sam knows how to cheat. >> israel's a crook. i mean, he didn't go in it to steal, but fraud is fraud... and he took my money and my money is gone, and he swindled me, there's no way to put a nice spin on that. it is friday, that means it's time for "options action. i'm frank holland filling in for melissa lee. joining me tonight, mike khouw 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 your thoughts on the mark action >> 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.

from my perspective, 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 us trying t engineer a bullish case with the notion of peak inflation even if this meeting wer 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? and there were some really big ones i think the best example of that 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. that's something we can look at. rarely is that above one there's another index we don't talk about that often. the credit suisse fear ba ram ter it was developed over ther 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 fundamental head winds exist. what do you do 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 as i was saying, 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. and i think especially whe you're this late into the game, the market's down 20%.

we've seen some pregnant significant volatile 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 correlated into equities then only after you have done all those you look at puttin 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 is 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. and keeping in mind, when they were making these asset purchases, included in that was high yield and hyg. i'm looking out to august looking at the hyg 75 70 put spread own 1.50 fox that are -- max profit of 350. so you're risking 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 blue 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 as bonawyn was pointing out, 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 bon and epic low defates for basically riskier borrowers and that is what high yield is high yield is a euphemism, what we used to call junk bonds. and, of course, if we start seeing 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 "options action" 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. thinkorswim® by td ameritrade

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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 big sell-off. tony, play the name if you think this one inches lower from her 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 analyst revisions that hav 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 rerate back to our normal multiples, this is a stock that at best will trad 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 industrial generally. i would certainly share that for caterpillar. something else people ought to be thinking about for a big multinational like caterpillar, 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, some of the fx head wind 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 near the upper bound of that channel, i think timin 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. premiums for options are elevated so i want to use a structure that allows me t 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 structure. >> all right, bonawyn, i saw you laughing when i said swipe left or swipe right 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 about 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. if there's one 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 >> meanwhile, let's look a 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 taking a look at fxi, one of the two big etfs that track the large cap stocks in china.

also we have kweb. 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 is something that 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. and if we happen to think they have an opportunity to rebound 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 significantly 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. why is that? 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 pretty close to even. i think it was a slight net debit. you're going to need to move and adjust your strikes around when we see high implied volatilities, this is wher 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'm in kweb. i did add to the fxi position today. >> tony, any thoughts on this one? >> yeah, so we've seen the silent rotation into china starting in march, but it accelerated this week. the only concern i have is 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 this way you get upside exposure but you have that opportunit 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. there's 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. the rate on i-bond 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 just remember, you

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welcome back to "options action." 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, purchasing those 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 mirror dated options we're looking at selling the june 60s those were also over $6. 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 the higher strikes 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 the xle has neared 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 that you're going to see a significant pullback in xle. i think you could actually see a further upside as you get towards the 94, $95 range, i would take a more neutral stance looking at selling call credit spreads. >> all right, next person says i'm looking to average on the 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 health care, utilities, 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 i would slide in to mayb july 29th or september, put on the same strike call and bring down your break even >> all right, coming up next on "options action," the final call stay with us

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caterpillar, selling a 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 myself today >> that does it for us >> "mad money with jim cramer" starts right now - [narrator] the following is a paid presentation for the premium mattress topper by do dormeo. one of the fastest growing sleep companies in the world. what's captured these people's attention. - whoa! - oh my god! - wow! - that's it. - wow! i'm impressed. - whoa! never would've thought. - never expected that. - it did, it feels like it's a brand new mattress. - yeah. - [narrator] it's not a new mattress that creating this reaction, they're lying on the same old mattress they've had for years. it's time for you to discover the premium mattress topper by dormeo. we believe, it's the world's most comfortable mattress topper.