit spread like the one that tony just laid out is the right way to do it. >> tony, what do you make of microsoft chart or the statement that dan made that you don't want to be long technology going into earnings? >> right well let's take the latter first. think it is a very asemiticry move for the market, there is not much that the big ones that could say that will make them surge. but anything that is hinting at weakness, a little disappointment, a little light, something not right, and you could get asymmetrical drops something big. as the pattern goes, look, microsoft is on its one year trend but it was broken trend for fr its covid low i think as the market goes, microsoft goes, as microsoft goes, the market goes. >> tony, your last words on this trade? >> so i do think that we have to look at the azure cloud

business i think that is going to drive some upside here going into an earnings event and because i want to protect myself, i'm using an out of the money call trend in this structure. >> check out our website and sign up for our newsletter here is what is coming up next. >> till to come, ships happen, usually in the options chest game, we anticipate change but when surprise change turns you into a pawn, you could still use these tools to get yourself out of debt. the proffer explains. >> plus calling all fans, reach into your pocket and grab your phone and tweet us your question at options action. if it is 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

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♪ welcome back to "options action." when using options, we're looking ahead to an expected catalyst, but what happens when it take you by surprise. we have another teaching moment for us professor. >> so i kind of want tobegin this conversation with a last one ended, basically and carter was pointing out that if you take a look at some of the tech earnings, that there isn't much that these companies could say that would propel the tock higher but any disappointment and you could suddenly see them go a lot lower. well there is another sector that that happened to this past week and that is financials. you look the at last five trading days, down 7.5% versus 5.5% for the s&p more broadly and the reason was what we heard from the big financials. who were reporting, we're

talking about jp morgan, citi, wells, black rock, and goldman sachs and coming out and these are different areas of financial services as well so, this was supposed to be the time for financials, right we were supposed to be seeing rising rates, we're going to see better interest margins and yet here we are. so i think this is a situation where these whole sector is essentially stuck. but also we've gotten into a situation where a lot of the bad news has already come out. so i think this is an interesting set up potentially for something called an iron condor an iron condor is a strategy that we could use when we believe that we might be range bound for some time. now the thing about getting into a situation where your betting it is not going to go materially higher or lower, is to be mindful of catalyst. we've seen many of those come and go and that is not to say we don't have some important ones coming up, we have the fed next week. and that is important.

one of the things that is when you use an iron condor, we're going to be getting into a short options trade. where it is a credit trade this is a situation where, because you want to take advantage of the fact that options decay more rapidly, the more nearer dated they are, we're looking for shorter dated options. so in this case i was looking to february and looking at the xlf 35, 37, 42 iron condor and in this, i'm selling the 37, 35 put spread and i'm selling the 42 call spread net-net. >> i'm collecting about 64 cents. it could only be where it is now. lower or higher, at expiration, you only have risk on one side of that spread if it starts to move in either direction so really the way to think about how much you're receiving relative to the risk you take, is the amount of premium you collect basically relative to

the distance between the two strikes on the put spread and the call spread. the idea here is that it is going to stay within that boundary between now and february 18th. prevent it from going much higher, by what we're seeing in the market and prevented from going much lower because the bad news has already come out. >> carter, what do you make of the charts >> well, i've got two. but before we get to those the important thing is this. this, perhaps with no exception was the most embraced theme over the past three to four months. rates will go higher and the financials, as value stocks, will outperform. it is been nothing but the opposite jp morgan, goldman sachs, brokers like jeffries, cowhan and it is down, it is going the exact opposite way so financials have being rerated lower will go flat the first chart is xlf and you see the well defined down trend

and this is xlf relative to spy. we've hit this line four or five times and i don't think anything of more of the same, likely to continue to fail at this line. second is xlf, the last chart of the two, itself. and it is talking about a well defined channel. we have moved from the top to the bottom this is the channel over the past ten months. and so at the bottom it probably sort of starts to meander and do nothing. i think xlf were loved, now they're not interesting if you will and so betting against volatility. >> so the technicals line up tony, what is your take and is this a trade you could be inclined to make >> it is because this is really a question of timing iron condor in order for it to profit, the asset needs to trade sideways an that is always tricky to identify because a lot of traders tend to put on iron condors once they've seen the training range take hold but our research shows almost the exact opposite

that assets trade sideways after a huge move. and that is exactly what we've seen to far in xlf this week because the move we've seen this week has only happened nine times over the last four years so timing, i think, is very great on this particular iron condor if you look at the trade structure again, the iron condor is a combination of a put credit spread and a call spreadity spread he's selling the 37, 35 put credit spread and the 42 call spread and collecting about one third which is $2 wide on each side i tend to be more tactical i think we're near the bottom end of the range i think you could move it up to by $1 but that is the tactical on the bought am end of the range and that will bring in about another 13 cents, 14 cents in trade that brings it to one and a half to onech that is a minor adjustment i would make to

this particular iron kobdor. >> mike, why did you choose your levels >> i choose mys base in a situation where you see all risk as et -- assets declining, people will often times sell because they have to not just because they want to necessarily. and so even things that might otherwise hold up just on a value basis, you might still see some continues pressure. if the s&p 500 is down 80 handles again next monday, do i expect to see financials up? no because the bad news has already come out i'm fading that down side put just slightly simply because i'm trying to reflect the market sentiment in which we find our sfz. >> up next, we're taking a look back on a high energy trade from a few weeks ck more "options action" right after this

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welcome back to "options action." time for a high energy look back a few weeks back toby laid out a way to play the xle. >> my expectation is to look for some higher oil prices and especially as we've had some pent up demand and that is likely to going to be a nice boost for energy stocks noots second half of next year so if we look at a chart of just crude prices, we have a full year of what we would consider higher highs and higher lows and this simply points to further upside here next year towards about 85 and potentially higher. so i'm going out to june and i'm buying the $55 call options on xle and against that i'm going to sell the february $59 call options against it for about 80 cents. >> since then energy is up nearly 13% so tony, what do you do now? >> well, you certainly move faster than i had expected if you had just bought the call

options you're looking at about 100% return if you used the diagonal structure, you're up about 40%. certainly not nothing to sneeze at however i'm inclined to hold on to the february call options i think we could see some weakness where i look to buy back the calls an maintain my june options because i think there is further upside down the road. >> up next, your tweets d e anth final call 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. ♪♪

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♪♪ ♪♪ welcome back to "options action." time to take tweets. netflixs with down almost 90% today, hi to close them today. any recovery trade, mike what do you tell this person. >> i'm not sure which straddles you're referring to because this stock was down more than 20% overnight basically on earning so even the may straddles didn't lose any value

simply because the move was so big. but of course a lot of premium was love i think we've had a big rerate here in the price of this stock. and the thing that is interesting to me about the price of options is that the near dated ones are still trading even net of all of this at higher implied volatility than the longer ones i like calendar spreads as the way to do it i would probably be taking a look at something like a february may, and if you're long the stock and looking for recovery, look to one by two call spreads over your long stock positions if you continue to hold it. >> carter, your take on netflix and the damage that had been done. >> in terms avenue couple things the total value traded today at some $28 billion is more than the value of so many stocks in the s&p. but if there were ever a case of if it is so bad it is good you're seeing that here. would you be contrarian and take the bite. >> tike for the final call

carter >> google, if we have it be careful it is looks like it is rolling over and there is more to go. >> tony? >> microsoft it is a diamond in the rough buy a call spread going into earnings >> mike? >> use put spreads and google to speculate or to hedge. >> see you back here next friday "mad money" with jim cramer starts right now ♪ my mission is simple -- to make you money i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now hey, i'm cramer. welcome to "mad money. hope you want to make friends. i'm trying to help you save money. my job is not just to entertain by teach call me at 1-800-743-cnbc. i heard it called all day today, the end of the bull market the popping of the bubble.