it is friday, that means it's time for options action i'm frank holland filling in for melissa lee. joining me tonight, mike, tony, and a special guest appearance by bonawyn we're wrapping up a rough day on wall street. stocks plummeting after hotter than expected cpi data nasdaq falling more than 3.5%. each index closing out its worst week since january mike, start with you >> it's pretty grim. i think that much is clear and i think one of the things we

have to take a look at is you know, what's the next level i think for the s&p. it seems very difficult for me to imagine we're not going to retest those late may lows i think that those are firmly in play at this point and i'm kind of, you know, the thing that's more surprising to me is that people are surprised by these inflation numbers. if you're sort of tracking the data, i think that high inflation is well understood by now. we didn't expect this number to be any lower than it is, but i think what we're really looking at is that rates are going to have to go higher and i mean a lot higher to start correcting this and if rates go higher, there's room for equities to go substantially lower. >> tony? >> yeah, that's exactly right. we talked about the fact that the 4200 level didn't hold on spx a couple of weeks ago and that brought further downside. that's what we've seen and even when we look at some volatility

indicators, we're not seeing signs of capitulation here and that we're near a market bottom. if you look at the s&p, i think we're still probably at least 7% before we hit some of our downside targets so we are not a buyer yet here in equities. i think there's further downside >> bonawyn, what about you >> well, frank, you know i've been bearish kind of been pounding the table about that on the "fast money" show what kind of surprises me is this notion of engineer a bullish case with the notion of peak inflation even if this reading marked higher and were marginally lower, doesn't really change the playbook of what the fed needs to do and says nothing about how inflation is persisting and how volatile it is and what segments it's kind of rearing its ugly head i echo the economist of the other two panelists in saying that i really think there is significant downside here.

keeping in mind that earnings revisions really haven't been ratcheted down yet so the forward multiple you're looking at probably is being multiplied by the growing phase. so yeah, i think there's definitely significant downside here >> all right, with all this red in the market, if you think there's yet more to come, mike's going to start us off with a way to hedge all this downside volatility mike >> yeah, so one of the things i was paying attention today, what are the really big institutional trades in the options markets we were seeing? the best example was the spy 245. those were june expiration expire a week from today they're well out of the money. those are real crash protection hedges, but we saw a block of over 130,000 of those trade and then another block of 75,000 of those that actually traded earlier. we saw similar trades in the qs. these are people buying essentially downside lottery

tickets in the event that the weakness we saw today persists through next week and we get a real significant washout the thing i want to really caution people about in this circumstance is that in kind of an environment, it is a difficult thing to try to press your shorts because you can certainly get further dips, but you can also get very big rips in this kind of an environment and so we are seeing a lot of bearish sentiment and sometimes those can create those kinds of short, dead cat bounces that you'll see what are some examples we saw the cbo put call ratio, 1.3 today. rarely is that above one there's another index we don't talk about that often. the credit suisse fear developed many years ago and the levels we're seeing right now, we haven't seen those since

december of 2018, in the last five years, and march of 2020. i think we can all agree those were situations where the market bounced significantly there after. but the fun mental head winds exist. i'm looking for put spreads that are going to pay me 4-1. 375 350 put spreads in spy, still less than $5 getting me slightly better than a 4-1 payout be careful how much capital you deploy pressing bearish bets, especially after 100 plus point down days like we saw in the s&p today. i do think the s&p trades lower. just understand it's probably going to be a bumpy ride getting there. >> all right, tony, laid it out all there. what do you think about mike's trade? >> yeah. so an out of the money put spread like mike is using is a relatively inexpensive way to buy what we would call catastrophic insurance on your

portfolio. especially when you're this late into the game, the market's down 20%. we've seen significant moves today which means elevated options premiums this is really the way you want to structure any type of downside protection going forward. but for equity investors who are holding on to long positions, the order of operations is really first, looking at reducing potentially long exposure in stocks or etfs that you're holding that you may have changed your views on then look at reallocating into other asset classes not as heavily correla correlated into equities then look at putting on a put protection on the remaining positions that you have that are correlated to equities so right trade structure, but there are a few things you might want to do before you put on a put spread like this >> so bonawyn, you're looking at a similar strategy, but in a different part of the market >> it is my trade is in hyg

there's been a lot of discussion around the rate picture. i think what really hasn't been discussed quite as much a quantitative tightening. you have a fed letting 47.5 billion run off the next two, three months and that's going to double to 95 billion. when they were making these asset purchases, included in that was high yield and h kwlrks hyg. i'm looking out to august looking at the 75 70 put spread. max profit of 350. so you're risk 150 to make five for a max profit of 350. what i'm saying is even though this is a pretty tight band in terms of hyg, this is something that has only about a 14, 15 implied volatility so you're not going to see the same moves in this credit etf that you will in other equity type markets so i really think the fed put that's been discussed is really more so pertinent to the credit

market we're currently tracking at about 4.5% in terms of high yield credit spreads that's out to 10, 10.5, 11 in the fed downturn >> mike, kind of similar to yours. different part of the market what's your take on bonawyn's trade? >> if we take a look at the market in general, the stuff that's going to get washed out first is equity and the next step down is going to be high yield, low grade credit. you could have a risk of widening spreads the buyer for this, this is still a choice of liquidity because hyg is still a tradeable instrument that's going to be a problem for sure we're cutting off a period of an epic bull market for bonds and epic low default rates for basically riskier borrowers and that is what high yield is it's a euphemism what we used to call jurnk bonds we start seeing increase in

default rates, those are going to blow out. >> still to come, make the most of the bear market tony has two familiar names he can still ride to the downside for everything options action, check out our website. while you're there, sign up for our newsletter there's more after this. 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.

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and welcome back even the strongest stocks lately

are starting to crack under the pressure that seems to be the case for caterpillar, which wasn't immune to today's selloff tony, play the name if you think this 1 inches lower from here now. tony >> yeah, frank, as you said, some of these stocks that have held up quite well like caterpillar, i think there is reckoning coming for stocks like this especially ones that are further at risk from inflationary perspective. if we take a look at the chart here of caterpillar, this is a stock that largely has been range bound between 190 and 230 and just a couple of days ago, we bounced off of that 230 upper bound and i think we're headed back towards the lower around $190 or so but more importantly, if you look at the chart of caterpillar relative to its sector, the industrial sector, you see that it's currently forming this double top after what has been a very strong relative performance since the november lows and this is really from my perspective a good time to bet on what could be some underperformance for

this particular stock. but this is really where i think the technicals and fundamentals align well because caterpillar is currently trading nearly 17 times next year's earnings, which is a rich premium to its relative history prior to the pandemic this is not putting into account what bonawyn said at the top of the show, which is the fact these are still based on analysts remissions that have not been revised for the new environment we're in so trading at 17 times next year's earnings may still be on the lower end. so i think at a minimum, if we re rerate b normal multiples, this is at best, will trade at $190, potentially lower. to play this, i'm using a trade structure similar to the mike's spy trade as a hedge i'm using the out of the money august 210 190 put verticals, spending about $5.80 for this $20 wide vertical paying only about a quarter of the debit

spread risking in this case, only 2.7% of the stock's value to take a bearish bet on caterpillar to basically trade back towards the bottom end of the range right now. >> so, mike, you're hearing what tony's laying out there. what's your take on the trade? >> well, you know, i think i previously put on a trade in xli couple of weeks ago on the show. so i think people probably recognize that my view is the same as his in industrials generally. something else people ought to be thinking about for a big multinational like this, let's assume we do the right thing and try to reign inflation in. more aggressively than central banks abroad and that creates dollar strength that's going to create problems for companies like caterpillar why? almost 60% of their revenues are not from north america this is a problem that we have to think about as well in an environment where rates are changing and they're going to need to.

>> tony, one other stock is mad match. swiping left or right? >> swiping left. unfortunately in the tech space, names like match, i still think there is further downside. especially even as mike said, the fx headwinds that are there for caterpillar are also here for match. especially given the growth opportunities for match are international. if we take a look at the chart for match, we are in a clear bearish trend and right now, we've seen a bit of a rally here nearly upward bound with that channel. i think timing perspective, great risk reward ratio for short exposure the technology sector. recent outperformance relative to its sector leads me to believe that now we're going to enter a period of underperformance if you take a look at the business itself, we have seen fairly substantial revenue growth here from match, but despite that, we have seen

almost no earnings growth. that's why i think the valuations that it's currently commanding here is still overvalued despite what we've already seen as a fairly significant multiple contraction here for match.com so the trade structure i want to use here is a little different than i'm using for caterpillar because the stock has declined substantially. premi premiums for options are elevated so i want to use a structure that allows many e to take advantage of this so i'm going out to the july 22nd weekly expiration and i'm selling the 77 by 88 call vertical collecting in this case, about $3.84. this will allow me to profit whether the directional view of match moving lower is correct or the stock just stays where it is, i'm able to collect 40% of vertical by using this type of trade sturucture. >> all right, bonawyn, i saw you laughing i don't know what you were thinking about >> i'm married, i don't swipe at

all. so, this match trade is i think a very strong alternative to shorting we've spoken ad nauseam at the risk in pressing shorts in a bear market. this allows you to actually take in spending versus spending premium putting on a put spread. but there's a concern you may want to consider changing strikes. you have to be comfortable with the max loss to the upside, but i think that's going to be up to the trader investor and what they're risk reward type of profile is >> let's look at the fxi large cap etf. one of the rare bright spots in the market this week mike, you're looking to make some profits offshore. what's the strategy here >> so, i'm talkking a look at fi one of the two big etfs that track the large cap stocks in china. we focus more on k web this is a rare bright spot this week we saw huge flows on the option side midweek a couple of things are driving

that number one, we're talking about china reopening. and there's something else, too. look at the performance of fxi this has been extremely hard hit. when we look at caterpillar that tony was talking about, that's trading at a relatively lofty valuation. not so for the chinese stocks. we've got some reopening going on, they look cheap to me. of course, options prices are pretty elevated. because of that bump, midweek we were up more by the end of week, up about 2.7, 2.8% week on week i was looking at call spread risk reversals these are ways you can get near term exposure to the upside and with the downside risk that you can have the underlying put to you at a short put strike. i was looking specifically at the august 30 33 37 call spread risk reversal. 30 essentially would get you in at levels below where we were

trading a week ago so that's where you would end up owning it and i'm trying to get this thing on for close to even i think it was a slight net debit. you're going to need to move and adjust your strikes around this is where you can start to look for these structures where you can get at least 10% upside over the next couple of months and avoid the first 10% to the downside but to me, this is one of the areas i'm adding i did add to the fxi position today. >> tony, any thoughts on this one? >> yeah, so we've seen the silent reation into china starting in march, but it accelerated this week. the only concern i have is in price action on this particular etf posting near the low of the week i'd really like to see this close above 33 next week and if that's the case, i see substantial upside now with the call spread risk reversal, if you're new to this strategy, the best way to think is you're selling a $30 put

option and the premium you collect with the obligation to buy the stock at $30 affords you to buy the 33 37 call spread for free you have to opportunity to buy stock about 10% lower which i'm comfortable doing. >> up next, taking a look back at a successful past crypto trade and answering some of your questions. much more options action after this >> here's a tip for your money, your future. consider boosting your short-term savings with i-bonds. they can be a good hedge against inflation with strong returns. it rises and falls with the consumer price index right now, the rate is 9.62% for six months you can purchase up to $10,000 in i-bonds each year from the government at treasurydirect.gov can't cash them in f oorne year and there's a penalty for selling within five years. orswi,

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it is time for a look back a few weeks back, mike laid out a way to play coinbase >> specifically in this case looking at the september 65 puts, you'll notice, this is not surprising given the volatility we see both in all of the cryptos, but anything associated with them. so you'll notice that the september 65 puts in coinbase cost $16 that's well more than 20% of the strike price of course, that also applies to m mirror dated options we're looking at selling the june 60s once again, the idea here is to try to collect the decay on an accelerating basis >> sense then, coinbase is way down, but the trade is way up. looks like you collected the decay, mike. what are you doing now

>> yeah, so we have a situation here because obviously you have expiration on those junes coming up next week so you want to keep an eye on that you want to close those before expiration if you can. my strikes were a little different because my timing was different but i rolled them down to the 55, the first out of the money strike in september today. that's what i would be doing with my septembers if you also hold those >> all right there we go. time to take some of your tweets our first fan is asking the xle, this is for tony near its 2014 highs. is it time to take bearish exposure in a pullback or is it too early? what's the best strategy tony, over to you. >> yeah, i'm not in the camp you're going to see a cig significant pullback in xle. as you get towards the 94, $95 range, i would take a more neutral stance looking at selling call credit spreads. >> i'm looking to average on if

january 4 call good idea. this for bonawyn >> you know, i like a contrarian call they've made quite a, it's like $50 billion in terms of the commitment to epb, but in terms of deliveries. i will say in this market, i think if you're playing for the upside outside of energy or healthcare, utilities, i think it's more of a contrarian call i think if you're expecting somewhat of a rip to the upside, a bear market rally if you will, you want something that has more exposure maybe july 29th or september, put on the same strike call and bring down your break even >> up next here on options ayitusthfil ll st wh

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early in the downside cycle. >> tony. >> seeking downside exposure buying a put spread in caterpillar, selling of call spread in match.com. >> mike, last word >> i like fxi and by the way to the ford call buyer, i bought some of those january calls today. >> "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 a special west coast edition of "mad money. i'm just trying to help you save some money my job is not just to teach, but to entertain, educate.

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