and the hype around technology. this has been "cnbc leaders." thanks for watching. ♪♪ ♪ welcome, everybody. and right now on "oa," how to win with a perpetual loser. we're taking on banks that are still bust even in a rising interest environment. how does that happen? grab your oversized jar of cheese balls and a cold one. we still have earnings on our shopping list in costco and constellation brands. as the saying goes, a bird in the hand is worth two in the bush. we'll look back on an iron condor that delivered precisely for us in fedex.

i'm tyler mathisen. good evening, everybody, in for melissa lee, "options action" live from the nasdaq market site. and 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 their worst weeks since march after the fed decision earlier this week saying rates will probably stay higher for longer and took a couple rate cuts out of the equation for next year. that marks the third week of losses. but there's even more telling signs deeper within the markets. 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 3000. >> sure. so, i mean, tyler, in a way, right, it's the whole shooting match, the russell 3000

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 on october 13th, almost a year ago. but if you were to look at all 3,000 constituents in the russell, and we have a chart that depicts this, you know that 1,400 of them are down from where they were in october a year ago? which is to say, essentially, 47% of the investable universe has represented russell 3000 has not moved up over the last year, is actually down from where it was when purportedly the equity market made a low. and what this is, of course, is that the big names have driven all the results. and so the index itself is up some 16% from that low, but the performance of all 3,000 stocks on average is up 8.3. the median stock is up only 2. and, again, half of them, or a little less than half, actually

are down. that is not a very healthy market. >> so, just what i was going to say, brian, your thoughts here, because what carter is saying is, is that 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 basically have seen this market move sideways to slightly lower here, going back to july 1st. it's been a tough sled the last few days. it seems like after the fed meeting, everybody was in a hurry to sell the market. interest rates popped higher. that has people concerned the valuations we're at in the market right now, certainly that's on people's take on things. the vix did see a significant pop a couple days ago, but we saw people were actually selling p puts, the vix, the spikes, the volatility indexes were down 10% at one point today, meaning people are basically selling their insurance out, rolling it out kicking it down the can to

say let's say december, january, february, buying options going out further dated. so at least right now, maybe this selloff right here maybe contained for a few days but we're definitely at a cusp here where the market is going to move big off this 4400 level in the s&p. i don't think it can sit here. carter lays out a lot of risks. >> you agree with that, the risk is to the downside? >> the risk with names that haven't performed will continue to perform very badly. in other words, i want to own the good high quality, large mega cap names in the market 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. stocks up near to date were up today, and those flat or down on the year, were down today. that will exasperate if we see a market selloff. >> and mike, yet some of the big mega caps that have been the four horsemen or the seven horsemen lately will be selling nvidia from where it was on earnings day above 500 after market trade, now down in the low 400s.

apple fallen off an underperformed technology shares as a group. bring it all home for us, and 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 a market where you'd better be good at picking stocks. >> yeah, i think that's true, or at the very least one way to think about it is that if you have a secular shift, and basically that has been a tail wind, and it becomes a head wind and that's what's propelling the indices, then those are the areas that are probably going to be vulnerable. consider that six months ago it was very 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. >> yeah. >> 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 that you would have for buying high duration equities,

what are high do you rememberation equities? those are the stocks that trade at high multiples, buying future growth. and that is generally going to represent some of the best performing stocks, like the one you mentioned, nvidia, which was a holding of ours up to and through earnings we unfortunately didn't top tick it and underline it at 2, the high it hit. but we did get out at the 480s. the reason we don't want to own stocks like that in this environment, these are the areas most vulnerable, and, you know, today could represent the market coming down a little bit but the trouble isn't over. the equity risk premium, that is the valuation of equities relative to fixed income instruments, right now is very narrow, and i think that's going to create some pressure. if we continue to see high rates you have to wonder about high duration equities, and you're going to see volatility continue through year's end. let's zone in on a sector that's likely to lose regardless

of the way it breaks, and that would be banks. what are you seeing, carter? >> what a mess. i guess the issue is this, so financials in general, third largest sector in the s&p at around 13%, 12.9. but they're more important than that. they are the transmission mechanism for the economy, and it's where the ultimate nightmares can happen, leverage, right, and we can look at a chart of the kre or bkx, and we should, but these are not good setups. we know we have those news-related plunges in may, and we've rallied a bit since. but the thinking here is to fade all three. so if you were to look at the bkx index or the kre, the regional banks, or a big name like a bank 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 might find it easier to make money. >> the thing is banks are really going to have a difficult time. it gets more difficult to lend further out to people, and so that's where the big bank money centers make their money. that profit margin gets shrunk in this type of market environment. and carter mentioned a name like bank of america. that's a name i want to short. but, look, if the market turns around and holds steady here, all this is a fake sell-off and the market rallies, bank of america could turn around but for right now play it to it short side. i think the big money centers basically are there's not really the profit center to grow right now, and they're almost -- yes, too big to fail, but maybe not going to collapse like a 2008, but i think they're too big to succeed right now. i want to play these to the short side.

this is a way to make a short bet in a sector of the market that seems to be underperforming or sort of stuck in the mud and still for that i'm looking to buy a put spread in bac, basically playing out through november expiration here, this gets me through an earnings cycle with bank of america, playing it to the downside, the cost of this is relatively cheap, only 90 cents if i buy the 28 strike for a $1.20, and finance that by selling the $25 strike for 30 cents, the break even is $27, so i can play to the downside here using options to play that, and put a short bet on the market, sort of a hedge to the rest of my portfolio, and i can get long other names in the financials or other parts of the market knowing i have the short bet out. >> that's an interesting way to go. that's fascinating stuff. move away from banks now, and if market pessimism hasn't overcome you yet, 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, what that trade was and what does it offer us in terms of a teachable moment? >> yeah, i mean, so, you know, we were talking about these high duration equities, things like nvidia, maybe another example of a relatively high multiple stock that has done pretty well up until recently is uber, and we saw a big trade in there yesterday, calls significantly outpaced puts but one of the trades i saw was a risk reversal. 47.5 trade 6,000 times buying upside calls, financed in part by selling those downside puts. and they laid out a nominal amount of premium to do this, about a dollar a contract, a little over 2% of the current stock price, and i think this is probably a replacement for stock, and i think that if you are tempted to go into some of these stocks, these are the types of trade structures you might want to consider.

why is that? take a look at this chart here. you'll notice that the stock was, in fact, above 47.5 earlier this week, owning that upside call would allow you to participate if the stock actually starts to recover and we 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 and further draw, downs, the downside would be that you would own the stock down at that the level that it was trading in mid may or there abouts. that's about a 16% discount to the current stock price when i was looking at that. so, these are the types of trade structures you might want to consider if you're thinking about dipping your toe in, rather than buying the stock, give yourself some downside buffer, say, okay, fine, if the market does actually stabilize here, and we start to see better news, better numbers, better economic data, then i will get that participation, but give yourself a buffer.

you can do that either by owning put spreads, like brian was just talking about, or doing trades like this, where the downside puts are so well bid they actually can finance much closer to at the money calls. >> carter, what's your thought on uber and mike's way of playing it? >> well, 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, really, in my estimation is, how does it look? how has it performed? how does it peer lift, killing lift, how about all consumer decision kregs in the xly. beating that. compared to hertz or avis, compared to consumer in general, compared to ford, it's an idiosyncratic circumstance and one wants to generally be long. >> thank you guys for that. don't go away. there is more "options action" after this. >> announcer: still to come, a

ten pack of croissants, a six pack of beer, an unlikely culinary pairing indeed, but a perfect pair for trading around earnings. how to cook something up in both costco and constellation brands on deck next week. plus, calling all "options action" fans, reach into your pocket, grab your phone and tweet us your question @optionsaction, if it's nice we'll answer it on air when "options action" returns.

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td ameritrade. award-winning customer service that has your back. welcome back to "options action," we're looking ahead to key earnings reports 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 bolts up even more, mike has a way to play it. what's the trade here, mike? >> so costco, this as many will know, is one of my holly index names, a holding of ours, a longtime holding, and, you know, costco is interesting with respect to the grocers, this a company that's growing its top line better than gdp or inflation growth. it's growing in real terms. they have better margins than most grocers do, and they have recurring revenues in the form of membership fees.

the only challenge that 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. great companies at okay or fair prices, or you can get okay or fair companies at great prices. that's really the issue that we have here, trading at about 30 times earnings. i would describe the current price as fair. we're not selling our shares, but if you're looking at getting long in the stock and going into earnings maybe a better and safer way to play it, given the multiples we're seeing is with a call spread, i was looking out to november. buy the 565-610 call spread, a way to get some participation bearing in mind this is a very high dollar stock, you could spend about $13 in premiums, maybe a little bit more, getting fairly close to that 25% of the distance between the strikes that we like on our debit spreads and a relatively small percentage of the current stock price in the event that it doesn't have actually a great outcome coming out of earnings, or it becomes a victim of the broader market volatility that we've begun to see this week. >> brian, how does this strike you as a way to play costco?

>> well, i would say one thing, if you look at really the all time high in the stock, it's around that $600 level. normally that range of strikes mike is using to buy his call spread i'm good with. in this case, probably with the high p/e that mike mentions, where the stock could go after earnings, i would move that strike down a little bit and bring in extra premium. i love this play heading into earnings, heading into volatility in the market here, let's use call spreads instead of just going out right now and buying the stock. the right way to play it. >> carter, how about you? >> technically it sets up well and we have a chart, we can look at it. the issue here is how well defined these converging trend lines are. so we see the lining effects since the lows of covid or close to it, the down trend line in effect since the high. we're bumping up against the down trend line. we break out. this is not a high beta affair, so not likely to get a particularly big move on earnings.

my thinking is you want to be long. >> a long costco. all right, we'll need a corkscrew for this next one, brian, sipping on constellation options ahead of results in a few weeks, so brian, knock this one back, what's the trade on constellation? >> well, costco is probably one of those consumer staple type stocks we were playing to the upside, constellation is something i want to play to the downside. and here's a stock that had a tremendous run in the late 2010s, and basically after this sort of inflation, sort of bubble that occurred, the stock has basically been sideways and it looks like it's breaking out to some degree. but, at the same time, it's pretty susceptible. this is a stock, multiples above 20 p/e, just for beer, let's call it, right, basically their main brand, and alcohol and whatnot, to play that kind of multiple on a stock like this, i'm not so certain this has a ton of upside. i think it's got more risk on the downside. so, same thing like i talked about with bank of america, i want to buy a put spread here, play to the downside that

carries through earnings. now earnings are coming down a couple weeks here, or october 5th i believe is the date. i want to own a put spread to play that earnings to the downside if we break lower in the market, i think constellation follows that. i can go out to october, by 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. so, or i'm sorry, the max risk here is $2.30. the payout is much greater because i'm selling a put that's further down around below that $2.50 level to $2.35. break even 247, 70, i need it to break bust through there to the downside and that's how i want to play it. >> how many bottles of beer on the wall for you here, carter? >> yeah, well, i'm on the downside here as well. i think we have a circumstance where stock and -- not think. these are just the facts. the stock broke out to new highs and quite often you'll get a

fake breakout and see it there. well defined tops at a common level, heavy thrust in gaap, and, what, no followthrough. and now slipping to the point where we're about to break trend, the trend that's been in effect since the lows of the past six months. i'm a seller. >> a seller there. folks, moving on and spread your wings, an update on mike's iron condor fedex trade is next, "options action" is back in two.

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 continue to be long the stock, but as expected it didn't move a whole lot on earnings, and that's a good setup for the iron condor that we sold. i think you want to look to cover this one while it remains between those strikes, which it was at one point today, it was probably right at the border of that short call, about $2.50 to get this one back. >> mike, thanks very much, good call there. and next, answers to your questions. and the final call. "options action" will be back in two minutes.

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that match your preferred style of learning. learn your way. not theirs. td ameritrade. where smart investors get smarter℠. welcome back to "options action," time to take questions. 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, original producer show max myers say keep your answers quick and dirty. keep it quick and dirty here. do not overleverage this position and use zero dtes, if i want to play the stock to the upside. i'm going to buy 100 shares, i might just buy one call, or 50 delta call, not use this as leverage, this is binary, happen or they don't. play it carefully and smart. >> our next fan asks, what are

carter's thoughts on xlu calls, the xlu/spy ratio chart is near november 21 lows. >> lows recently 33 year all-time lows, you do the trade, xlu long, spy short. >> all right go to our final calls now, as time is running tight, carter, go first. >> everyone owns apple, trim some. >> trim some. that was quick. brian, your thoughts. >> put spreads on bank of america to the short side. >> and mike, your final call? >> i think put spreads in general are a good way to protect any gains you have. >> all right, folks, and that really does it for "options action," a little more efficiently 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 of our daily market coverage, so continue to risk less to make more. "options action" will continue

during the week. have a great weekend. stay out of the way of the storm on the east coast. you know what's next. "mad money" with jim cramer starts right now. following programrator] te is a paid commercial announcement from great healthworks. - welcome, my name is connie craig-carrol, and i'm so glad that you're joining me. the chances are you or someone you know, is dealing with the challenges and the limitations of pain in our back, knee, shoulders every day. and we seem to miss out on life because we just can't find relief. i know what that's like. joint pain can be such a burden. today we're gonna tell you about omegaxl,