Begin. Welcome everybody. Good to have you with us on options action. Escalating coronavirus fears ripping through markets this webb 96 of the s p 500 now in correction territory or worse meaning down more than 10 from the highs. All three major indexes handing in the worst week since the financial crisis in 2008 the dow shedding around 3,600 points more than 10 . And all sectors down from the highs. But energy and financials, the largest victims, both sectors down more than 13 in the past week if you are wondering how to protect your portfolio and who isnt amid the market madness our team of traders are here to break it down. Cornerants macro carter worth and mike khouw opt myself advisers we know this was a historic week for stocks and bonds but mike in any wayway was it historic for the options market. I think anything thats going to be a historic move for equities is going to be a historic move for options on the same equities. And this certainly was one of the cases. The vix was almost up to 50 by the at some point today that obviously is a very unusual set of circumstances in a situation like this you have to ask yourself a couple of things number one is it overdone . Number two is there any fundamental rational for what we see . When we go into Investment Committee meetings one of the things we are asked to do make a bull case, wear case, whats your case . So lets start with what the bear case is. Obviously a lot of the corn eu a virus news we know that. There is another thing we have which is if the market was reasonably priced before does that mean its cheap now and the answer to that we got from calm of banks throughout the course of the week several banks were lowering their growth estimates for earnings in the s p as a group of stocks to zero. Lets think about that for a second if we originally forecasted 173 in earnings for the s p and now looking at 150 the s p peaked out about 3390. You put the same turn on 151 of earnings where does that get you 29. 56 . Where did we close right around 2950 what that tells you is that if the new earnings estimate is correct we are valued the same place. A guy question guy asked before. You said this a couple of times the last couple weeks. Energy space is a risky place to be we saw a lot of basically indications in the Options Markets of how risky that is we saw bearish put spreads put on in west texas intermediate in good size. We saw big spread trades betting the prize of west texas intermediate was going to widen. Minus five, six, minus ten or more thats disastrous for e and p companies. That creates a credit problem. Financials might follow. But i also believe that stom stocks actually are overdone when the vicks starts approaching 50 when you see rsi gets getting down to where they are, the big volumes, and then you see a sudden bounce back what that suggests to me and see in the near term it might be overdone. The 1950 is the 50 retracement where the support is but when this is written in the history books it will not be missed that as more and more people got bullish and high are and higher the transportation areas were never confirming. Bkx was never firming. Energy never confirmed materials never confirmed. We in grave divergence the nasdaq 100 was trading higher every time in 15 years. The s p. Do you believe it was a semi false rally to correct at some point in coronavirus is the. The black swan. Was the spark was the fuse. Thats right. And also think about it. The bond marketen and the fact that we were led by utilities and signaling this for so long yet the equity party continued and whats negative about in week is they finally started to sell utilities and sold gold and silver got smoked. Thats aggressive. Weve been talking about the disconnect between rates and equities for some time and the coronavirus is whats driven this pullback here from my perspective the fact that vix almost hit 50 but closed around 40 is encouraging for the selloff and this was the first day we didnt see the weakness into the close. Look at the coronavirus cases something ive been tracking closely a lot of the fear this week is due to the acceleration in cases outside of the u. S. But in the context and the big picture you only have about 5,000 cases in the grand scheme of china you have 80,000 confirmed cases. There is a great number its about behavior associated with it. Exactly. The day to day goings on that can change. Thats what we talkedabout in fast money with the airlines and Everything Else all right. So obviously if you are wondering how to navigate this market meltdown using options, mike khouw is going to give you a little portfolio protection as he saunters to the plasma, mike. Most of us are in the longterm are investors and when we trade options we do it against a long equity portfolio. What do we talk about . One of the things we mentioned is that although we had a invite pullback the market isnt particularly cheap but lets watch the longterm prize which is were longterm equity investors. As we also pointed out, if you are going out and start selectively stock picking right now be wire ware that names like energy names is like oil if is falling might on a Valuation Base be more expensive now than a week orr two ago but some names are cheaper, microsoft names like that spring to mind the other things is options premiums are elevated with you we can see in the market environment like this they might be justified now, here is the thing if you want to hang onto the stocks or have cash you are ready to deploy to possibly purchase more you may want to put on hedges. We have to acknowledge two things because options ream yums are elevated, more expensive we are looking for ways to spread that. There is Something Else too because we have seen the sharp pullback carter was talking about on fast money the largest magnitude moves we have seen, you have to consider how much further it could go from here in the near term. This is one of the reasons we should be looking at using a put spread against the long equity portfolio. I was looking at spy out to april, the 280260 put spread. You could spend 5 for that many times on the show we look for situations where you get the decent pay off the pay off is 3 to 1 and not aspening a considerable amount relative not notional value of s p. This is the way to mute some of the Downside Risk after the downside move without spending too much appear give yourself latitude to selective i deploy capital if you play for a bounce next week. All right, mike, come on back to the desk. So carter, do you like the trade . If you dont, tell us why. If you do, how much . And also talk about the technical if you wouldnt mind. We tried to address that to some extent in fast. This is a moment for everyone. There is every case to be made lots of clients saying listen this is such a bullish thing to get a reset to have the huge relief with crude goes right to the consumer pocket that the fed will accommodate you could get the vtype recovery at the same time there is the reason to make the case the damage done is so sbongs substantial that it often is the beginning will look back and think what a peak it was how could so many people been so naive. One of the things we think about looking at equity prices is we get a dislocation, often times its a fundamental factor. Big earnings disappointment might hit the market for example por even the market overall. Here we have a situation with a lot of unknowns. More shoes could drop next week or nothing could happen. No news definitely will be good news process we go two weeks no additional news or additional coronavirus cases, more quarantines and things, that obviously is going to begin to give people some sense of ease but of course some damage is being done you cant put people in hotel rooms that remain empty. Planes that didnt go filled cant be filled. Thats lost appear gone. Deferred pps pc. That can come. Wish you could, tony be right. Makes trade mike makes a lot of sense, right. Right now the risks i think is skewed to the downside things can happen be i think the number of cases worldwide will climb and thats putting fear back in investors. So the fact that you are using a put spread i think the only way to play ahedge here. I will say the only thing about this particular trade is that if things do improve, the premiums on this put spread will evaporate quickly. Its important you cut losses very quickly on this particular put spread paying about 5 for the put spread i would say if if goes down to 2. 50, 2 time to get out. One of the things you are doing this against a long equity portfolio. You might be willing to pay the premium to pay the positions in the interest of disclosure i had put spreads on in the s p this week. Sold some monday and tuesday and wednesday. I sold the balance yesterday morning. Im actually pairing back on some of the hedges at this point. And tonight i think its important to speak plainly because we have a lot of viewers that may not be regular viewers to options action just because by the way every major News Organization is leading with the markets and the virus. What you just said is your trade is basically a way for people to buy a little Downside Protection but not sell the stocks that they may own thats the whole point. Correct where you might have tax hits or just trading whatever it is. That kind of reactionary trade something never good for longterm investing. If you decide every time you see a 12 to 15 drou down knew is now is the time to sell that damages your performance over time badly indeed. Yes. Well it wasnt just stocks. That took a hit this week. If you havent been paying attention you have to see the yoeld on the 10year treasury note hitting a new low not just year long low, alltime low like going back 150 years low. As people sold stocks they flooded the bond market which theyve been doing before the sell i dont have. Maybe looking to the Federal Reserve for help tony zhang looks for what might be happening next. I want to take a shift our attention here to the treasurys because we have seen incredible moves the last few days. I think that we can utilize options here to play this what i want to look at is the charts. Lets zoom pout and look at 10year on treasurys what we have seen tlt moved about 40 from the december 2018 lows this happened consistently a couple of times the last decade. Every time thats happened we have seen consolidation or pullback after the 40 move. Zooming in a little looking at the oneier chart. Tlt is up 15 year to date and its currently reading overbought if you look at momentum indicators such as rsi. Coupled with the fact that there is negative divergence implies high probability of pullback or consolidation in tlt i like the setup because the longterm and shortterm charts line up well whats interesting if we look at futures the poshlt probability of a single rate cut in march increase from 11 to 70 in the last week. And if we look at the april cut for two rate cuts we are looking at a jump from three to 63 thats an incredible shift in probability for rate cut considering the fact that we have only seen 5,000 new cases in the coronavirus even though this is globally now over the elicit couple of weeks the way to play this is i dont want to bet against a rate cut here what im looking to do is im looking to bet that tlt is not going to continue to move higher im using a call credit spread to trade tlt going out to the april 9th expiration selling the call spread. Collecting 3. 98 to sell the 1. A a calls and paying the 2. 28 to buy the 160 calls. The break even price on this stock is 157. 20. Betting that tlt wont go higher than that. Im using the call spread to define the risk because a lot can happen and i want to make sure i reduce the risk to 2. 80 per share on the trade. Thank you very much we have news breaking on United Airlines phil. Brian United Airlines post potence the Analyst Investor scheduled next week in chicago united saying the uncertainty due to the coronavirus, the impact that its having on booking both nearterm and intermediate lets say the next couple months as the has the company saying we cant give guidance we pulled guidance for 2020 why are we holding handlist day. Postponing likely happening in the early summer or fall but thats an indication for the airlines they dont have clarity in terms of the overall impact of the coronavirus but to be clear, theyre not not holding it because theyre afraid of people getting infected no, no. Its about the business. They are just saying they having in to say. They pulled the guidance this week they pulled the guidance what do they tell analysts they dont have answers in terms of bookings its mart sore postpone it. Phil low bebow maybe the first of many. Well find out. Speaking of airlines were talking travel stocks some actually in the green today. Hard to believe with this day and week well break down what might be behind the move there. Plus you have questions, we have options. Send them to the twitter handle we will answer them later on as always live from the Nasdaq Market site in times sque. rba r wee ckft ts. And welcome back to options action. Obviously coronavirus fears rocking the markets all week long the three major indexes closing out the worst week since the financial crisis and now sitting in on correction territory. More than 10 below the highs. This weeks selloff wiping nearly 4 trillion in market cap out of markets as bad as things were there were a couple of bright spots today a number of travel stocks staying afloat aid midthe market meltdown. What gives carter worth at the plasma talk about the technicals. On the week things very strong closed well today semis, software and then the things that are the worst. I mean this is the ground zrp. Boats. Literally boats where people are stuck on with the flu. This is the third worst calendar week of all time for this particular subindustry group Hotels Resorts and cruise ships. You see the stivgs lets keep moving what with he know look at the chart. Its literally a perfect double top. And had the next screen. Its a perfect Double Bottom we have literally gone right back to where we were. This event over the past two years this was a 30 decline, 31, 30 and we found the low. Literally right into a range and i think were going to get and they were green today as you saw there, reactionary bounce now take rcl down almost 50 plunging through the bottom of its thing. My thought here is that we will come back to the underbelly of the break. And that is a nice seven, 8, 9 move rcl for a bounce having dropped basically 50 in a month. Yeah, absolutely brutal chart. Come on back to the desk, carter what do you think of the trade whats the best trade around rcl. This is the second time based on this news that we have tried to play for a bounce in one of the cruises, norwegian was the first. For those watching at the time we risk 65 cents a share to make the bullish bet. The idea trying to catch the falling knife if you think you get the vbottom is to risk a small amount its hard are to do that now because options premiums are elevated so we need to puce a spread a bit more complicated but it isnt all that tough what were doing is looking out to april i was looking at the april 85951090 call butterfly. What im do something calling one of the 85 selling two 95 kaulitz and buying one of the 100s by selling the options im selling the elevated ream yum it runs up to the 95 strike or thereabouts. Risking about 2. 15 to do that on an 80dollar stock. If the stock continued to fall were risking relatively small amount of the current price because the premiums are elevated we are ceiling elevated premium. Because its asmrk unlike conventional butterflies this makes money even through the 100 strike price this is a way you can basically make this play with a little bit a good of pay off if if lands where you target april expiration we dont think thats the highest probability but you have a opportunity to make a couple times the money. Its not random that of the 158 subindustry groups in the s p, the top four performers were things that were historically bombed out. Number one cruise ships, hotels, number two oil and gas, e and p pach people went after the bombed out things and closed up well next two System Software and semis. Favoring relative good so bad its good catch the falling knife gnat random. Some of the travel related stocks might have leverage buying the equity could be risk spending a bit of money on the options trade isnt as risky. I love the creative way to play a bounce here risking only about 2. 5 to use a broken wing butterfly here the only question i have here is are consumer going to be comfortable enough to get off and on a cruise ship. No, no. Because out of the travel stocks hit the most between hotels airlines, cruise ships, i think playing the bounce using a butterfly is a great trade i think i would prioritize hotels and perhaps airlines before i would play the cruise ships. Its a theme right. You notice expedia a and booking up as welcome. Dropping 50 lets say no earnings for a year or two a lot is priced in tactical bounce. Goot stuff upon a hotly debated name and sector. More for more important the sell off stay tuned for the commercialfree coverage on markets in turmoil tonight and kudos to that team theyve been working you know what he is off all week youve got questions weve got answers. And options. Your trader have what you want to know about ottiouprecng yr portfolio in in insane time. Its been bonkers. Were back after this. Announcer options action sponsored by think or swim by Td Ameritrade. Announcer options action announcer options action sponsored by think or swim by Td Ameritrade announcer will the bears continue the run or will there be signs tor turn around in the is your moil the read on early investing. Squuk on the street watch or listen live on the cnbc app. Quick final call carter. Resort. Cruise ships for bounce play rcl. Take a deep breath. Use put spreads. Tlt weve gotten to a top sell call kret spreads. Macro night as well appropriate. Full coverage of selloff continues mad money with jim my mission is simple to make you money im here to level the Playing Field for all investors. Theres always a bull market somewhere. And i promise to help you find it mad money starts now hey, im cramer. Welcome to mad money. Welcome to cramerica other people want to make friends. Im just trying to survive save you some money my job isnt just to entertain but to educate and teach you so call me at 1800743cnbc. Or tweet me jimcramer. The stock market