Welcome, everybody good to have you here with us on options action. Obviously escalating coronavirus fears ripping through the markets all this week. 96 of the s p 500 now in correction territory or worse, meaning down below 10 from the highs. All three major indexes handing in their worst week. The financial crisis since 2008. The dow shedding 3600 points more than 10 down energy and financials, the largest victims of the selloff both down more than 13 in the last week. If you are wondering how to protect your portfolio, who isnt, amid this madness, our team of options workers are here carter werth, tony zhang and mike khouw we know this was an historic week for stocks and bonds. Mike, in any way was it historic for the Options Market yeah. I think anything thats going to be an historic move for equities is going to be an historic move for options on those same equities this is certainly one of those same cases we had the vix get almost up to 50 at some point today so 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 rationale for what were seeing when we go into Investment Committee meetings one of the things were always asked to do, make a bold case, make a bear case, whats your case so lets start with what the bear case is obviously a lot of the coronavirus news, we already know that. Theres another thing we have which is if the market was reasonably priced before, does that mean its cheap now the answer to that we actually got from a couple 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. So lets think about that for a second if we are originally forecasting 173 for earnings and now were looking at 150 the s p peaked out at 3390 you put the same turn on 151 o earnings, where does that get you . 2956 where did we close today right around 2950. What that tells you is if that new earnings estimate is correct, were actually valued in the same place. Theres a question guy was asking before. Winners and losers you have said this over the last couple of weeks. Ener energy space is a very risky place to be. We saw a lot of indications of how risky that is. We saw bearish put spreads in good signs we saw big spread trades betting that the price that west texas intermediate was going to widen. Minus five six going to minus ten or more. Thats disastrous for e and p companies. That creates credit problems and financials will follow i do believe some stocks are actually overdone. When the vix starts approaching 50 when you start seeing rsis getting down to where they are, when you see the big volumes and you see a sudden bounce back, what that suggests to me is at least maybe in the near term it might be over done. 1950 is interesting i think when this is all written in the history books, it will not be missed that as more and more people got bullish, we went higher and higher, transportation was never concerned. Epx index was never confirming materials were never confirming. We had great divergence. The nasdaq 100 was trading higher above the 150 every time. The ford pe and s p at an 18 year high and no one cared. Do you believe it was a semifalse rally that had to correct at some point and coronavirus is the black swan. Was the spark, was the fuse. Thats right. I think theres a lot. Also, think about it the bond market and the fact that theyre led by utilities and all of those things had been signaling for so long and the equity is continuing whats so really negative about this week is they finally started to sell utilities, gold, silver got smoked. Thats when its getting aggressive weve been talking about the disconnect between rates and equities the coronavirus is whats driven this pull back here. And from my perspective, the fact that vix almost hit 50 today but closed at around 40 is certainly encouraging for this selloff. This was the first day where we didnt see some weakness going into the close if we 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. In the context of the big picture, you only have about 5,000 cases in the grand scheme of it and in china you have 80,000 cases. Its about behavior associated with it. Exactly. The day to day goings on that can change. Yeah. Thats what we talked about in fast money with the airlines and everything else. All right. So obviously if youre wondering how to navigate this market meltdown using options, mike khouw is going to give you a little portfolio protection as he sau he saunters over to the plasma. Most of us in the long term are investors. When were doing trading were doing it against an equity portfolio. One of the things beeweve mentioned, the market isnt particularly cheap lets keep our eyes on the longterm equity prize as we also pointed out, if youre going to go out and start selectively stock picking be aware that some names like energy names might actually on a valuation basis be more expensive now than they were a week or two ago. Some names are cheaper, names like microsoft spring to mind. The other thing is options premiums are certainly elevated. We can see in a market environment like this, they might be justified heres the thing if you want to hang on to your stocks or if you have cash that youre ready to deploy to possibly purchase more, you may want to put some hedges on we do have to acknowledge two things because options premiums are elevated, theyre more expensive, were going to look for ways to spread that. Because weve already seen such a sharp pull back. Carter was talking about on fast money that largest magnitude moves, 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 taking a look at using a put spread against your long equity portfolio i was looking at spy out to april. The 2. 80, 2. 60 put spread. You can spend 5 on that you can get a decent payoff, payoff would be three to one, and youre not spending a considerable amount relative for the notional value of s p. This is a way you can mute some of the down side risk after weve already had a down side move without spending too much and give yourself the latitude to selectively deploy more capital if youre going to begin to play for a bounce next week. Mike, why dont you come on back to the desk so, carter, do you like the trade . If you dont, tell us why. If you do, how much. Also talk about some of the technicals. We tried to address that to some extent and fast this is a moment for everyone, lets just say that. Theres every case to be made. This is such a bullish thing to get a reset like this, to have a basic huge relief with crude that goes to the consumers pocket you could get a vtype recovery. At the exact same time theres every reason to make the case that the damage done is so substantial that it often is the beginning and the look back and think what a peak it was how could so many people have been so naive. One of the things we think about when were looking at equity prices is, you know, we get some kind of dislocation oftentimes its a fundamental factor big earnings disappointments might hit the stock or a market more overall here we have a situation where we have a lot of unknowns. More shoes could drop next week or nothing could happen. No news definitely will be good news if we go two weeks and we have no additional news, no additional coronavirus cases, we dont have more quarantines and things like that, that is going to begin to give people some sense of ease but of course some damage is being done you cant put people into hotel rooms that remain empty. Planes that didnt go filled cant subsequently be filled thats lost and gone discretionary spending, lost and gone deferred purchases, pcs, hardware that might happen wish you could, tony, right mikes trade makes a lot of sense, right right now the risk is still skewed to the down side. Things can happen. I think the number of cases worldwide are still going to continue to climb and thats going to put fear back in investors so the fact that youre using a put spread here i think is the only way to play a hedge here i will say the only thing about this particular trade is that if things do improve, the premiums on this put spread are going to evaporate quickly. Its important that you cut your losses very quickly on this particular put spread. Youre paying 5 for this put spread if this put spread goes down to 250, 2 bucks its time to get out. One of the things, youre doing this against a long equity portfolio. You might be willing to pay this premium to maintain your positions. In the interest of disclosure, i had some put spreads on the s p. I sold some monday, i sold some tuesday, i sold some wednesday i sold the balance of them yesterday morning. I am pairing back on some of those hedges at this point. Tonight i think its important to speak plainly we have a lot of viewers that may not be regular viewers to options action. By the way, every major News Organization is leading with the markets and the virus. What you said is your trade is basically a way for people to buy a little down side protection but not sell any of the stocks they mail. Correct. Thats the whole point. Correct. You might have tax hits, trading. That kind of reactionary trading is never good for longterm investing. If you decide every single time you see a 12 to 15 draw down that now is the time to sell, i can tell you thats going to damage your performance over time very badly. All right well, it wasnt just stocks that took a hit this week if you havent been paying attention, youve got to see the yield on the tenyear treasury note hitting a new low i dont mean a new yearlong low i mean new alltime low like going back 150 years type low. As people sold stocks they flooded into the bond market which they had been doing before the selloff. The market may be lacking to the Federal Reserve for answers or help tony zhang is taking a glimpse at what might be coming next. I want to shift our attention to the treasuries because weve seen some pretty incredible moves. I think we can utilize options i want to take a look at the charts lets zoom out and take a look at the tenyear chart on treasuries tlt has moved 40 from the december 2018 lows and thishas happened consistently a couple of times over the last decade. Every time thats happened weve seen either consolidation or pull back after that 40 move. If we zoom in a little looking at a oneyear chart, tlt is up 15 year to date its currently reading fairly over bought if you look at momentum indicators. Couple that with the fact that we see negative divergence implies that theres a relatively higher probability of a pull back. So i like the setup because the longterm and shortterm charts like up well whats interesting here is that if we look at the futures, the probability of a single rate caught in march increased from 11 to 70 in the last week and if we look at the april cut for two rate cuts, were looking at a jump from 3 to 63 . I think thats a pretty incredible shift in probabilities for rate cut considering the fact that weve only seen 5,000 new cases in coronavirus even though this is globally now over the last couple of weeks. So the way that i want to play this is i dont necessarily want to bet against a rate cut here what im looking to do is im actually looking to bet that tlt is not going to continue moving higher im going to use a call credit spread to trade tlt by going out to the april 9th expiration. Im selling the 160 call spread. Im collecting 3. 98 to sell the calls and paying 2. 28 to buy the calls. My break even is 1. 5720 betting tlt wont go much higher than that im using a call spread. A lot can happen and i want to make sure i reduce my risk to 2. 80 per share. News breaking right now on United Airlines. Phil. Brian, United Airlines is postponing its Analyst Investor day set for next week in chicago. The uncertainty due to the coronavirus, the impact that its having on bookings, both near term and intermediate, lets say out over the next couple of months, having the company saying we cant give guidance why are we holding an analyst day. Postponing it. Likely going to happen in the summer, maybe early fall thats another indication that for the airlines, they dont have a whole lot of clarity in terms of the overall impact of the coronavirus. But to be clear, theyre not not holding it because theyre afraid of maybe people getting infected it sounds like no, no, no, no, no its about their business we dont have anything to say . Correct remember, they pulled their guidance theyve pulled their guidance. What are they going to tell analysts we dont have a whole lot of information about bookings. Phil lebeau there, maybe the first of many. Were going to find out. Speaking of airlines coming up, were going to talk travel stocks. Some of them actually in the green today. Hard to believe with this kind of day and week. Well break down what might be behind those moves you have questions, we have options. Send them over to our twitter handle optionsaction. Were back after this. Shouldnt you pay less when ynow you can. Data . 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Obviously coronavirus here is rocking the markets all week long three major indexes closing out their worst week since the financial crisis now sitting in correction territory. 10 below their highs. This weeks selloff wiping 4 trillion in market cap out of the markets, but bad as things were, there were actually a couple of bright spots today a number of travel stocks actually staying afloat amid the market meltdown. What gives lets find out carter werth at the plasma talking about technicals interestingly on the week, things that were very strong closed well today. Semis, software and the things that were the worst. This is the ground zero. Boats for people stuck with the flu. So this is the third worst calendar week of all time for this particular sub industry group, hotels, resorts and cruise ships you see the statistics here. Lets keep moving. What we know look at the chart. It is literally a perfect level top and the next screen, it is a perfect level bottom we have literally gone right back to where we were. This event over the past two years, this was a 30 decline, 31, this was 30. Weve found that low so literally i think were going to get we were green today as you saw there, reactionary bounce 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 7, 8, 9, 10 move rcl for a bounce having dropped basically 50 . 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. We risk 65 cents a share to make that bullish bet the idea when youre trying to catch the falling knife, if you think youre going to get a v bottom is to risk a relatively small amount it is harder to do that now because options premiums are elevated so we need to use a spread thats a little bit more complicated but it isnt really all that tough what were doing is looking out to april i was looking at the april 85, 95, 100 call butterfly what im doing is buying one of the 85 calls, selling two of the 95 calls and then buying one of the 100s the idea here is by selling a couple of those options im basically selling some of that elevated premium the idea is that it runs up to the 95 strike or thereabouts were risking 2. 15 to do that on an 80 stock. If the stock continued to fall, you know, were risking relatively small amount of the current price. Because the premiums are elevated, were trying to sell that because this flies asymmetric, this will make money if it goes through the 100 strike price this is a way that you can basically make this play with a little bit of a good payoff if it lands right where youre targeting, april expiration. We dont think thats the highest probability but you have the opportunity to make it a couple times a month. Its not random that of the 158 sub Industry Groups in the s p, the top four performers were things that were historically bottomed out. Number one, cruise ships, hotels, and number two was oil and gas e p. People went after the most bottomed out things and the exact opposite, system softwares and semis. Favoring bottom and catching a falling knife. Energy and travelrelated stocks might have a little bit of leverage on them. Going out and buying the equity can be a risky thing to do spending money on options trade isnt quite as risky. I love this creative way to play a bounce here and risking 2. 5 for the broken winged butterfly here the only question i have is are consumers comfortable enough to get back on a cruise ship . No. No out of the travel stocks that have been 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 Even Airlines before i would its really a theme, right . You notice expedia booking was up having dropped 50 , lets say they dont have earnings for a year, maybe 2, a lot is priced in. Good stuff there on a hotly debated name and sector. For more on this weeks historic selloff be sure to stay tuned for cnbcs special commercial free coverage. Markets in turmoil. Theyve been working their you know whats off 7 p. M. Eastern time. 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Stepbystep options trading support from Td Ameritrade quick final call carter. Cruiseships, play rcl. Take a deep breath. Use put spreads for tech tony . Tlt, weve gotten to a top. Sell call credit spreads. Great job tonight, guys its appropriate full coverage of selloff continues. You have mad money with jim, special at 7 wild week. See you next week. Take care. [narrator] the following is a paid advertisement for the hoover smartwash. When your throw rugs need cleaning, you toss them in the washing machine, easy. If only you could do the same for your carpet. Instead, heres what Carpet Cleaning looks like for many of us hauling around heavy, bulky rental machines. Theyre a hassle. And do you really want to bring someone elses dirt into your home . And then theres all the mixing, soaking, waiting forever for your carpet to dry. No wonder we sometimes give up and call in a pro, but thats a whole other level of pain. Theyre all over your house. 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