it is a friday, with a big market sell-off. it is time for "options action." i'm melissa lee in times square along with cart er worth, mike khouw and tony zhang the s&p and the nasdaq both close out a third week in a row of losses across all listed options in the u.s and mike you noted this has only occurred six times in the past two years. what do you think this means >> yeah, i mean, i think we need to take a look at that and i think we need to take a look at other things in the options market too first thing i would say is that obviously there is a tremendous amount of concern right now. a lot of the unusual put volume we saw was not retail traders going out and buying puts on the stocks they hold, we saw, you

know, well above average activity in things like the spx index, largely an institutional product. we saw well over 1.5 million puts trade in that one today normally about a million and that is a big instrument we're talking about $430,000 per contract when we think about spx. the other thing i was looking at, though, and really when we see a day like today, our biggest question is what are we looking forward to or not looking forward to i think is probably what we're really concerned about as we go into the weekend. january 21st we had that same dynamic. big above average volumes, puts outtrading calls much lukeike ty did today and we see that and we think that's a contrary indicator. you see the vix spike and puts significantly outtrading calls, it might be actually time to assume that we actually could start to seeing some happen and we could be bottoming out. the problem i have with that is

that when i look at the vix, it didn't behave the same way that it did in january. it is up sharply, but it may not be up sharply enough what we're looking at here was the term structure of vix futures versus spot last week, the blue line is where it is now. but actually when you really get a washout, it is not trading in the high 20s, it is going to get into the 30s you're going to see that thing completely invert. it hasn't done that. that's got me a little worried. >> tony what did you make of the action today >> yeah, that's exactly right. it certainly is concerning the market had an opportunity this week to make a low if you will, and continue to -- on to a new rally to new highs however, we didn't see that. yesterday's price action between after powell effectively confirmed there could be a 50 basis point hike, the market sold off heavily on the back of that, largely we were expecting as far as that type of move from the fed. the fact we sold off so heavily

yesterday, see that follow through today on such heavy volume, that really leads me to believe that we are headed further down and it aligns with all the other indicators we're looking at with respect to inflation, concerns around future inflation here going forward. >> carter, what is your charting work telling you at this point >> i mean, one way to consider this market is to say, well, we're still above where we were on the lows two months ago there is a structure we have that plunge low of january 24 and then we have the february 24 low, and then here is the problem, we have the massive rally, which draws in a lot of capital, a lot of hope and now since that rally is being unwound, the capital of money that pushed the market higher on the rebound has to reverse itself that's a bunch of people who never sold in the first place starting to get concerned. so look at this chart of the s&p, what you see here, the point is when we have a bounce like that, 15, 16, 17, 18% in certain aggregates and reapproach that low, the lows

have more and more authority and you break below those lows it is a very bad setup. >> all this being said, next week is a huge week for big cap tech earnings. carter, how are we setting up ahead of that? >> right, well, one of the things we know, if you look at the history on weeks where the five largest stocks, apple, microsoft, google, and so forth, report on the same week, almost every time it has been a bad week there are a few exceptions, but generally down and so we have that this coming week, you got apple reporting, of course, microsoft, google, and the charts are not good. let's look at a few charts and try to figure it out together. so, the first here is the same lines that you've seen that have been drawn, an tnotations by me and many others. we have a bullish to bearish reversal and we have a head and shoulders of sorts

look at the next, this is a weekly, right, and this is a daily again. the key is do we break now below those lows of just one month ago? and again the problem is to bounce so vigorously, that means money was pushed into the market, hope is alive, and now that money in principle is reversing, not to mention all the money that never took measures in the first place. the longer term charts are also important. look at what is up next, this is one way to draw the lines, it is a longer term chart and where we might be headed. i think we have at least a minimum of 3% downside, up to as much as 10 you see that on the very long-term charts, which is next on the screen, and if we were to did a 50% retracement, that's reasonable, you're looking at another 9%, 10% from here. it is not a good setup >> wow, so mike, what is the trade? >> well, the trade takes a look at two things. one, timing. and that is that you know, we're

in the throes of it right now. this isn't a question about what's going to happen in the next quarter, next summer, next fall we're talking about what is going to happen next week or the next couple of weeks and so we don't have to go that far out in time. the second thing is, carter points out some pretty specific levels i think you can just go to the june 30th month ending qqq 310/231 310/290 put spread i was looking at that earlier today, it may be more expensive by the close, since we closed on the dead lows that was $4.50 spending $10.5 to buy the june 30th 310 puts, collect 6 on the 290s that's targeting the two levels he put into the charts right there. something else i would point out is that, you know, in circumstances like this, we do have premiums elevated, but not as elevated frankly as i think they might be. i actually think they should be

higher the opportunity to buy a put spread at this point with everything that we have seen, for less than a quarter of the distance between the strikes, which is what this one would cost you, it seems quite cheap to me. >> so you want to buy the insurance now, tony. what do you make of the structure of the trade >> the structure is exactly the structure you want to use in the market like this especially when we are already pushing fairly relative lows here right now short-term targets here around 317 to the downside. our models are showing long-term targets down to 286, which aligns just almost right to the same level that carter's referring to the 290 level that carter is referring to is 50% retracement level. that's a very reasonable and average pullback many times we see pullbacks that are more severe. perhaps 62% is sometimes also a common pullback area which really puts us at significant further downside but as mike said, it is really surprising that right now we're able to buy this $20 wide put spread for less than a quarter

of the distance between the two strikes. he's risking less, a little over 1% of the value of qs in order to put on this hedge whether you're using this as a hedge against a portfolio of stocks, or you're simply using this as a speculative bearish position going into the markets, this is the trade structure i would use. >> so the real question here is risk, right. is there -- essentially we know the nasdaq is the leading edge, right, the best performing index of all, up 13 years in a row, where all the growth is and now the one that is most under pressure it is a problem. and the risks outweigh the reward >> okay. so now let's focus on one of the biggest of the big names reporting next week, amazon set to deliver results on thursday, the e-commerce giant had a wild year so far. now down nearly 14%. but if you think this stock is prime for a comeback, tony says you may need to wait a little bit longer

what do you mean >> yeah, if you look at the -- if you look at amazon stock reporting earnings next week, i unfortunately think there is some potentially some downside risk going into that event the first chart i want to look at is amazon relative to the broader markets. and what you see is large underperformance of this particular stock since the beginning -- since last year of this particular time and the -- the question is whether or not the earnings catalyst is going to be what reverses this downtrend or underperformance of this stock relative to the market and if you look at the fundamentals, this is really where i don't see a strong case for why amazon is now in this particular quarter going to turn things around relative to the market and if you look at the chart here for amazon relative to its sector as well, the consumer discretionary sector, you have largely the exact same chart underperformance relative to the sector, i think this is going to continue and then if you look at the chart of amazon itself, this is

a chart that carter has spoken to quite a bit over the past few quarters you have a stock that has outperformed the broader markets for vast amount of time before over the past two years really going absolutely nowhere from an absolute basis but the most important thing for me is really those relative charts the underperformance relative to the market and its sector is telling for where it is going to trade. the fact that we're trading near the bottom end of the range, and i think that necessary -- i don't necessarily think this quarter will have a bad result, but i think that if you look towards guidance, toward the rest of the year, that is really the big risk that drives potentially the catalyst of amazon breaking lower below this particular trading range if you look at the options market right now, it is implying a pretty sizable move of about 7.1%, versus the average over the past eight quarters of about 5.3% and the challenge here with amazon is always the price of the underlying stock and how to find an options structure that isn't too particularly expensive. so this particular trade i'm

going out to the may expiration and choosing the 2885 spending about $11.80 for this vertical spread i was looking at this spread earlier today, and amazon was trading about 40 bucks higher at the time when i put on this -- i looked at this spread. if you're putting this on monday morning, you may want to just the strike prices roughly $40 lower in order to find a spread that is priced around the same $11.80 by using a spread like this, where the two strikes are relatively close together from a percentage basis, $30 wide debit spread, traditionally quite wide, but on a percentage basis for amazon what it acts as is more of a binary option. it is a binary outcome, either if the stock is above 2885, i'm losing about $1100, close to $1200, but if the stock is below 2855, i'm looking at about an $1800 profit

so a positive risk reward looking for a downside move for amazon going into earnings. >> all right, speaking of amazon, just last month you laid out an amazon trade set to expire next week how do you manage that one now >> it already has been managed f you follow me on twitter, i sent out a tweet today, trading still over 2900 buck a share at the time and i said, you know, discretionary is the better part of valor here. we have earnings coming up, the market looks terrible and we're spot in the middle of the short iron -- so the smart thing to do was to take profits, even though options expire most rapidly just as expiration approaches normally in that situation, you may have been inclined to carry it i think take something profits, even if more modest than we might have otherwise had hoped at this point was the right move follow us on twitter if you want those updates. >> yeah, absolutely. carter, what is your take on amazon here? >> it is charts like amazon that make the chart of the s&p.

you have an incredible ricochet, 30%, and now it is reapproaching the low from which the rick ashay took place the implied move that tony referred to would take you to the march 8th low of 2671. that would be a place to consider the biggest subject is does it break that low in which case it is free to fall free to collapse >> wow all right. we got to take a break for everything "options action," check out our website and our newsletter here's what's coming up next when big transitions grip the market, it is often the small caps that show the first signs of change. professor khouw shows you how to prepare with a play on the russell 2000 plus, calling all "options action" fans reach into your pocket, grab your phone, and tweet us your question at optionsaction. if it is 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® 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® by td ameritrade

welcome back to "options action." as much as we focus on macro market issues, those issues often first manifest themselves in smaller stocks and if you think this week's volatility is over with today's flush, the russell 2000 would indicate otherwise. professor khouw, why is that how do we hedge against it >> yeah, so, first of all, we all know what the fundamental story that is going on here, rising rates, rising inflation, weakening economy, that's terrible for large cap stocks. worse for small cap stocks small cap stocks tend to have weaker liquidity positions, their credit is not as good. these types of things pressure them significantly more. the other thing is, already down

considerably and i'm not going to say this is a hedge. we're talking about a trade now. couple of reasons for that, one, it is already down 20% two, most people are heavily in large cap stocks the thing is, this thing is moving around. and so it does offer an opportunity to trade and we have to actually take a look at the technicals to do that we care about what direction are we going in from here, when or why is that going to happen and how far are we expecting it to move it is moving right now, so i think we can expect it to move and we probably should get carter to figure out exactly how far and how fast we should be betting on right now >> so, carter, what level should we be looking at >> right there are always key levels. i think the thing to note is the sequencing, the same as a real low so far was february 24 we have the ricochet and are we approaching that low that's when you undercut let's lack aook at some charts these are weekly charts of the i

wiwm. you see no judgments, and here is the moving average on the second and it has all the look and feel of a rolling overformation, a bullish to bearish reversal topping out, doesn't matter and you see the arrow drawn. where might it go? look at the next one the retracement, another 10% from here, that's perfectly reasonable finally, relative performance, final chart is simply a ratio chart, the performance of the russell 2000 versus the s&p 500. iwm versus spy underperforming since 2013, what is to change that? and finally just as a fact, we know that the waiting in financials is some 16%, 17%, versus 10% or 11% in the s&p that's an issue in and of itself. >> we have carter's input. mike, what's the trade >> we're going to look out to july here, now, we are going to

spend more on a relative basis for options in small cap stocks because they are more volatile we have seen that and we're going to continue to see it. i was looking at the july 190, 165 put spread $25 wide put spread can be yours for a little over $6 that's a biggest percentage of the current level of the iwm than the put spread we were putting on in the qs this can really move it has been moving it will continue to. and frankly right now i see little reason for a bounce anytime soon >> okay. so tony, what's your take on this >> yeah, so you have effectively the exact same setup as the other major indices. carter was referring to before the nasdaq 100 right now looks the weakest. i argue that iwm as of today's close looks even weaker. our models show a downside target of 270, 170, the same as carter's level here.

and historically, a yield curve inversion is a bearish here for small caps one thing that is a little different this time is really if you look at the valuations of the russell 2000, right now it trades the a fairly substantial discount on both a trailing and forward pe basis relative to its own history. also, if you look at valuations on those same measurements, relative to small caps, it is trading at a steeper discount. i think that perhaps small caps would be a little cushioned here to the downside from value investors. but i think that the trade structure that mike is using is what you want to use as he said, we're down 20% already we're selling lows, hoping that the market goes even lower you want to protect your risk in that particular example. he's risking 3% of the value to trade a debit put structure like this, and he's targeting that 170 level, which is from a technical perspective where i would target i like the trade structure i do have some concerns from a valuation perspective.

>> all right up next, we're streaming right into some tweets on netflix. that stock's wild week "options action" is back in two.

as a business owner, your bottom line is always top of mind. so start saving by switching to the mobile service designed for small business: comcast business mobile. flexible data plans mean you can get unlimited data or pay by the gig. all on the most reliable 5g network. with no line activation fees or term contracts... saving you up to $500 a year. and it's only available to comcast business internet customers. so boost your bottom line by switching today. comcast business. powering possibilities.™ 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® by td ameritrade welcome back to "options action." let's get to a tweet daniel asks, can you give me your thoughts on a put credit spread for netflix mike what do you tell daniel >> i like this, daniel, actually this is one of the few things that didn't close on the lows today and we actually highlighted some people coming in and starting to sell some puts on this institutional sellers, main 175s yesterday. i was actually trying to do that myself today >> carter, you made a bold call yesterday on netflix >> yeah. feeling quite good about it. everything is down but netflix down 1.2% versus the qqq down 2.6, the russell 2000

down 2.7, down half as much as other key indices and the point of that relative chart last night was it is overdone i think that's the right thing to >> tony, where do you stand on netflix? >> yeah, so you have the right trade structure given the fact that you have elevated implied volatility, mitigating your risk by using a put credit spread i question the price mike is referring to the 175 puts that's a far away from where we currently trade. i think it is the right structure, but i wait a little bit or use put spreads relatively far out of money. >> coming up, more of your tweets and the 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. ♪♪ welcome back time for more tweets thoughts on microsoft's acquisition of activision. i have august 85 calls that's down currently tony, what do you say? >> yeah, so call openings for

the asymmetrical risk. what you want to do is to hold on to this because you have the option of buying the stock at 85, if the deal goes through and sell it at 95. if it doesn't work out, you have limited risk to the downside hopefully you can find your risk, have plenty of time, stick with this trade. >> next viewer asks what do you do with hca after today, so bad it's good or falling knife carter, to you on that. >> i think we're going to go with the former. so bad it's good you're talking about a steady business, that, the guidance was light if you will, revenue and earnings, but the point is it is down some 30% at this point i would be contrarian, like netflix and step in and call it is bad it's good. >> all right it is time now for the final call carter, back to you for that, kick us off. >> sure, qs, which is where all the action is, have more downside, be careful >> tony zhang? >> risks to the amazon earnings announcement next week buying a put vertical spread

>> mike khouw? >> yeah, put vertical spreads in amazon qs, iwm suits you well. some are so bad they're good >> all right, that does it for us on "options action. see you back here next friday at 5:30 p.m. eastern time don't go anywhere. "mad money" with jim cramer starts right now there's always a bull market somewhere. i promise to help you find it. "mad money" starts now hey, i'm cramer. welcome to "mad money. i'm just trying to save you some money. my job is not just to entertain and educate and teach about days like today call me at 1-800-743-cnbc. sometimes the whole stock market, the whole stock gets