she only likes to go to five-star hotels. she wouldn't go to a four-star hotel. well, she's not in a hotel anymore. and i think she's going to live the rest of her life out, a very, very sad life. . welcome to friday and options action i'm melissa lee. the markets tumbled today after better than expected jobs picture -- we may see it in earnings results next week beginning with it banks. we'll help you get setup there and while the fed impact is one thing it's amplified in small caps but there are ways to dampen in options. first before trades let's get quick thoughts on this week from all of you since it has been a

roller coaster week. carter worth, what'd you make of it >> well, i think there's that expression when you're hoping it's hopeless. i think there's this hope somehow that we're going to not break below the june lows, and i don't see that at all. i think we're going to break, we are breaking and we break substantially. >> mike? >> yeah, i think we still have more concern ahead you know, if you were just taking a look how we did week over week and say oh, we're up a little over 100 since last friday, but none of the situations we've been talking about then have gone away. if anything there's more evidence now i think that central bankers should continue to persist to try to fix inflation problem. and one of the things i think people tend to focus their time and attention on which is sort of the headline inflation number at any given moment. rather than just sort of taking the look at aggregate prices and where those stand relative to

income say verses 2 1/2 years ago. if you look at things that way and say, wait a minute, how are things up, if you look at it that sense metals and everything else, it doesn't look good you have to get these things back in line, unfortunately. and rates in a historical context are not high here. that's something else we have to remember >> it's amazing to think that over the course of the week with all the volatility we've seen and all the sort of changes we actually enter the week higher, pretty solidly higher. and i'm wondering how you think that gets us setup heading into earnings season, where we have an amd warning overshadowing us and fedex as well. >> i thinkthere's a few things i think there were some shorts that were squeezed and that's why you saw the exacerbated moves to the up side we saw earlier in the week. and going into earnings i think

there's still -- the reason we see these knee jerk moves there's still this underlying feeling the fed has this credibility problem. let's take me for example the last time i got chastised for calling back someone on set, you don't do it again. they are being extremely transparent about what they're going to do. they continue to be data driven and yet you still see these bucks to the trend in the market i think this earnings season you might actually start to see a little of the trickle down effect of what the fed has been doing, and now the posture is starting to change i really don't think that tells the story. the intraweek volatility is really where the focus should be not the absolute number from monday >> well, it is that time again and could be more important than

ever of course you talk about earnings season next week kicking off with the big banks the xlf is down more than 20%. digging into where the sector is headed next and how that could set the tone for the season here carter >> that's right. we've got 15 stocks in the s&p recording. half of them are financials. let's get right to the charts. the first is a weekly chart of the xlf. that's the etf that tracks the sector of course the sector is not just banks. the line drawn there is that support. you get down to support and then you can sink further into support. i think presumptively that's what happens look at the next -- it's a two panel. that top is exactly what we saw on its own but thabottom panel is the relative performancech the financial sector peaked right after the election in 2016

has been underperforming ever since, not so good xlf itself here and now up close and personal charts there's one. no lines or drawings, no arrows. look at it with some annotations, pretty epic inverted cup and handle. doesn't matter what you call it, it projects lower. other iteration, same chart. it's a descending triangle it's a wedge it all points to lower the question is does the xlf find support because it's at the covid highs? it's at support i think will sink further into support. >> sink further into support so, mike, what is the trade based on that? >> yeah, i mean, the volatility we saw this week and we have been seeing unsurprisingly have been impacting options premiums so they're considerably elevated options premiums are going to

rise as we start seeing events like earnings coming up, and that's going to impact the price of options on the individual stocks as well as it is indices of which they're constituents and the etfs that trade them like xlf i think one of the things we could do here to try to take advantage of one of those options premium and anticipating it's unlikely next week and the week following are going to provide the needed boost to get xlf actually to bounce off the support level here, i was looking at the november 32, 33 call spread selling that when i looking at that earlier today you could collect about 38 cents in premium from that widespread, which is attractive. and the other thing i'd point out is in the event it does somehow miraculously bounce off of whatever we hear next week from all the companies that are going to be reporting, you will not lose the full dollar even if it runs through that longer 33

strike that you have to the up side so it's not exactly that you are risking 60 cents to make 40 provided that you cover this if you do get a strong bounce, but that is obviously not what i'm anticipating here. >> what's your take in the financials on the trade here >> i think say setup for a pretty challenging framework going into earnings. i like the trade i think your net shorting volatility, which i like going into a bounce in vol like we've seen today and the fact of the matter is markets can remain irrational more than we can remain solve want i thinkthality limits your risk in terms of a short squeeze there. >> mike, it's always tricky with the banks because a bulk of them report on the same day but then there's stragglers afterwards. how do you anticipate managing the trade because most of the time they move as a group of the

back of the first ones out of the gate >> if we're thinking about investment and trading and commercial banking that's basically number one black rock and morgan stanley on the asset management side. i mean it's hard to imagine the numbers could be all that great when you have declining asset prices after all, their numbers are tied directly to their aum and that has been declining although some of the most recent declines aren't going to show up in the reported quarter, but presumably people are going to look at that and factor that in i'm not looking at any of the stragglers to release any information that's new i think we're going to find out what we need to know by the end of next week >> all right, well large caps are one thing, small caps could arguably feel the economics than any other part of the market in fact, they already have in one direction. what are you doing >> i'm taking a look at the iwm. so a lot of weakness has been

attributed to currency exchange rates and weakness abroad. i think the focus is going to shift from fed policy and monetary policy to economic health, to actual hernings health and what i want is a more levered beta play to do that if you still are constructive in terms of s&p and the dow or some other large cap bellwether name, i want to have something give a bit more tail risk in iwm. you could but that on for even money depending on where you are in the day i like here this is real tail risk when you see shocks in volatility like today it's not often at the money it's how you think those tails are going to flex. yes, in the crazy case where we're down net net 50%, this trade is challenge but between down 10% and down almost 20% this trade is

profitable there's no cash outlay to put this on, and this really gives you that crash protection that i think if you're going to see you'll likely see it in this more sensitive pocket of the market >> do you see a crash in the cards for iwm, carter? >> remember conventional wisdom is lower quality assets in a roust do better than smaller quality assets if you're playing beta you do it through certain vehicles at the same time it has no currency risk, right he mentioned the macro it really gets down to earnings. i would also point out bank exposure in the russell 2000 is much higher than it does in the s&p 500. it's got a lot of characteristics that has to be contended with and important to say since may small cap stocks have been

consistently outperforming larger cap and it's not a function of the russell 2000 going up. it's just going down less than the big heavies because apple and others are starting to come apart. still to come your semi setup and for everything options action check out our website and newsletter there's more "options action" right after this

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welcome back to options action check out amd plunging to a 52-week low today. saying it expects revenues to fall short of its prior forecast investors don't seem to think this will be an isolated scenario either. fear not because these chip makers pain could be your gain mike khouw is here to show you how to turn a choppy outlook into smooth sailing for your portfolio. captain mike, take it away >> captain, i like that. i'll have to share that with some other people. so thisis an interesting situation, right, because the semis as a group are down about 40% since their highs earlier this year, significantly even

more than the s&p has declined you know, if you think it's so bad it's good then you might take a look at how these companies are looking relative to their trailing and their originally forecast earnings, and if we look back about 20 years on a multiple basis the semiconductors as a group are trading pretty close to their cheapest valuations, but one of the things i would point out and i think it's important for people to remember this is that cyclical businesses often do look cheapest right before things turn south, and that is because people are still working with their operating assumptions for how these businesses were going to do, and those are what's changing. and that's essentially the news we got out of amd. and that's what we're seeing priced into some of these other stocks that said it's exceptionally challenging to try to press shorts when you're looking at a group of stocks already down 40%. so how do you do that? in this case i was looking out to december, andiest looking at a 185-55 put spread. when i i was looking at that, that's a $30 wide put spread

that cost about $7.63. that's about 4% of the current price of smh as a way to make a bearish bet. we are in a situation where we certainly could see for the dips i don't think we're going to resume bull market anytime soon personally, but if we do even get a sharp bear market rally, which is certainly a significant possibility in every bear market, and we've already seen it several times in this one, you want to limit your rick. and i think by risking just 4% of the current etf share price that's a way you can do this >> how does smh look to you, carter >> they're going to get worse. let's look at three charts they're all the same time frame. so the first just simply depicts where the smh is in relation to its pre-covid high the s&p would need to drop 6% to get to its pre-covid high. for the smh it's 19% if we want to draw some lines on

this the first way to do it would be like that, which is converging trend lines we've broken to the down side out of that formation, and again i think it all projects to the pre-covid highs. and third final way to draw the line it's all the same chart is just to annotate and depict the importance of the reversal doesn't matter whether you call it a head and shoulders. it's a massive up trend that reverse and the question is the reversed finish? i don't think so i think there's more down side >> you in the same camp? >> i am. it's a little expensive. i want to focus on the width of the strikes here if you're going to lean into this you might as well make sure that you're going to get your bucks worth here, and that's exactly what mike has down i think if there's more down side, it's really going to rollover heavy as carter said. and i think the width of strikes allows you to capture the bulk of that move >> mike, last word here.

i'm just wonder how you manage a trade especially when it looks like when stocks are swept up we go to the down side pretty decisively such volatility in the markets these days when we had the two big up days semiconductors had huge rips to the up side. >> right and i think that's why we're sort of defining our risk at the outset to 4% of the share price. >> certainly if you were going to short smh it would be reasonable to say the risk you're taking if it's going to move to the up side should be significantly larger than that one of the reasons i chose strikes this wide i wanted to be able to have a trade to manage if we start to see things rollover let's say it drops down to 175, 170, you could take that 180 strike, roll that down, keep the short side on and essentially reduce your exposure if we do get a bear market rip. and those happened have they'll

continue to. up next we're getting rapid fire takes from a number of big moves this week. oa's back in two it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective. and a dedicated trade desk of expert-level support. that will push you to be even better. and just might change how you trade—forever. because once you experience thinkorswim® by td ameritrade ♪♪♪ there's no going back.

good luck. td ameritrade, this is anna. hi anna, this position is all over the place, help! hey professor, subscriptions are down but that's only an estimated 15% of their valuation. do you think the market is overreacting? how'd you know that? the company profile tool, in thinkorswim®. yes, i love you!! please ignore that. td ameritrade. award-winning customer service that has your back. welcome back to "options

actions. we're going to tackle some of the biggest names in an options rapid fire session a lot of these names were very actively traded this week. first one twitter. the shares jumping up as tesla ceo elon musk said he would buy the social media company for his original bid a lot of news back and forth, but what your observations here? >> it's interesting here right after that news came out we as i buy right, buying the stock, selling the strike -- but as the week rolled on we started seeing more bearish activity people were buying for example the january 40, 50 put spread. elon tried to walk away from this deal when things looked a lot better than they do now, and then he wanted basically out of the court case ongoing he got that objective, and right now the options market is implying about a 15% chance this deal breaks. i think it's still a pretty significant possibility, so i'd

be a punter. if i was along the stock here i'd basically take the gains this week and walk away. >> yeah, i really like that short vol setup. you want to make sure you're not caught long volatility because it's going to collapse to zero because that's implied volatility of cash and realized. on the down side i do think, sure, if you want to spend some small modicum of premium to bet the deal crashes i would say your risk sets up really well but it's likely to be a loser. >> carter, what do you think what does the chart look like? >> the chart implies a completion of the deal as drawn it's a normal flag. you get that heavy line thrust on the news related of course the deal is on and this lilting pull back. i think we head towards 54, 55 all right, next up hess up

nearly 18% this week alone carter, how does this one look >> sometimes you can use the word up trend or steady as she goes or even god-like. it's up and to the right, orderly, a nice asent. >> god-like, did you just use that word? i feel like you've only used that word a couple of times. >> right it's closer to god-like as one might see in the charts. >> wow, okay let's get to chewy here also doing well, up more than 17% this week. >> this one is interesting i'm not particularly constructive on the name i to think in a relative base versus consumer discretionary it is a little bit more sticky. if i'm going to play the long side it's definitely via options but i'm going to spread this because ultimately i don't want the massive cash lay that being outright vol an this environment

after today is going to cost me. >> let's get to draft kings. up nearly 9% on the week >> this is an interesting case obviously had some news talking about a collaboration with espn. of course i don't like longer duration equity. that's what this thing is. it's not making lot of money yet. if i was going to play it on the up side i would do so with only call sides or call side risk reversal because it does create some floor >> what do you think of draft kings? it's not god-like. >> dropped 85%, but it's week over week, month over month price action is very developmental. let's get to nike. this is agood one. up 5% this week. carter >> talk about down and to the right? it's the opposite of hess, and i don't see any reason to own the stock. >> what do you think of nike >> it's the short-term it's

challenging. it's a name i've been wanting to get long for a while it's going to be challenging in the short-term, but there are specific names that will hold up and stood the test of time i think nike fits that bill. >> was there a lot of activity, and what did that activity to you indicate >> we actually owned this stock. don't do it would be what i would say. yeah, this is not one you want to own here. i think what we saw of this was a little bit of relief after a really poor performance and that's the reason we got this bounce, but i don't think it's going to last. up next, final call. thinkorswim® by td ameritrade is more than a trading platform. it's an entire trading experience. with innovation that lets you customize interfaces, charts and orders to your style of trading. personalized education to expand your perspective. and a dedicated trade desk of expert-level support. that will push you to be even better. and just might change how you trade—forever.

because once you experience thinkorswim® by td ameritrade ♪♪♪ there's no going back. thanks to avalara we can calculate sales tax on almost anything, anywhere, automatically. avalarahhhhh. what if tax rates change? ahhhhhh. filing sales tax returns? ahhhhhh. managing exemption certificates? ahhhhhh. business license guidance? ahhhhhh. does it connect with accounting? ahhhhhh. item classification? ahhhhhh. cross-border sales? ahhhhhh. what about? ahhhhhh. ahhhhhh. do you have those budget markups? thank you. mmhm. [bubbles]

good luck. td ameritrade, this is anna. hi anna, this position is all over the place, help! hey professor, subscriptions are down but that's only an estimated 15% of their valuation. do you think the market is overreacting? how'd you know that? the company profile tool, in thinkorswim®. yes, i love you!! please ignore that. td ameritrade. award-winning customer service that has your back. final call time. carter worth >> markets in a precarious position short sqi. >> iwm, high beta, levered down side >> mike khouw. >> take advantage of high options premium by selling

vertical spreads with limited risk >> that does it for us on "options action. have a great weekend we'll be back here next friday 5:30 p.m. eastern time meantime, don't go anywhere. mad money with jim cramer starts right now. - [announcer 1] the following is a paid advertisement for plexaderm skincare. - [announcer 2] watch this. it's all 100% real. witness what happens to this woman's bags under her eyes in an actual time-lapse, in just minutes. nothing has been doctored or tampered with. the very real problem will disappear before your eyes and hers with a revolutionary topical formulation that works in just minutes and the effects will last for hours and hours. over 1 million people are successfully using this topical technique to visually reduce puffiness and bags. it works on sagging jowls, even fine lines and wrinkles on the face and forehead. introducing plexaderm, from sheer science.