that's culpability beyond any rational defense. if you would interview him in prison, i'm sure he'd say, "screw 'em. i was there for the money." it is a friday with a big market sell off. it is time for "options action." i'm melissa lee in times square with carter worth, mike coe and tony zeng. the major averages falling more than 2.5% with the dow posting its worst day since october of 2020 the s&p and nasdaq both close out a third week in a row of losses across all listed options in the u.s., put volume exceeded call volume. 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 is that the and i think we need to take a look at other things in the options

market, too. the first thing i'd say is 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 that they hold. we saw, you know, well above average activity in things like the spf index. that's largely an institutional product. we saw well over 1 1/2 million puts trade-in that one today normally about a million that is a big instrument we're talking about $430,000 per contract when we talk about spx. our question is what are we look forward to or not looking forward to is what we're really concerned about as we go into the weekend. january 21st, we had that same dynamic. big above average volumes, puts out trading calls, much like they did today and sometimes we see that and we think that's a contrary indicator when you start to see the vix really

spike and see puts significantly on trading calls, it might actually be time to assume that we actually could start to see something happen and we could be bottoming out. the problem i have with that is when i look at the vix, it didn't behave the same way 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's futures versus spot last week. the blue line is where it is now. but actually when you really get a washout, it's not going to be trading in the high 20s. it's going to get into the 30s you're going to see that thing completely invert and it hasn't done that and 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 blow, if you will, and continue on to a new rally to new highs however, we didn't see that. yesterday's price action between after powell effectively confirmed that there could be a

50 basis point hike, the markets sold off heavily on the back of that which largely we were already expecting as far as that type of move from the fed. the fact we sold off so heavily yesterday, we see that follow through today on such heavy volume, that leads me to believe we are headed further down and it aligns with all the indicators we're looking at with respect to inflation and concerns around future inflation here going forward >> carter, what's your charting work telling you at this point >> well, 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. meaning there's a structure. we have that plunge low of jan 24 and we have the feb 24 low here's the problem we have the massive rally which draws in a lot of capital, lot of hope. and now since that rally is being unwound, the very capital or 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.

a look at the chart of the s&p, what you see here is the point is when we have a bounce like that, 15, 16, 18% $16, 18% in c aggregate and now we reapproach that low, now the lows have more and more authority and ultimately you break below those lows it's a very bad set up >> all right all this being said, next week is a huge week for big cap tech earnings so, 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, so forth -- report on the same week, almost every time it's been a bad week there are a few sepexceptions, generally down apple reporting, microsoft, google the charts are not good. let's look at a few dharts and try to figure it out together. so, the first here is the same lines that you've seen that have been drawn, annotations by me

and many others. you can draw the lines you want. we have the double top in the nasdaq 100 we have all the makings of a big up trend that's reversed, a bullish to bearish reversal. and we have a head and shoulders of sorts this is a next -- a weekly melissa, this is a daily again, the key is do we break 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 monday of i that took measures in the first place. the longer term charts are important. take a look at what's up next. this is one way to draw the lines, a longer term chart and where we might be head ed. i think we have a minimum of 3% downside as much as 10 you can see on the very long term charts, which is next on the screen if we were to do a 50% retracement, that's perfectly reasonable, you're looking at another 9, 10% from here

it's not a good set-up >> wow so, mike, what's the trade >> well, the trade takes a look at two things. one, timing. and that is that you know, we're in the throws 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's 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 pointed out some pretty specific levels i think you can go to the june 30th month ending qq q3102.90 put spread i was looking at that today, it might have been more expensive at the close since we closed on the dead lows. that was 4 1/2 bucs. you were going to spend 10 1/2 dollars for june 3.10 puts 6 on the 2.90s that's targeting the levels he

put into the charts right there. something else i would point out, in circumstances like this, we do have premiums elevated but they're not as elevated, frankly, as i think they might be i actually think they should be higher you know, the opportunity to buy a put spread at this point with everything that we've 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 this trade? >> yeah, so, the structure is exactly the structure you want to use in a market like this especially when we are already pushing fairly relative lows here right now short-term targets 317 to the downside, our models are showing long-term targets 286, which aligns right to the same level carter is referring to the 290 level carter is referring to is the 50% retracement level. as he said that is a reasonable and average pull back. many times we see pull back more

severe sometimes 62% is a common pull back area which puts us at significant further downside as mike said, it's 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 so 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 that i would use. >> so, the real question here is risk, right. is there, after -- essentially, we know the nasdaq is the leading edge, right. it's the best performing index of all it's been up 13 years in a row, where all the growth is and now the one that's most under pressure it's 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 has had a wild year so far now down nearly 14%. if you think the stock is primed for a comeback, tony says you may need to wait a little bit longer tony, what do you mean >> yeah, if you look at amazon stock that's reporting earnings next week, i unfortunately think there is potentially some downside risk going into that event. so if we take a look at a few charts here, the first chartd i want to look at is amazon relative to the broader markets, since last year of this particular time. and the question is whether or not the earnings catalyst is going to be what reverses this down trend or under performance this stuck relative to the market if you look at the fundamentals, this is 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 under performance relative to the sector and i simply 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 a 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 under performance relative to the market and its sector is telling for where it's going to trade. and the fact that we're trading near the bottom end of the range, and i think that -- i don't necessarily think this quarter will have a bad result, but i think if you look towards guidance, towards -- to the rest of the year, that's really the big risk that drives potentially the catalyst of amazon breaking lower below this particular trading range. and if you look at the options market right now, it is implying a pretty sizeable move, 7.1%

versus the past eight quarters of 5.3%. the challenge here with amazon is always the price of the underlying stock and how to find an option structure that isn't too particularly expensive so this particular trade, i'm going out to the may expiration and i'm choosing the 28.85, 28.55 put vertical here, spending about $11.80 for this vertical spread. now, i was looking at this spread earlier today amazon was trading about 40 bucks higher at the time when i put on this -- when i looked at this spread. so if you were putting this on a monday morning, you might want to adjust the strike price $40 lower in order to find a spread that's priced around the same $11.80 and by using a spread like this, where the two strikes are relatively close together from a percentage basis, this is a $30 wide debit spread which is traditionally quite wide on a percentage basis for amazon, what it really acts as is really more of a binary

option a binary outcome if the stock is above 2885, i'm losing $1100, close to $1200 if the stock is below 2855, i'm looking at about an $1800 profit a positive risk/reward for amazon going into earnings >> speaking of amazon, mike, just last month you laid out an amazon trade set to expire next week how do you manage that one now >> it's already been managed if you follow me on twitter you know i sent out a tweet today. it was trading still over 2900 bucks a share at the time. and i said, you know, discretion is the better part of valor here earnings coming up, the market is looking terrible. the smart thing to do was to take profits even though options expire most rapidly as expiration approaches. normally in that situation you might have been inclined to carry. i think taking profits even though they're more modest than

we might have hoped is the right move be sure to follow us on twitter if you want those kinds of updates, by the way. >> absolutely. carter, what's your take on amazon here? >> it's charts like amazon that make the chart of the s&p. you have an incredible ricochet 20%. it's reapproaching the low from which the ricochet took place. the implied move tony referred to would take you exactly to the march 8 low of 2671. that would be a place to consider the biggest subject is does it break that low in which case it's free to fall, free to collapse >> wow all right. we're going to take a break here for everything "options action" check our website and newsletter here's what's coming up next >> announcer: when big transitions grip the market, it's often the small caps that show the first signs of change professor coe shows you how to p prepare with a play on the russell 2,000 option

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welcome back to "options action." as much as we can we focus on macro market issues, those issues first manifest themselves in smaller stocks. and if you think this week's van hollen stilt is over with, today is flush, the russell 2,000 would indicate otherwise

professor coe, how do we hedge against it >> we know what the fundamental story is, rising rates, rising inflation, weakening rate, it's even 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 it's already down considerably. and i'm not going to say this as a hedge. we're talking about a trade now. a couple of reasons for that one, it's already down 20% two, most people are heavily in large cap stocks but the thing is this thing is moving around so it does offer an opportunity to trade. and we have to actually take a look at the technicals to do that what we care about is 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 a set up from carter to figure out exactly how far and how fast we should be betting on right now

>> all right so, carter, what level should we be looking at? >> right there are always key levels, the thing to know is the sequencing. the same as the real low so far was feb 24 we have the rick say and the dastardly part is we're reapproaching that low let's look at some charts. these are weekly charts of iwnm. no annotations, no judgments let's put in the moving average. it has all the look and feel of of a rolling over formation, what i could call a bullish to bearish reversal topping out it doesn't matter. you see the arrow drawn. where might it go? well, look at the next one 50% retracement. that's another 10% from here that's perfectly reasonable. and finally, relative performance. the final chart is simply a ratio chart. it's the performance of the russell 2,000 versus the s&p 500 or iwm versus spy.

small caps have been under performing since 2013. what's to change that? finally as a fact, we know the weighting in financials is some 16, 17% versus only 10 or 11 in the s&p. that's an issue in and of itself >> all right so, we've got carter's input mike, what's the trade >> yeah, so we're going to look out to july here now, we are going to spend more on a relative basis for options and small cap stocks because they are more volatile we've seen that and we're going to continue to see it. i was looking at the july 190, 165 put spread when i was looking at that earlier today. that $25 wide put spread could be yours for a little over $6 as you can see. that's a bigger percentage of the current level of iwm than the put spread we were putting on in the qs this is the thing that can really move. it has been moving it will continue to. and frankly right now, i see little reason for a bounce any time soon. >> okay. so, tony, what's your take on this

>> yeah, so, you have effectively the exact same set up as the other major indices. carter was referring to before the nasdaq 100 now looks like the weakest of the four day indices. the iwm is close, it looks even weaker our models currently show a downside target of 270 -- 1070, which is the same as carter's level. yield curve inversion is bearish here for small caps. the one thing i think is a little different this time is really if you look at the valuations of the russell 2,000, right now it trades at a fairly substantial discount on both a trailing and forward p/e basis relative to its history. if you look at valuations on those same measurements relative to small caps it's trading at a steeper discount small caps could be a little cushioned to the downside for value investors, but i think the trade structure mike is using is exactly what you want be to use.

as he said, we're down 20% already. we're effect ly selling lows hoping the market goes even lower you want to protect your risk in that example he's risking just about 3% of the ets value to trade a debit put structure like this. and he's tar guesting that 170 level, which is from a technical perspective where i would target so i like the trade structure. i do have some concerns from a valuations perspective >> all right up next we are streaming right into some tweets on netflix and that stock's wild week "options action"s back in 2.

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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, the may 175s yesterday. in fact, i was actually trying to do that myself today. >> carter, you made a bold call yesterday on netflix >> yeah. feeling quite good about it actually everything is down today netflix down 1.2% versus the qqq

down 2%, russell 2,000 down 2.7. it's not just other key indices. the point of the relative chart last night, it's overdone. i think that's the right thing to do, sell a credit spread or put spread here. >> tony, where do you stand on netflix? >> yeah, you have the right trade structure given the fact you have elevated implied volatility you are mitigating your risk using a credit spread. what i do question is the price. mike was referring to the 175 puts that's far from where we currently trade. i would use put spreads relatively far out of the 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 to oa time for more tweets thoughts on microsoft's acquisition of acti vision i have 85 calls that's down currently. tony, what do you say?

>> yes, some call options for the asymmetrical risk. what you want to do in my opinion is hold onto this. you have the option of buying the stock at 85 if the deal goes through and sell it at 95. if it doesn't workout, you have limited risk to the downside hopefully you find your risk you have plenty of time. i would stick with the trade >> the next viewer asks, what do you do with hca after today? so bad it's good or falling knife carter >> you're talking about a steady business that, well, guidance was a little light, if you will, revenue and earnings the point is it's down some 30%. at this point i'd be contrarian, a little like netflix, step in and call it, it's so bad it's good >> all right it is time for the final call. carter, back over to you for that kick us off. >> sure. qs, which is where all the action is, have more downside. be careful >> tony zeng >> risks are the amazon earnings

announcement buying puts vertical spread. >> mike coe. >> amazon, qs, amazon suits you well there are some indeed so bad they are good. netflix, hca stands out to me. >> thatdoes it for "options action." see you next thursday. "mad money" with jim cramer starts now (dramatic music) ♪ i really can see the difference. i can see this hair coming in. i have hair on my head. i can brush my hair now. within two months, i've gotten my hair back. it's just like a second chance on life. ♪ no hormones, no surgery. ♪