welcome,er, and right now on o.a., how to win with a perpetual loser. we're taking on banks that are still bust even in a rising interest rate environment. how does that happen? then, grab your oversized jar of cheese balls and a cold one. we've still got earnings on our shopping list in costco and constellation brands. as the saying goes, a bird in the hand is worth two in the bushel we'll look back on an iron condor that delivered

precisely for us in fedex. this is play action pac live from the nasdaq market site, and live on the desk tonight is nobody. they're all remote! mike khouw is here, carter worth is here, brian stutland is here, and i am right here all by my little lonesome missing you guys. the s&p and nasdaq posted its worst weeks since march after fed said rates are probably going to say higher for longer and took a couple rate cuts out of the reevacuation, presumably for next year. that marks their third week of losses. but there's even more telling signs deeper within the market. so before we get to any trades let's go around the horn for everyone's take on where the markets stand, and carter, let's begin with you and the big picture to be seen in the russell 3,000. >> sure. tyler, in a way, it's the whole shooting match. the russell 3,000 represents 98%

of the u.s. investable equity market, and what's remarkable is that we all know that equities in the u.s. globally, everywhere, bottomed october 13th almost a year ago. but if you were to look at all three constituents in the russell, you know that 1,400 of them are actually done from where they were in october a year ago? which is to say essentially 47% of the investable universe as represent by russell 3,000 has not moved up from last year. it's actually down from where it was when purportedly the equity market made a low. what this is is that the big names have driven all the results. the index is up 16% from that low, but the performance of all 3,000 stock on average is up 8.3%. median up only 2. the rest -- half of them are down. that is not a healthy market. >> just what i was going to say.

brian, your thoughts? what carter is saying is the market isn't as healthy as it looks on the surface. >> yeah, and i think that's the reason why the last few months we've basically seen this market sort of move sideways to slightly lower. this is going back to july 1st. it's been a tough sweat the last few days. after the fed meeting everybody was in a hurry to sell the market. saw interest rates pop higher. that's got people concerned about thele extra situations in the market right thousand, and certainly that saw people sort of tank things. now, the vix did see a significant pop a couple days ago, but today was interesting. we saw people actually selling puts. the vix, the spikes, these volatility indexes were down almost 10% today, meaning people are selling their insurance out, rolling and it kicking it down the can to, say, december, january, buying options further outdated. maybe the sell-off might get

contained for a few days but we're definitely as a cusp when the market is going to move big off that 4,400 level in the s&p. i don't think it can sit here. carter lays outs risks in the market to the downside. >> and you agree with that that the risk is to the downside, brian. >> i think the risk with names that haven't performed will continue to perform badly. i want to own the good high quality large cap names in this environment and stay away from that middle ground area, because i think people are just going to move into what's been working correctly. we saw that today. a lot of stock up year to date were up today. those that are flat or down on the year were down today. so i think that move will exasperate basically if we see a market sell-off. >> and mike, yet some of the big mega caps that have been sort of the four horseman or the seven horsemen lately have been selling nvidia from where it was on earnings day above 500. it's down in the low 400s now.

we were talking about apple underperformed technology shares as a group. bring it all home for us. i guess what occurs to me, as a guy who generally supports index investing -- i think it's a very economical and smart way to go -- this looks to me like a market where you better be good at picking stocks. >> yeah, you think that's true, or at the very least, one way to think about it is if you have a secular shift, and basically that has been a tail wind, becomes a head wind, and that's what propelling the indices, those are the areas that are probably going to be vulnerable. consider that six months ago it was common for people to say, we think that by the end of the year we're going to see the fed lowering rates. well, that is right out the window. in fact, thinking that they would just remain stable, with jerome powell talking about the possibility of another rate hike, that basically dismantles

the argument you have for buying high duration equities. those are stocks that trade at high multiples, where you're buying future growth, and that is generally going to represent some of the best performing stocks like the one you mentioned, nvidia, which is a holding of ours up to and through earnings. we did get out in the 480s, and the reason we don't want to own stocks like that in this environment is because i think these are the areas that are going to be most vulnerable. today could represent maybe the market coming down a little bit, but i don't think the trouble is over. the equity risk premium, the value weigh of equities compared to fixed instruments right now is very narrow, and i think that's going to create pressure. if we continue to see high rates you have to wonder about these high duration equities, and i think they're going continue to see significant volatility through year's end. >> let's zone in on a sector

that's likely to lose no matter which way the markets break, and that would be banks. what are a seeing here, carter? >> what a mess. i guess the why is this -- look, financials in general, a third largest sector in the s&p around 13%, 12.9%. but they're more important than that. they're the transmission mechanism for the economy, and it's where ultimate nightmares can happen, right? leverage. we can look at a chart of the kre or bkx, and we should, but these are not goodsetups. we have those news related plunges in may, and we've rally a bit since, but the thinking here is to fade all three. so if you were to look at the bkx index, the kre, which is the regional banks, or a big name like bank of america, either way the lines draw themselves in my estimation, and the lines all suggest lower levels ahead.

>> lower they go. brian, how would you trade the banks here to take advantage of that continued weakness? it's kind of perplexing because you think as interest rates go up, banks may find it easier to make money. >> well, yeah, but the thing is banks really aren't going to have a difficult time in this interest rate environment. basically have an inverted yield curve meaning it gets more difficult to land further out to people, and that's where these big bank money centers make their money. that profit margin gets shh runk in this profit environment. carter mentioned bank of america. that's a name i want to short. if the market turns around, holds steady, all this was a fake sell-off and the market rallies, bank of america is one that can turn around, but for right now i want to play it to the short side. i think the big money centers are not really the profit senter to grow right now, and they're almost -- they are, yes, maybe too big to fail. they're not going to collapse like 2008, but i think they're

too big to succeed right now, so i want to play these to the short side. this is a way to make a bet in the sector of the market that seems to be underperforming or stuck in the mud. for that i'm looking to buy a put spread in bac, basically playing out through november aspiration here. this gets me through an earnings cycle with bank of america. playing it to the downside. the cost of this is relatively cheap. there you see only 90 cents if i b buy. basically my break even there is about 27 bucks, so i can play to the downside here using options to play that and put a short bet on the market. it's a hedge to the rest of my portfolio and i can get long other names or financials in the market knowing i have this short bet on. >> that's an interesting way to go. fascinating stuff. let's move away from banks now. if market pessimism hasn't overcome you and you want to

play carefully to the long side, mike khouw has a trade example made in the options market yesterday that has many of the right attributes for that. mike lay out what that trade was and what does it offer us in terms of a teachable moment? >> we were talking about high duration equities, nvidia. another example of a high multiple stock that has done pretty well up until recently is uber. we saw a big trade in there yesterday. calls significantly outpaced puts. but one of the trades i saw was a risk reversal, november 37 1/2, 47 1/2 risk reversal. buying upside calls financed in part by selling downside puts, and they laid out a nominal amount of premium, about a dollar a contract. a little over 2% of the current stock price. i think this is probably a replacement for stock. if i think if emptied to go into some of these stocks, these are

the trade structure you might want to consider. why is that? taking a look at this chart you'll note the fox was above 47 1/2 earlier this week. owning this upside call would allow you to part pate if the stock recovers and we start to test new highs. on the other hand if the volatility we've seen is basically a symptom that we're going to be experiencing this volatility in further drawdowns, the downside would be you own at the 37 1/2 level. you have to go all the way back to beginning of this year to see those prices. in fact i think that's the level it was trading in mid may or thereabouts. this is a 16% discount to the current stock price when i was looking at. that these are the type of trade structures you may want to consider if you're dipping your toe in. give yourself downside buffer. say, if the market does stabilize here and we start to see better news, better numbers, better connection data, then i

will get that participation. give yourself a buffer. you can do that by owning put spreads like brian was just talking about or doing trade like this, where they can finance closer to the money calls. >> carter, what's your thought on uber and mike's way of playing it? >> it's a prudent way to do it, and that's really the main thrust of a lot of the conversations we have here regarding options. the key to uber in my estimation is how does it look? how has it performed? how has it performed compared with direct peer lyft? it's killing lyft. how about hertz or avis? compare it to consumer in general. compare it to ford. it just is an instance of tremendous relative strength. it's an idiosyncratic circumstance and i think one generally wants to be long. >> thanks, guys for that. don't go away, anybody, because

there's more "options action" after this. still to come, a ten-pack of croissants and a six pack of beer. an unlikely culinary pairing but a perfect pairing for trading around earnings. we'll show you how to cook something up in costco and constellation on deck next week. reach into your pock, grab your phone, and tweet us your question at "options action." if it's nice, we'll answer it on air, when "options action" tus.rern

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welcome back to "options action." we're looking ahead to some of

the key earnings reports that are still on the horizon with a special focus on the consumer, and first up is costco, reporting tuesday big box retailer up more than 20% this year. higher today as well. and if you're hoping this one bulks up even more, mike has a way to play it. what's the trade here, mike? >> yeah, so costco, this as many will know is one of my holly index names. this is a holding of ours, a long-time holding. costco is interesting because this is a company that is growing its top line and be thor than gdp or inflation growth. it's growing in real terms. they have better margins than most grocers do. they have recurring revenues in the terms of membership fees it will only challenge we have with costco is that we can invest in great companies or we can buy companies at great prices. oftentimes, though, we can't get both. you can get great companies at okay or fair prices, or you can get okay or fair companies at great prices, and that's really

the issue we have here, trading at about 30 times earnings. i would describe the current price as fairle we're not selling our shares, but if you're looking at getting long the stock going into earnings, maybe a better and safer way to play it with the multiples we're seeing, call spread out to november, you could buy the 565, 610 call spread. this would be a way to get some participation, bearing in mind also this is a very high dollar stock. so you could spend about 13 bucks in premium, maybe more, getting fairly close to that 25% of the distance between the strikes we like on our debit spreads and a relatively small percentage of the current price in the event it doesn't have a great outcome coming out of earnings or it become a victim of the broader market volatility we've begun to see this week. >> brian, how does this strike you as a way to play costco? >> if you look at the all-time high in the stock it's around that $600 level. normally the range of strikes mike is using to buy his call

spread i am good with. this ace with the high pe that mike mentions, where the stock could go after earnings, i'd move that strike down, bring in a little extra premium, but still i love this play, headed into earnings, into some volatility in the market. let's use call spreads instead of going and buying a stock. >> carter how about you? >> technically sets up well. we have a chart we can look at. the issue is how well defined are these converging trend lines are. so we see the line in effect since the lows of covid or close to it. we see the downtrend line in effect since the high. we're bumping up against that downtrend line. i think we do break out. this is not a high beta affair. you're not likely to get a particularly big move on earnings. my thinking is you want to be long. >> a long costco. we'll need a corkscrew for that one. brian sipping on constellation

options ahead of results. brian knock this one back. what's the trade on constellation? >> well, costco's probably one of those consumer staple stock we're playing the upside. constellation is something i want to play to the downside. here's a stock that had a tremendous run in the late 2010s. basically after this inflation bubble that occurred the stock has been sideways. looks luke it's breaking out to some degree, but at the same time i think it's pretty susceptible. this is a stock, multiples above 20 pe just for beer, let's call it, right? that's basically their main brand and alcohol. to play that multiple on a stock like, this i'm not certain this has a ton of upside. i think at has more on the downside. same thing with bank of america, i want to play a put spread, earnings coming out in a couple weeks. october 5th i believe is the date. i want to play a put spread to the downside.

the we break lower in the market, i think constellation follows that. i can go out to october, buy a relatively cheap put spread here, and then play to the downside using that put spread. so here you see the payout is $2.30. max loss is about the same as well. sorry, max risk is $2.30. the payout is greater because i'm selling a put all the way down to $2.35. that's how i want to play it to the short way. >> how many bottles of beer on the wall here for you, carter? >> yeah. well, i'm on the downside here as well. i think we have a circumstance where stock -- i mean, these are just the facts, right? stock broke out to new highs, and quite often you'll get a fake breakout. well defined tops. heavy thrust, gap, and what? no follow through. now slipping to the point where

we're about the break trend, a trend that's been in effect since the lows of the past six months i'm a seller. >> he's a seller there. folks, we're going to move on. spread your wings an update on mike's iron condor fed ex trade is next. "options action" is back in two. you ok, man? the internet is telling me a million different ways i should be trading. look! what's up my trade dogs? you should be listening to me. you want to be rich like me? you want to trust me on this one. [inaudible] wow! yeah! it's time to take control of your investing education. cut through the noise with best-in-class education resources that match your preferred style of learning. learn your way. not theirs. td ameritrade. where smart investors get smarter℠.

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welcome back to "options action." last week, mike laid out an iron condor trade on fedex ahead of earnings and, that stock is hovering right where it needs to be, putting this one in the green. mike, how are you managing it now? >> yeah, well, we on the to be long the stock, but as expected it didn't move a lot on earnings and, that's a good setup for the iron condor we sold. i think you want to look to cover this one while it remains between the strikes. bid about $2.30 to get this one

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welcome back to "options action." time to take some questions. our first fan asks, what is an example of a proper use of a zero days to expiration option for the individual investor? brian, your thoughts. >> well, our original producer on the show max meyers used to say keep your answers quick and dirty. i'll keep it quick and dirty here. simply do not, do not overleverage this position and use zero dts for that. if i want to play the stock to the upside, for example i'm going buy 100 shares, might buy one call. if it's a 50 delta i might buy two, give deltas to the market, not use options at leverage, because this is binary.

either they happen or don't. play carefully, play smart. >> our next fan asks, what are carters thoughts on the xlu calls? chart is near its november '21 lows. >> near those lows and just recently 33-year all-time lows. i think you do the trade, xlu long, s.p.y. short. >> let's go to our final call now as time is running tight. carter, you get to go first. >> everyone owns apple. trim some. >> trim some. that was quick. brian, your thoughts? >> buy put spreads on bank of america to the short side. >> mike, your final call. >> i think put spreads in general are a good way to protect any gains you have. >> all right, folks, and tlal does it for "options action." a little more officially and formally than usual. tonight is the last friday "options action." the show is ending its current run. we thank you for watching. however, we will continue of course to cover options on "fast money" during the week, all week

long. it's an important part of our daily market coverage, so continue to risk less to make more. "options action" will continue during the week. we want you in the meantime to have a great weekend. stay out of the way of the storm if you're on the east coast. you know what's next. "mad money with jim my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull somewhere and i promise to help you find it. mad money starts now. >> hey i'm cramer. welcome to mad money. i'm just trying to make you money. my job is to educate you. call me. okay there might be something to -- may be start of something good. stocks bouncing, nasdaq where all the damage seemso